General Banking Law

RA 8791

Banks
- Banks are entities engaged in the lending of funds obtained in the form of deposits from the
public. (GBL, Sec. 3.1)

Note: The moment you become a bank, subject ka na in a stricter scrutiny by the BSP and other
agencies.

Quasi-banks
- Quasi-banks are entities engaged in the borrowing of funds through the issuance,
endorsement or assignment with recourse or acceptance of deposit substitutes for purposes
of relending or purchasing of receivables and other obligations. (GBL, Sec. 4)

Notes: In quasi-banks, funds are not money, but rather instruments.

Nature of Banking Business

1. Debtor-creditor relationship
- The relation existing between a depositor and a bank is that of a creditor and debtor and not
that of a depositor and a depositary under the Civil Code.

- The relationship being contractual in nature, mandamus is therefore not an available remedy
since mandamus does not lie to perform contractual obligations. (Lucman vs Malawi, GR.
No. 159794, December 19, 2006) (Hindi mo pwedeng i-mandamus ang contractual
obligation, ang tamang remedy jan, specific performance)

2. Fiduciary duty
- This fiduciary relationship means that the bank’s obligation to observe “high standards of
integrity and performance” is deemed written into every deposit agreement between a bank
and its depositor. (Philippine Banking Corp. vs CA, GR. No. 127469, January 15, 2004)

3. Not a trust agreement

- The fiduciary nature of a bank-depositor relationship does not convert the contract from a
simple loan to a trust agreement, whether express or implied. The law simply imposes on a
bank a higher standard of integrity and performance in complying with its obligations under
the contract of simple loan, beyond those required of a non-bank debtors under a similar
contract of simple loan. (Dizon)

4. Indispensable institution
- The banking system is an indispensable institution in the modern world and plays a vital role
in the economic life of every civilized nation. (Simex International Inc. vs CA, GR. No. 88013,
March 19, 1990)

5. Impressed with public interest

- The business of banking is imbued with public interest. The stability of banks largely
depends on the confidence of the people in the honesty and efficiency of banks. (Philippine
Banking Corp. vs CA, GR. No. 127468, January 15, 2004)

6. Utmost diligence
- The GBL requires of banks the highest standards of integrity and performance. Of
paramount importance is the trust and confidence of the public, in general to the banking
 industry. Consequently, the diligence required of banks is more than that of a Roman pater
familias or a good father of a family. The highest degree of diligence is expected. (Philippine
Commercial Bank vs Balmaceda, GR. No. 158143, September 21, 2011)

7. Treatment of accounts with meticulous case

- Banks must treat accounts of its depositors with meticulous care, always having in mind the
fiduciary nature of their relationship regardless of amount involved. (Simex International Inc.
vs CA, GR. No. 88013, March 19, 1990)

8. Duty to keep records

- Banks shall have a true and accurate account, record or statement of their daily
transactions, particularly those referring to their deposit liabilities. The making of any false
entry or the willful omission of entries relevant to any transaction is a ground for the
imposition of administrative sanctions and disqualification from office of any director or officer
responsible therefor. This is without prejudice to their criminal liability under NCBA and/or the
applicable provisions of the Revised Penal Code. (Dizon)

9. Banks are not gratuitous bailees

- Banks run for gain, and they solicit deposits in order that they can use the money for that
very purpose. (San Carlos Milling Co. vs BPI, GR. No. 37467, December 11, 1933)

10. Dealing with registered lands

- The rule that persons dealing with registered land can rely solely on the certificate does not
apply to banks. (DBP vs CA, GR. No. 129471, April 28, 2000)

11. Not expected to be infallible

- Banks must bear the blame for not discovering mistakes despite established procedures.
(BPI vs IAC, GR. No. 37467, February 21, 1992) (Banks naman however are not expected
to be zero or error-free. For example, despite following all the protocols, they still committed
a mistake, hindi naman siya automatically agad magiging liable.)

12. May exclude persons in their premises

- Banks may impose reasonable conditions or limitations to access by non-employees to its
premises and records, even absent any imminent or actual unlawful aggression provided
that such limitations are not contrary to law. (UCPB vs Basco, GR. No. 142668, August 30,
2004)

13. Charging of interest for loans

- This forms a very essential and fundamental element of the banking business. In fact, it may
be considered to be the very essence of the banking’s existence or being. (Sps. Anastacio-
Calina vs DBP, GR. No. 159748, July 31, 2007)

Note: Ito yung mga principles na pwede nyong gamitin sa mga sagot nyo when you are given a
problem involving negligence of the banks.

Classification of Banks

1. Universal banks
2. Commercial banks
3. Thrift banks
4. Rural banks
5. Islamic banks
6. Cooperative banks
 7. Other classification of banks as determined by the Monetary Board of the BSP

Universal banks
- Banks that have authority to exercise the powers of a commercial banks and an investment
house, invest in non-allied enterprise. (GBL, Sec. 23), and have the highest capitalization
requirement. It is primarily governed by the GBL. (Dizon) (it is a commercial bank with a
power of an investment house and can invest in non-allied enterprises)

Commercial banks
- These are ordinary banks governed by the GBL which have a lower capitalization
requirement than universal banks and can exercise neither powers of an investment house
nor invest in non-allied enterprises. (GBL, Sec. 30)

Universal bank Commercial bank

As to additional powers
With additional No such additional
powers other than powers
those authorized
for commercial
banks
As to type of investment
May invest in May invest in allied
allied and non- enterprises only
allied enterprises
As to powers
1. Corporate 1. General
powers powers
incident to
corporations
2. Powers of 2. Such power
an as may be
investment necessary
house to carry on
the
business of
commercial
banking
3. Power to 3. Power to
invest in invest in
allied allied
enterprises enterprises
4. Power to
invest in
non-allied
enterprises
As to total investment in allied
enterprises
50% of net worth 35% of net
worth
As to total investment in non-allied
enterprises
50% of net worth n/a
 As to equity investment in financial allied
enterprise
100% of equity 100% of equity of a
thrift or rural bank
A publicly-listed
bank may own up In other financial
to 100% of the allied enterprises
voting stock of only including another
one other UB/CB. CB, invest shall
remain a minority
holding.

Thrift banks
- Banks engaged in accumulating savings of depositors and investing them and provide short-
term working capital and medium-term and long-term financing to businesses engaged in
agriculture, services, industry and housing, and diversified financial and allied services, and
to their chosen markets and constituencies, especially small and medium enterprises. (RA.
79206, Sec. 3a)
- Thrift banks are primarily governed by the Thrift Banks Act (RA. 7906)

Rural banks
- Designed to make needed credit available and readily accessible in the rural areas on
reasonable terms.
- Governed by the Rural Bank Act of 1992 (RA. 7353)

Islamic bank
- Banks that promote and accelerate the socio-economic development of the Autonomous
region by performing banking, financing, and investment operations and to establish and
participate in the agricultural, commercial, and industrial ventures based on the Islamic
concept of banking. (RA. 6848) (Under Islamic law, hindi ka pwedeng magpahiram with
interest. Dito, instead na singilin ka ng interest, magkakaron ng agreement kung saan ung
islamic bank will become a sort of an investor)

Allied Enterprises
- It may either be financial or non-financial (GBL, Sec. 24)

1. Financial Allied Enterprises

a. Leasing companies including leasing of stalls and spaces in a commercial establishment
provided that bank investment in/acquisition of shares of such leasing company shall be
limited/applicable only in cases of conversion of outstanding loan obligations into equity;
b. Banks;
c. Investment houses;
d. Credit card companies;
e. Financial institutions catering to small and medium scale industries including venture
capital corporation;
f. Securities dealership;
g. Foreign exchange dealership (manual of regulations for banks, Sec. X377)

In addition, universal banks may invest in:

a. Insurance companies; and
b. Holding company (manual of regulations for banks, Sec. X377)
Note: When you talk about allied enterprises, parang ito yung mga businesses na kapatid ng
banking business kung saan kumikita sila ng pera. For example, leasing. May mga universal banks
they can do allied businesses and establish companies engaged in leasing or credit card companies
or security dealership.

2. Non-Financial Allied Enterprises

- These are enterprises whose activities do not involve money matters:

a. Warehousing companies;
b. Storage companies;
c. Safety deposit box companies;
d. Management corporations engaged or to be engaged in an activity similar to the
management of mutual funds;
e. Computer services;
f. Insurance agencies;
g. Home building and development;
h. Drying and/or milling facilities for agriculture;
i. Service bureaus;
j. Philippine Clearing House Corporation; and
k. Other similar activities as the MB may declare (manual of regulations for banks, Sec.. X380)

Non-Allied Enterprises
1. Agriculture, mining, quarrying, manufacturing, public utilities, construction, whole sale trade
and community and social services following the industrial groupings in the Philippine
Standard Industrial Classification;
2. Industrial park projects and/or industrial estate developments;
3. Financial and commercial complex projects arising from or in connection with the
government’s privatization program; and
4. Such other categories as the MB may declare as appropriate (manual of regulations for
banks, Sec. 138.1)

Functions of banks
1. Loan function;
2. Deposit function; and
3. Other function

Loan Function
- A loan is an account under the loan portfolio of the bank (manual of regulations for banks,
Sec. x303 b)

Note: Yung bangko mo may pera, meron siyang mga kakilala na kailangan ng pera, so yung mga
inipon niya na pera ng depositor pwede niyang ipahiram. That’s the loan function.

Limit on loans, credit accommodations and guarantees

1. Single Borrower’s Limit (SBL);
2. Joint and Solidary Signature (JSS) Practice; and
3. Restrictions on bank exposure to Directors, Stockholders, and Related Interests (DOSRI)
Accounts

Single Borrower’s Limit

- The total amount of loans, credit accommodations and guarantees that may be extended by
a bank to any person, partnership, association, corporation or other entity shall at no time
exceed 25% of the net worth of such bank. The basis for determining compliance with the
 SBL is the total credit commitment of the bank to or on behalf of the borrower. (BSP Circular
No. 425, series of 2004)

 Rationale:
1. To prevent the bank from making excessive loans and other credit
accommodations to a single borrower or corporate group
2. It safeguards the bank from too large a risk exposure to a single client
3. It is a damage control mechanism

Joint and Solidary Signature (JSS) Practice

A common banking practice that requires 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 vs Cuence, GR. No. 138544, October 3, 2000)

The JSS as a contract of adhesion should be taken contra proferentum against the party who may
have caused any ambiguity therein. (Dizon)

 Rationale:
1. In case of default, creditor’s recourse is not limited to corporate
properties but extends to personal assets of the surety; and
2. Surety would be compelled to ensure that the loan would used for the
purpose intended.

Restrictions on Bank Exposure to Directors, Officers, Stockholders, and Related Interests (DOSRI)
Accounts

Requisites:
1. The borrower is a director, officer, or any stockholder of a bank and related interest
2. He contracts a loan or financial accommodation
3. Loan is from:
a. His bank; or
b. A bank that is a subsidiary of a bank holding company of which both his bank
and the lending bank are subsidiaries; or
c. A bank in which a controlling portion of the shares is owned by the same interest
that owns a controlling portion of the shares of his bank (GBL, Sec. 6);
d. The loan of the DOS, singly or with that of his related interest, is in excess of the
5% of the capital and surplus of the lending bank or in the maximum amount
permitted by law, whichever is lower. (BSP Circular 170, NCBA Sec. 26)

Who are covered

Directors Directors of the lending bank

Officers As identified in the by-laws
or generally known as such
Stockholders Stockholder of record,
personally or through an
attorney-in-fact
Related a. Spouse, relatives
interest within first degree of
consanguinity or
affinity, or relative by
legal adoption of a
DOS;
 b. Partnership of which
a DOS or his spouse
or relatives within
first degree of
consanguinity or
affinity, or relative by
legal adoption is a
general partner;
c. Co-owner with a
DOS or his spouse
or relatives within
first degree of
consanguinity or
affinity, or relative by
legal adoption, of the
property/interest/right
mortgaged, pledged
assigned to secure
the loans except
when the loan covers
only the co-owner’s
undivided interest;
d. Corporation, firm,
association of which
a director or officer is
also a director or
officer of the same.

Note: Hindi naman pinagbabawal ang DOSRI loans, except that pag nag DOSRI loans ka merong
mga requirements na mas mahigpit.

Restrictions under the GBL and NCBA Relating to DOSRI

1. Procedural requirement
General Rule: no director or officer of any bank shall, directly or indirectly, borrow from such
bank nor shall he be a guarantor or surety for loans from such bank to others.

Exception: loan may be allowed where there is written approval of the majority of all the
directors concerned, excluding the director concerned.

Exception to the exception: no written approval of the majority of directors is required where
loan is under a fringe benefit plan approved by the BSP. (GBL, Sec. 36)

2. Arm’s Length Rule

- Dealings of a bank with any of its DOSRI shall be upon terms not less than favorable to the
bank than those offered to others. (GBL, Sec. 36)

3. Aggregate Ceilings
- The Monetary Board may regulate the amount of loans that may be extended by a bank to
its DOSRI, as well as investments of such bank in enterprises owned or controlled by said
DOSRI. (GBL, Sec. 36)

4. Individual Ceilings
 General Rule: the outstanding loans, credit accommodations, and guarantees extended to a
DOSRI shall be limited to an amount equivalent to their unencumbered deposits and book
value of their paid-in capital. (GBL, Sec. 36)

Note: Yung DOSRI pwede ka manghiram sa bangko pero hindi pwedeng lumagpas dun sa
unencumbered deposits mo, meaning, yung deposits na pwedeng kunin ng bangko anytime
pag hindi ka nagbayad, or kapag yung shares mo naman, wala kang deposits or kulang,
yung value ng paid-in capital mo pag shareholder ka.

Exception: fringe benefits, non-risk items classified by MB and those extended by

Cooperative banks to its stockholders.

5. Ceiling on Unsecured Loans

- Observed for proper caution before granting loans (GBL, Sec. 41)

6. Reportorial requirement (GBL, Sec. 36)

7. Waiver of Bank Secrecy

- A DOSRI who contracts a loan with their bank is required to execute a written waiver of
secrecy deposits (GBL, Sec. 26)

8. Examination (GBL, Sec. 26)

Effect of Violation of DOSRI

- After due notice to the board of directors of the bank, the office of any bank director or officer who
violates the DOSRI rules may be declared vacant and the director or officer shall be subject to the
penal provisions in the NCBA. (BSP Circular 423, series of 2004)