GENERAL BANKING LAW OF 2000 (RA 8791)

Policy of the state behind the General Banking Act (RA 8791)
The State recognizes the vital role of banks in providing an environment conducive to the
sustained development of the national economy and the fiduciary nature of banking that
requires high standards of integrity and performance. In furtherance thereof, the State shall
promote and maintain a stable and efficient banking and financial system that is globally
competitive, dynamic and responsive to the demands of a developing economy (RA 8791, Sec
2).

DEFINITION AND CLASSIFICATION OF BANKS

Bank
A bank is an entity engaged in the lending of funds obtained from the public in the form of
deposits.

Elements for an entity to be considered doing business as a bank

1. The entity is engaged in the lending of funds
2. Funds obtained from the public with at least 20 depositors
3. Funds are in the form of deposits

NOTE: A transaction involving not a loan but purchase of receivables at a discount within the
purview of investing, reinvesting, or trading in securities which an investment company may
perform is not banking.

Extent of ownership of foreign individuals and non-bank corporations in a bank

Foreign individuals may own or control up to forty percent (40%) of the voting stock of a
domestic bank (GBL, Sec 2).

Extent of ownership of a non-banking corporations in a bank

GR: A corporation may only own 40% of the bank
XPNs:

1. A universal bank can own up to 100% of a thrift bank

2. A corporation whose shares are listed in the stock exchange can own up to 60% of the bank.
This privilege can be exercised only once.
3. If the corporation is in existence for 10 years it can own up to 60% of the bank. This privilege
can be exercised only once.
4. Under Foreign Bank Liberalization Law (RA 7721), the Monetary Board may authorize foreign
banks to operate in the Philippines.

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Ownership of foreign individuals in a bank
The percentage of foreign-owned voting stocks in a bank shall be determined by the citizenship
of the individual stockholders in that bank. The citizenship of the corporation which is a
stockholder in a bank shall follow the citizenship of the controlling stockholders of the
corporation, irrespective of the place of incorporation (GBL, Sec 2).

Classifications of banks (2002, 2010 Bar)

1. Universal banks- Primarily governed by the GBL. They can exercise the powers of an
investment house and invest in non-allied enterprises and have the highest capitalization.
2. Commercial banks- Ordinary banks governed by the GBL which have a lower capitalization
requirement than universal banks and can neither exercise the powers of an investment house
nor invest in non-allied enterprises.
3. Thrift banks – These are a) Savings and mortgage banks; b) Stock savings and loan
associations; and c) Private development banks, which are primarily governed by the Thrift
Banks Act (RA 7906).
4. Rural banks – These are mandated to make needed credit available and readily accessible in
the rural areas on reasonable terms and which are primarily governed by the Rural Banks Act of
1992 (RA 7353).
5. Cooperative banks – Banks whose majority shares are owned and controlled by cooperatives
primarily to provide financial and credit services to cooperatives. It shall include cooperative
rural banks. They are governed primarily by the Cooperative Code (RA 6938).
6. Islamic banks – Banks whose business dealings and activities are subject to the basic
principles and rulings of Islamic Shari’ a, such as the Al Amanah Islamic Investment Bank of the
Philippines which was created by RA 6848.
7. Other classification of banks as determined by the Monetary Board of the BSP

Universal banks vs. Commercial banks vs. Thrift banks

COMMERCIAL
UNIVERSAL BANKS THRIFT BANKS
BANKS
General Banking Law GBL Thrift Banks Act (R.A.
Governing Laws
(GBL) 7906)
1. Has the authority To engage in allied All the powers of a
to exercise the undertakings and, in commercial bank,
powers of a addition to the except:
commercial bank. general powers 1. To issue imported
2. To act as an incident to a LC
Powers investment house – a corporation, may 2.To accept or open
corporation that sells exercise all such checking account
and guarantees sale powers as may be except with prior
of securities and necessary to carry on approval by the
shares of stocks. i.e. the business of Monetary Board (MB
Petron will tap an commercial banking. requires at least a net

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 investment house in NOTE: Allied asset worth of 28M)
order to sell its undertakings are
stocks. those activities or
3. To engage in a entities which
non-allied enhance or
undertaking – which complement banking.
is not related at all to
banking.
e.g. Realty
1. Head office only – Head office in NCR
1. Head office only – 2B 1. Head office only –
3B 2. Up to 10 branches 500M
2. Up to 10 branches – 4B 2. Up to 10 branches
– 6B 3. 11 – 100 branches – 750M
3. 11 – 100 branches – 10B 3. 11 to 50 branches
– 15B 4. More than 100 – 1B
4. More than 100 branches – 15B 4. More than 50
branches – 20B branches – 2B
Capitalization Head office outside
(BSP Circular No. 854, NCR
Oct. 9, 2014) 1. Head office only –
200M
2. Up to 10 branches
– 300M
3. 11 to 50 branches
– 400M
4. More than 50
branches – 800M
Can be a stock holder Only allied Only allied
in both allied and undertaking undertaking
Equity Investment
non-allied
undertaking
Can invest but shall Cannot invest Cannot invest
not exceed 25% of
Non- Allied
the investee
Transaction
(receiving)
corporation.
Total Amount of Not to exceed 50% of Not to exceed 35% of Not to exceed 35% of
Investment Equity the bank’s net worth. bank’s net worth. bank’s net worth.
Single Equity
Not to exceed 25% of bank’s net worth
Investment

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DISTINCTION OF BANKS FROM QUASI-BANKS AND TRUST ENTITIES
Quasi-bank
These are entities engaged in the borrowing of funds through the issuance, endorsement or
assignment with recourse or acceptance of deposit substitutes for purposes of re-lending or
purchasing of receivables and other obligations (GBL, Sec 4). Unlike banks, quasi-banks do not
accept deposits. Neither are funds obtained insured with the PDIC.
Trust entities

These are entities engaged in trust business that act as a trustee or administer any trust or hold
property in trust or on deposit for the use, benefit, or behalf of others (GBL, Sec. 79). A bank
does not act as a trustee.

Financial intermediaries
Persons or entities whose principal functions include the lending, investing, or placement of
funds on pieces of evidence of indebtedness or equity deposited with them, acquired by them
or otherwise coursed through them, either for their own account or for the account of others.

Pawnshops are non-bank financial intermediaries

Q: First Planters Pawnshop, Inc. (Pawnshop) contests the deficiency value-added and
documentary stamp taxes imposed upon it by the Bureau of Internal Revenue (BIR) for the
year 2000. The core of petitioner's argument is that it is not a lending investor within the
purview of Section 108(A) of the National Internal Revenue Code (NIRC), as amended, and
therefore not subject to value-added tax (VAT). Is Pawnshop’s contention correct?
A: NO. The tax treatment of pawnshops as non-bank financial intermediaries is not without
basis. Financial intermediaries are defined as persons or entities whose principal functions
include the lending, investing or placement of funds or evidences of indebtedness or equity
deposited with them, acquired by them, or otherwise coursed through them, either for their
own account or for the account of others. It need not be elaborated that pawnshops are non-
banks/banking institutions. Moreover, the nature of their business activities partakes that of a
financial intermediary in that its principal function is lending.
That pawnshops are to be treated as non-bank financial intermediaries is further bolstered by
the fact that pawnshops are under the regulatory supervision of the Bangko Sentral ng Pilipinas
and covered by its Manual of Regulations for Non-Bank Financial Institutions. (First Planters
Pawnshop, Inc. v. CIR, G.R. No. 174134, July 30, 2008)

Deposit substitutes
It is an alternative form of obtaining funds from the public, other than deposits, through the
issuance, endorsement, or acceptance of debt instruments, for the borrower's own account, for
the purpose of relending or purchasing of receivables and other obligations. These instruments
may include, but need not be limited to, banker’s acceptances, promissory notes,
participations, certificates of assignment and similar instruments with recourse, and repurchase
agreements.

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BANK POWERS AND LIABILITIES

CORPORATE POWERS
1. All powers provided by the corporation code, like issuance of stocks and entering into merger
or consolidation with other corporation or banks.
2. It can only acquire real property when it is needed for business, in settlement of debt
incurred in the course of the business, property as may be mortgaged to it to secure a debt in
good faith and property it may acquire during execution sale to satisfy judgment. Banks cannot
acquire real property in settlement of a civil liability arising from crime.
3. A universal and commercial bank can both invest in equity but only universal bank is allowed
to invest in equity of non-allied enterprises.

BANKING AND INCIDENTAL POWERS

Certificate of Authority to Register

This is a requirement before a bank may register or amend their articles of incorporation with
SEC. It is issued by the Monetary Board (GBL, Sec. 14). The following must be proven by the
bank to satisfy the Monetary Board and in order for the latter to grant such certificate:
1. All requirements of existing laws and regulations to engage in the business for which the
applicant is proposed to be incorporated have been complied with
2. That the public interest and economic conditions, both general and local, justify the
authorization
3. The amount of capital, the financing, organization, direction and administration, as well as
the integrity and responsibility of the organizers and administrators reasonably assure the
safety of deposits and the public interest. (ibid).

General powers and functions of a bank

1. Accepting drafts and issuing letters of credit
2. Discounting and negotiating promissory notes, drafts, bills of exchange and other instrument
evidencing debt
3. Accepting or creating demand deposits, receiving other types of deposit and deposit
substitutes
4. Buying and selling FOREX and gold or silver bullion
5. Acquiring marketable bonds and other debt securities
6. Extending credit
7. Determination of bonds and other debt securities eligible for investment including maturities
and aggregate amount of such investment, subject to such rules as the Monetary Board may
promulgate.
8. And all other powers as may be necessary to carry on the business of a bank (GBL, Sec. 29).

Rules regarding the issuance of stocks by a bank

1. The Monetary Board may prescribe rules and regulations on the types of stock a bank may
issue.

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2. Banks shall issue par value stocks only (GBL, Sec. 9).
3. GR: No bank shall purchase or acquire shares of its own capital stock or accept its own shares
as a security for a loan.

XPN: When authorized by the Monetary Board.

NOTE: That in every case the stock so purchased or acquired shall, within six months from the
time of its purchase or acquisition, be sold or disposed of at a public or private sale. (GBL, Sec.
10)
4. Foreign individuals and non-bank corporations may own or control up to 40% of the voting
stock of a domestic bank. This rule shall apply to Filipinos and domestic non-bank corporations.

NOTE: The percentage of foreign-owned voting stocks in a bank shall be determined by the
citizenship of the individual stockholders in that bank. The citizenship of the corporation which
is a stockholder in a bank shall follow the citizenship of the controlling stockholders of the
corporation, irrespective of the place of incorporation. (GBL, Sec 11)
5. Stockholdings of individuals related to each other within the fourth degree of consanguinity
or affinity, legitimate or common-law, shall be considered family groups or related interests
and must be fully disclosed in all transactions by such corporations or related groups of persons
with the bank. (GBL, Sec 12)
6. Two or more corporations owned or controlled by the same family group or same group of
persons (Corporate Stockholdings) shall be considered related interests and must be fully
disclosed in all transactions by such corporations or related group of persons with the bank.
(GBL, Sec 13)

Instances when a bank is prohibited from declaring dividends

1. Its clearing account with the Bangko Sentral is overdrawn; or
2. It is deficient in the required liquidity floor for government deposits for five or more
consecutive days, or
3. It does not comply with the liquidity standards/ratios prescribed by the Bangko Sentral for
purposes of determining funds available for dividend declaration; or
4. It has committed a major violation as may be determined by the Bangko Sentral (GBL, Sec.
57).

Independent directors in banks

Sec. 16 of the GBL provides for two (2).

Effect of merger or consolidation of banks to the number of directors allowed

The number of directors may be more than 15 but should not exceed 21 (GBL, Sec. 17).

DILIGENCE REQUIRED BY BANKS

Nature of banking business and responsibility of banks

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The banking system is an indispensable institution in the modern world and plays a vital role in
the economic life of every civilized nation. Whether as mere passive entities for the safekeeping
and saving of money or as active instruments of business and commerce, banks have become
an ubiquitous presence among the people, who have come to regard them with respect and
even gratitude and, most of all, confidence. Thus, even the humble wage-earner has not
hesitated to entrust his life’s savings to the bank of his choice, knowing that they will be safe in
its custody and will even earn some interest for him. The ordinary person, with equal faith,
usually maintains a modest checking account for security and convenience in the settling of his
monthly bills and the payment of ordinary expenses. As for business entities, the bank is a
trusted and active associate that can help in the running of their affairs, not only in the form of
loans when needed but more often in the conduct of their day-to-day transactions like the
issuance or encashment of checks.

In every case, the depositor expects the bank to treat his account with the utmost fidelity,
whether such account consists only of a few hundred pesos or of millions. The bank must
record every single transaction accurately, down to the last centavo and as promptly as
possible. This has to be done if the account is to reflect at any given time the amount of money
the depositor can dispose of as he sees fit, confident that the bank will deliver it as and to
whomever he directs.
The point is that as a business affected with public interest and because of the nature of its
functions, the bank is under obligations to treat the accounts of its depositors with meticulous
care, always having in mind the fiduciary nature of their relationship. (Simex International Inc. v.
Court of Appeals, G.R. No. 88013 March 19, 1990 as cited in the case of Land Bank of the
Philippines vs. Emmanuel Oñate, G.R. No. 192371, January 15, 2014)

Degree of diligence required of banks in handling deposits

Banks are expected to exercise extraordinary diligence in its dealings with depositors.
Consequently, the diligence required of banks is more than that of a Roman pater familias or a
good father of a family (PCI Bank v Balcameda G.R. No. 158143, September 21, 2011).

Q: FFCCI opened a savings/current and dollar savings account PNB at its Timog Avenue
Branch. Its President Felipe and Secretary-Treasurer Angelita were the named signatories
for the said accounts. While Felipe and Angelita were thus out of the country, applications for
cashiers and managers checks bearing Felipe’s signature were presented to and both
approved by the PNB. When Angelita returned to the country, she noticed the deductions of
P9,950,000.00 and P3,260,500.31. Claiming that these were unauthorized and fraudulently
made, FFCCI requested PNB to credit back and restore to its account the value of the checks.
PNB refused, and thus constrained [FFCCI] filed the instant suit for damages against the PNB
and its own accountant Aurea Caparas. On its part, PNB alleged that it exercised due diligence
in handling the account of FFCCI; that the applications for managers check have passed
through the standard bank procedures and it was only after finding no infirmity that these
were given due course; that In fact, it was no less than Caparas, the accountant of FFCCI, who

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confirmed the regularity of the transaction. Is PNB guilty of negligence in handling FFCCI’s
account?
A: As between a bank and its depositor, where the bank’s negligence is the proximate cause of
the loss and the depositor is guilty of contributory negligence, the greater proportion of the loss
shall be borne by the bank. The bank was negligent because it did not properly verify the
genuineness of the signatures in the applications for manager’s checks while the depositor was
negligent because it clothed its accountant/bookkeeper with apparent authority to transact
business with the Bank and it did not examine its monthly statement of account and report the
discrepancy to the Bank. The court allocated the damages between the bank and the depositor
on a 60-40 ratio (Philippine National Bank v. FF Cruz and Company, G.R. No. 173259, July 25,
2011, in Divina, 2014).

Degree of diligence required of banks with its other dealings

The diligence more than that of a Roman pater familias only applies only to cases where banks
act under their fiduciary capacity, that is, as depositary of the deposits of their depositors. The
same degree of diligence is not expected to be exerted by banks in commercial transactions
(Reyes v CA G.R. No. 118492. August 15, 2001).

Q: On Oct. 10, 2002, a check in the amount of P1,000,000.00 payable to MMGI was presented
for deposit and accepted at petitioner’s Kawit Branch. The check, post-dated “Oct. 9, 2003”,
was drawn against the account of Silva with BPI Bel-Air Branch.

The check was cleared by BPI and ABC credited the account of MMGI with P1,000,000.00. On
Oct. 22, 2002, MMGI’s account was closed and all the funds therein were withdrawn. A
month later, Silva discovered the debit of P1,000,000.00 from his account. In response to
Silva’s complaint, BPI credited his account with the aforesaid sum.

On March 21, 2003, respondent returned a photocopy of the check to petitioner for the
reason: “Postdated.” Petitioner, however, refused to accept and sent back to respondent a
photocopy of the check. Thereafter, the check, or more accurately, the Charge Slip, was
tossed several times from ABC to BPI, and back to ABC, until on May 6, 2003, BPI requested
the PCHC to take custody of the check. Acting on the request, PCHC directed BPI to deliver the
original check and informed it of PCHC’s authority under CHOM No. 279 dated 06 September
1996 to split 50/50 the amount of the check subject of a “Ping-Pong” controversy which shall
be implemented thru the issuance of Debit Adjustment Tickets against the outward demands
of the banks involved. PCHC likewise encouraged respondent to submit the controversy for
resolution thru the PCHC Arbitration Mechanism. The latter rendered its Decision in favor of
ABC and against BPI. Respondent filed a motion for reconsideration14 but it was denied by
the PCHC Board of Directors. The RTC affirmed with modification the Arbitration Committee’s
decision. By its Decision, the CA set aside the RTC judgment and ruled for a 60-40 sharing of
the loss as it found petitioner guilty of contributory negligence in accepting what is clearly a
post-dated check.
A: A collecting bank is guilty of contributory negligence when it accepted for deposit a post-
dated check notwithstanding that said check had been cleared by the drawee bank which failed

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to return the check within the 24-hour reglementary period. The collecting bank which
accepted a post-dated check for deposit and sent it for clearing and the drawee bank which
cleared and honored the check are both liable to the drawer for the entire face value of the
check (Allied Banking Corporation v. Bank of the Philippine Islands, G.R. No. 188363, February
27, 2013, in Divina, 2014).

Being a banking institution, DBP, the mortgagee, owed it to Guariña Corporation to exercise the
highest degree of diligence, as well as to observe the high standards of integrity and
performance in all its transactions because its business was imbued with public interest. Yet,
the bank failed in its duty to exercise the highest degree of diligence by prematurely foreclosing
the mortgages and unwarrantedly causing the foreclosure sale of the mortgaged properties
despite the mortgagor not being yet in default (DBP V. Guariña Agricultural and Realty
Development Corporaiton,G.R. No. 160758, January 15, 2014, in Divina, 2014).

Effect when the teller gave the passbook to a wrong person

Banks must exercise a high degree of diligence in insuring that they return the passbook only to
the depositor of his authorized representative. For failing to return the passbook to authorized
representative of the depositor, the bank presumptively failed to observe such high degree of
diligence in safeguarding the passbook and insuring its return to the party authorized to receive
the same.
However, a bank’s liability may be mitigated by the depositor’s contributory negligence such as
allowing a withdrawal slip signed by authorized signatories to fall into the hands of an impostor
(Consolidated Bank and Trust Corporation v. CA, GR No, 138569, September 11, 2003).

The bank is liable when an employee encashed a check without the required indorsement
The fiduciary nature of the relationship between the bank and the depositors must always be of
paramount concern (Philippine Savings Bank v. Chowking, G.R. No. 177526, July 4, 2008).

NATURE OF BANK FUNDS AND BANK DEPOSITS

Deposit function of banks

The function of the bank to receive a thing, primarily money, from depositors with the
obligation of safely keeping it and returning the same.

Kinds of deposits between a bank and its depositors

1. As debtor-creditor:
2. Special Kinds of Deposits
a. Demand deposits – all those liabilities of banks which are denominated in the Philippine
currency and are subject to payment in legal tender upon demand by representation of checks.
b. Savings deposits – the most common type of deposit and is usually evidenced by a passbook.

NOTE: The requirement of presentation of passbooks is required by the Manual of Regulations

for Banks. A bank is negligent if it allows the withdrawal without requiring the presentation of
passbook (BPI v. CA, GR No. 112392, February 29, 2000).

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c. Negotiable order of withdrawal account (NOWA) – Interest-bearing deposit accounts that
combine the payable on demand feature of checks and investment feature of saving accounts.
d. Time deposit – an account with fixed term; payment of which cannot be legally required
within such a specified number of days.

3. As trustee-trustor:
Trust account – a savings account, established under a trust agreement containing funds
administered by the bank for the benefit of the trustor or another person or persons.
4. As agent-principal:
a. Deposit of checks for collection
b. Deposit for specific purpose
c. Deposit for safekeeping

Types of deposit accounts

1. Savings
2. Current
3. Time

Deposit accounts may also be classified as:

1. Individual; or
2. Joint:
a. “And” account – the signature of both co-depositors are required for withdrawals.
b. “And/or” account – either one of the co-depositors may deposit and withdraw from the
account without the knowledge consent and signature of the other.

Joint accounts may be subject of a survivorship agreement whereby the co-depositors agree to
permit either of them to withdraw the whole deposit during their lifetime and transferring the
balance to the survivor upon the death of one of them (Vitug v. CA, G.R. No. 82027, March 29,
1990).

Anonymous account
GR: Anonymous accounts or those under fictitious names are prohibited (R.A. 9160 as amended
by R.A. 9194; BSP Circular No. 251, July 21, 2000).
XPN: In case where numbered accounts is allowed such as in foreign currency deposits.
However, banks/non-bank financial institutions should
ensure that the client is identified in an official or other identifying documents (R.A. 6426 as
amended, FCDA, Sec. 8).

Nature of a bank deposit

All kinds of bank deposits are loan. The bank can make use as its own the money deposited.
Said amount is not being held in trust for the depositor nor is it being kept for safekeeping
(Tang Tiong Tick v. American Apothecaries, G.R. No. 43682, March 31, 1938).

Mandamus will not lie in the enforcement of obligations concerning deposit

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All kinds of deposit are loans. Thus, the relationship being contractual in nature, mandamus
cannot be availed of because mandamus will not lie to enforce the performance of contractual
obligations (Lucman v. Alimatar Malawi, G.R. No. 159794, Dec. 19, 2006).

Contract between banks and depositors is not a trust agreement

The fiduciary nature of the bank-depositor relationship does not convert the contract between
banks and depositors to a trust agreement. Thus, failure by the bank to pay the depositor is
failure to pay simple loan, and not a breach of trust (Consolidated Bank and Trust Corp. v. CA,
G.R. No. 138569, September 11, 2003).

Nature of safety deposit box

The contract for the use of a safety deposit box should be governed by the law on lease.
In the case of Sia v. CA and Security Bank and Trust Company and under the old banking law, a
safety deposit box is a special deposit. However, the new General Banking Law, while retaining
the renting of safe deposit box as one of the services that the bank may render, deleted
reference to depository function (Divina, Handbook on Philippine Commercial Law).

Q: After procuring a checking account, the depositor issued several checks. He was surprised
to learn later that they had been dishonored for insufficient funds. Investigation disclosed
that deposits made by the depositor were not credited to its account. Is the bank liable for
damages?
A: YES, the depositor expects the bank to treat his account with utmost fidelity, whether such
account consist only of a few hundred pesos or of millions. The bank must record every single
transaction accurately, down to the last centavo, and as promptly as possible. This has to be
done if the account is to reflect at any given time the amount of money the depositor can
dispose of as he sees fit, confident that the bank will deliver it as and to whomever he directs. A
blunder on the part of the bank, such as the dishonor of the check without good reason, can
cause the depositor not a little embarrassment if not also financial loss and perhaps even civil
and criminal litigation (Simex Intl. v. CA, G.R. No. 88013, March 19, 1990).

STIPULATION ON INTERESTS

Rules on stipulation of interests

Old rule
1. Central Bank Circular 416 – 12% per annum in cases of:
a. Loans
b. Forbearance of money, goods and credits
c. Judgment involving such loan or forbearance, in the absence of express agreement as to such
rate of interest
2. Interest accruing from unpaid interest– interest due shall earn interest from the time it is
judicially demanded although the obligation may be silent upon this point.

NEW RULE

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Through Circular No. 799, the Monetary Board declared that effective July 1, 2013 the rate of
interest for the loan or forbearance of any money, goods or credits and the rate allowed in
judgments, in the absence of an express contract as to such rate of interest, shall be 6% per
annum (Section 1, Circular 799, Series of 2013 amending Section 2 of Circular No. 905, Series of
1982).
This means that if the parties fail to state in writing the interest payable on any of the
transactions mentioned, or on account of a court judgment involving a related money claim,
the imposable interest is 6% every year.

A bank forbidden by Central Bank to do business is NOT obligated to pay interest on deposit
A bank lends money, engages in international transactions, acquires foreclosed mortgaged
properties or their proceeds and generally engages in other banking and financing activities in
order that it can derive income therefrom. Therefore, unless a bank can engage in those
activities from which it can derive income, it is inconceivable how it can carry on as a depository
obligated to pay interest on money deposited with it (Fidelity & Savings and Mortgage Bank v.
Cenzon, G.R. No. L-46208, April 5, 1990).

GRANT OF LOANS AND SECURITY REQUIREMENTS

RATIO OF NET WORTH TO TOTAL RISK ASSETS

Net worth
The total of the unimpaired paid-in surplus, retained earnings and undivided profit, net of
valuation reserves and other adjustments as may be required by the BSP (GBL, Sec. 24.2).

Risked based capital

The minimum ratio prescribed by the Monetary Board which the net worth of a bank must bear
to its total risk assets which may include contingent accounts.
NOTE: The Monetary Board may require or suspend compliance with such ratio whenever
necessary for a maximum period of one year and that such ratio shall be applied uniformly to
banks of the same category (GBL,Sec. 34).
Effect of non-compliance with the ratio
1. Distribution of net profits may be limited or prohibited and MB may require that part or all of
the net profits be used to increase the capital accounts of the bank until the minimum
requirement has been met; or
2. GR: Acquisition of major assets and making of new investments may be restricted.

XPN: Purchases of evidence of indebtedness guaranteed by the Government can be exempted

from restrictions (GBL, Sec. 34).
SINGLE BORROWER’S LIMIT
Limitations imposed upon banks with respect to its loan function
1. GR: Single borrower’s limit – The total amount of loans, credit accommodations and
guarantees that the bank could grant should at no time exceed 25% of the bank’s net worth
(GBL, Sec 35.1, 2002 Bar, 2015 Bar).

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XPN:
a. As the Monetary Board may otherwise prescribe for reasons of national interest
b. Deposits of rural banks with GOCC financial institutions like LBP, DBP, and PNB.

2. The total amount of loans, credit accommodations and guarantees prescribed in (a) may be
increased by an additional 10% of the net worth of such bank provided that additional liabilities
are adequately secured by trust receipt, shipping documents, warehouse receipts and other
similar documents which must be fully covered by an insurance (GBL, Sec. 35.2).
3. Loans and other credit accommodations secured by REM shall not exceed 75% of the
appraised value of the real estate security plus 60% of the appraised value of the insured
improvements (GBL, Sec. 37) CM/intangible property such as patents, trademarks, etc. shall not
exceed 75% of the appraised value of the security (GBL, Sec. 38).
4. Loans being contractual, the period of payment may be subject to stipulation by the parties.
In the case of amortization, the amortization schedule has no fixed period as it depends on the
project to be financed such that if it was capable of raising revenues, it should be at least once a
year with a grace period of 3 years if the project to be financed is not that profitable which
could be deferred up to 5 years if the project was not capable of raising revenues (GBL, Sec. 44).
5. Loans granted to DOSRI:
a. Director
b. Officer
c. Stockholder, having at least 1% ownership over the bank
d. Related Interests, such as DOS’s spouses, their relatives within the first degree whether by
consanguinity or affinity, partnership whereby DOS is a partner or a corporation where DOS
owns at least 20%.

Exclusions from the aforesaid loan limitations

Non-risk loans, such as:
1. Loans secured by obligations of the BSP or the Philippine Government
2. Loans fully guaranteed by the Government
3. Loans covered by assignment of deposits maintained in the lending bank and held in the
Philippines
4. Loans, credit accommodations and acceptances under letters of credit to the extent covered
by margin deposits
5. Other loans or credit accommodations which the MB may specify as non-risk items.

Joint and solidary signature (JSS) practice

It is a common banking practice requiring as an additional security for a loan granted to a

corporation the joint and solidary signature of a major stockholder or corporate officer of the
borrowing corporation (Security Bank v. Cuenca, G.R. No. 138544, October 3, 2000).

RESTRICTIONS ON BANK EXPOSURE TO DOSRI (DIRECTORS, OFFICERS, STOCKHOLDERS AND

THEIR RELATED INTERESTS)

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Requirements that must be complied with in case of DOSRI accounts (2002 Bar)
1. Procedural requirement - Loan must be approved by the majority of all the directors not
including the director concerned. CB approval is not necessary; however, there is a need to
inform them prior to the transaction. Loan must be entered in the books of the corporation
(GBL, Sec. 36).

2. Substantive requirement - Loan must not exceed the paid in contribution and unencumbered
deposits. (Not to exceed 15% of the portfolio or 100% of the net worth, whichever is lower)
(GBL, Sec. 36 [4]).

In the case of Go v. Bangko Sentral ng Pilipinas, G.R. No. 178429, October 23, 2009, it was held
that the requirements are: (1) Approval requirement which means that the DOSRI transaction
must be approved by at least majority of the directors excluding the director concerned. (2)
Reportorial requirement means that the transaction must be recorder in the books of the bank
and reported to the BSP. (3) Ceiling requirement which means that the amount of the loan shall
not exceed the book valued of the paid-in contribution and the amount of the unencumbered
deposits. Three different offenses are committed by those who fail to observe the board
approval, reporting and ceiling requirements.

Effect of non-compliance with the foregoing requirement

Violation of DOSRI is a crime and carries with it penal sanction.
It does not make the transaction void but only renders the responsible officers and directors
criminally liable. (Republic v. Sandiganbayan, G.R. No. 166859, 169203, 180702, April 12, 2011).

Transactions covered by the DOSRI regulation

The transactions covered are loan and credit accommodation. Not being a loan, the ceiling will
not apply to lease and sale. However, it should still comply with the procedural requirement.

Arms-length rule
It provides that any dealings of a bank with any of its DOSRI shall be upon terms not less
favorable to the bank than those offered to others (GBL, Sec. 36 [2]).

The bank may terminate the loan and demand immediate payment if the borrower used the
funds for purposes other than that agreed upon
If the bank finds that the borrower has not employed the funds borrowed for the purpose
agreed upon between the bank and the borrower, the bank may terminate the loan and
demand immediate payment (Banco de Oro v. Bayuga, G.R. No. L-49568, Oct. 17, 1979).

Q: Pio is the president of Western Bank. His wife applied for a loan with the said bank to
finance an internet cafe. The loan officer told her that her application will not be approved
because the grant of loand to related interests of bank directors, officers, and stockholders is
prohibited by the General Banking Law. Explain whether the loan officer is correct. (2006 Bar)

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A: NO. The loan officer should have advised the wife to ask her husband to secure approval of
the bank’s Board of Directors for the intended loan and to limit the same in an amount not to
exceed its unencumbered deposits and book value of its paid in capital contribution in the
bank; if the intended loan should exceed the foregoing limit, the borrower should have the
same secured by a non-risk assets determined by the Monetary Board, unless the loan shall be
in the form of a fringe benefit. (GBL, Sec. 36)

A bank officer violates the DOSRI law when he acquires bank funds for his personal benefit,
even if such acquisition was facilitated by a fraudulent loan application. Directors, officers,
stockholders, and their related interests cannot be allowed to interpose the fraudulent nature
of the loan as a defense to escape culapability or their circumvention of the law. The
prohibition under the law covers loan by a bank director or officer which are made directly,
indirectly, for himself or as the representative or agent of others. At the same time, he is liable
for estafa through falsification of commercial documents. The bank money which came to his
possession as a result of the fraudulent loan application was not his. He remained bank’s
fiduciary with respect to that money, which makes it capable of misappropriation or conversion
in his hands (Soriano v. People of the Philippines, et al., G.R. No. 162336, February 1, 2010, in
Divina, 2014).

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