DEFINITION

and
NATURE OF BANKS

1
A. DEFINITION

• entities engaged in the lending of funds obtained in the form of

deposits (Sec. 3.1. of R.A. No. 8791 [GBL of 2000])

• moneyed institute founded to facilitate the borrowing, lending and

safe-keeping of money and to deal in notes, bills of exchange and
credits \ (Republic of the Philippines vs. Security Credit and
Acceptance Corp., 19 SCRA 58)

2
• In Teodoro Banas, et. al. VS. Asia Pacific Finance Corp., G.R. No.
128703, Oct. 18, 2000, 136 SCAD 504, the Supreme Court ruled that
banking laws are inapplicable to the respondent corporation because it
was not established that t was engaged in banking functions. The
respondent was organised as an “investment house” and it was
engaged in “investing, reinvesting or trading in securities”. This
function can be performed by an investment company and the same is
not in violation of banking laws. What is prohibited is for investment
companies t lend funds obtained from the public through receipt of
deposits. The High Court declared that it was not shown that the
respondent lent money obtained from deposits.

3
• However, in the case of Republic of the Phil. VS. Security Credit and
Acceptance Corp., supra, the Supreme Court found that “an
investment company which loans out money of its customers, collects
the interest, and charges a commission to both lender and borrower is
engaged in banking”.

• It should be noted that investment companies areas separate types of

entities under existing laws. However, they may be considered as
engaged in banking functions if they accept deposits and loa out the
money they receive.

4
Additional Functions
Banks have already been transformed into entirely different institutions
compared to banks in the early years of banking in the Philippines. Banks now
offer diverse services and perform functions that are unheard of in the years
past. Nevertheless, banks retain and must actually retain the core functions of
deposit taking and lending; otherwise, the entity cannot be considered a bank.

• Payment Function
There is, however, a third economic function of banks in addition to
deposit function and loan function, that is, its payment function. One of the
primary means employed in the performance of a bank’s payment function is
the drawing of checks. Banks may be drawee banks of checks issued by its
customers that are used in paying obligations. In addition, banks may issue
manager’s checks, cashier’s checks, traveler’s checks or demand drafts that
will be used for the same purpose. 5
• Other Functions
Other functions that are also now exercised by banks,
depending on the type of bank, include quasi- banking, provider of
safety deposit boxes, performance of the functions of investment
houses, performance of allied and non-allied financial services,
financial agent, buying and selling by order of and for the account
of their customers, shares, evidences of indebtedness and all types
of securities, and other functions.

6
B. NATURE OF BUSINESS

The importance of banks is recognized by the General Banking Law

(hereinafter referred to as GBL) in its Declaration of Policy. Section 2 of
the GBL provides that:
Section 2. Declaration of Policy. – The State recognizes the vital
role of banks in providing an environment conducive to the sustained
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.

7
“Banks are to the commercial world what arteries are to the human
system. Through them passes the vitalizing life-giving mediumof
exchange, and upon their healthy condition commercial activity and
prosperity will depend. They substitute their own credit which has
general acceptance in the business community for that of individuals
which has only limited acceptability.” (Carl Zollman, “The Laws of
Banks & Banking”, Vol. 1, 1936 Ed., p. 37)

Consequently, banking business is properly subject to reasonable

regulation under the police power of the state because of its nature and
relation to the fiscal affairs of the people and the revenues of the state.
(Central Bank of the Phil. VS. Court of Appeals, 208 SCRA 652, 684.)

8
FIDUCIARY NATURE OF BANKING
• “Given the overall importance of banks to the economy and the level of
trust customers place in banks, the banking industry is treated as impressed
with public interest.” (Solid bank Corp. VS. Arrieta, 451 SCRA, 711)

“Although the relationship between depositors and banks, and between

borrowers and banks, are considered commercial in nature, the system is
built on trust. The banking system must earn the confidence of the general
public so that it can effectively mobilize funds. The safety and soundness of
the banking system is a key element to earning the confidence of the general
public.” (11th. Cong., Record of the Senate 553 (Mar. 17, 1999( (enacted),
cited in “The General Banking Law Annotated,” BSP.

9
“The fiduciary nature of the bank’s relationship with its depositors does
not convert the contract between them froma simple loan to a trust
agreement, whether express or implied.” (Goyanko, Jr. VS. UCPB, 690
SCRA 79 [2013])

10
“This Section declares that the State recognizes the “fiduciary nature of
banking that requires high standards of integrity and performance.” This
provision is a statutory affirmation of Supreme Court decisions,
exemplified by the 1990 case of “Simex. International VS. C.A., (89
SCRA 360), holding that “as a business affected by public interest and
because of the nature of its functions, the bank is under obligation to
treat the accounts of its depositors with meticulous care, always having
in mind the fiduciary nature of their relationship.” (The Consolidated
Bank & Trust Corp. VS. C.A. [410 SCRA 562]).

11
UTMOST DILIGENCE
One of the consequences of the nature of the bank’s business is that
it is required to exercise utmost diligence in the handling of deposits.

The banking system is an indispensable institution

in the modern world and plays a vital role in the
economic life of the of every civilised nation. Whether
as mere passive entities for the safekeeping or saving
of money or as active instruments of business and
sscommerce, banks have become an ubiquitous
presence among the people, who have come to regard
them with respect and even with gratitude, and, most
of all, confidence. . .

12
“The diligence required of banks, therefore, is more than that of a good
father of a family. In every case, the depositor expects the bank to treat
his account with the utmost fidelity, whether such account consists only
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.
From the foregoing, it is clear that petitioner bank did not exercise the
degree of diligence that it ought to have exercised in dealing with its
client. (Equitable PCI Bank v. Tan, G.R. No. 165339, August 23, 2010)

13
 As for business entities like the petitioner, 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. . . .”
(Simex International (Manila) Incorporated VS. C.A., 183 SCRA 361,
362)

“Like a common carrier whose business is imbued with public

interest, a bank should exercise extraordinary diligence to negate its
liability to its depositors.” (Solid Bank Corporation VS. Tan, 520 SCRA
123 [2007])

14
Nevertheless, it was observed in Gregorio H. Reyes, et al. V. The Hon.
Court of Appeals, et al., that the duty of a bank to exercise the highest
degree of diligence applies only to the handling of deposits. In the said
case, the respondent bank assissted the petitioner in securing foreign
demand draft. The Supreme Court declared that utmost diligence is not
required in such activity.

15
Diligence for Non-deposit Functions
The Court consistently ruled in other cases that the duty to
exercise the highest degree of care is not limited to the handling of
deposits. Thus, the duty of banks is not satisfied if it prematurely
foreclosed the mortgage although the borrower was not yet in default.
(DBP vs. Guarina Agricultural and Realty Dev. Corp., G.R. No.
160758, January 15, 2014)
Similarly, a bank must exercise due care in the processing of loan
documents. There will be breach of such obligation for instance if it
made the client sign a certificate of completion of a house knowing
that the house is still incomplete. (Comsavings Bank vs. Sps.
Capistrano G.R. No. 170942, August 28, 2013)
16
STRIKES AND LOCKOUTS

The nature of the business of banks also requires special rules on

strikes and lockouts. Section 22 of the GBL declares that the banking
industry as indespensable to the national interest and “notwithstanding the
provisions of any law to the country, any strike or lockout involving
banks, if unsettled after seven (7) calendar days shall be reported by the
BSP to the Secretary of Labor who has two (2) options: (1) he may assume
jurisdiction over and decide the dispute or (2) certify the same to the
National Labor Relations Commission for compulsary arbitration.”
The law also allows the President of the Philippines to, at any time,
intervene and assume jurisdiction over such labor dispute in order to settle
or terminate the same.
17
Banks operate (and earn income) by:
• extending credit facilities
• financed primarily by deposit from the
public
• by ploughing back the bulk of said
deposits in the economy in the form of
loans.

18
 For this reason, banking is imbued with public interest (BDO-EPCI,
Inc. vs JAPRL Dev’t. Corp, GR No. 17991, 14 April 2008 [fiduciary
nature of banking]). Consequently, banking is properly subject to
reasonable regulation under the police power of the state because of its
nature and relation to the fiscal affairs of the people and the revenues of
the state (Central Bank of the Phil. vs. Court of Appeals, 208 SCRA
652, [May 8, 1992])

“The essence of banking” 

• the taking of deposits from the public and
• lending out these funds

19
 Thus, a financial institution obtaining deposits from the public which
was lent to persons deemed suitable by it, is engaged in banking
(Republic vs. Security Credit and Acceptance Corp., 19 SCRA 58
[1967])

Aside from the two (2) basic functions of banks: (1) deposit taking
and (2) lending, banks perform other activities depending on what
category they belong to. These additional activities are set out in various
sections of Republic Act No. 8791 (Secs. 23, 29 & 53) and other special
banking laws.

20
 But, an investment firm that purchased a PN at a discount
secured by a CM for purposes of reinvesting is not engaged in
a loan transaction or in banking but only in the purchase of
receivables (Banas vs. Asia Pacific Corp., 343 SCRA 527
[2000])

21
 GOVERNING LAW

1. Republic Act No. 8791, “An Act Providing for the Regulation of the
Organization and Operation of Banks, Quasi-Banks, Trust Entities
and Other Purposes” Otherwise known as the “General Banking
Law of 2000” (GBL) which took effect on June 13, 2000. The law
took effect on June 13, 2000. It superseded R.A. No. 337, otherwise
known as the General Banking Act- the law that regulated bank
organization and operations since 1949. (The General Banking Act
was amended by R.A. No. 865-B, P.D. No. 1317, P.D. No. 1765,
P.D. No. 1828, B.P. Blg. 61, and R.A. No. 7906)

22
2. Republic Act No. 7653, “The New Central Bank Act” which
was passed on June 14, 1993. This law prevails over general
laws, like the Corporation Code, in the regulation of banks (In Re:
Petition for Assistance in the Liquidation of RB of Bokod,
 (Benguet), Inc.., G.R. No. 158261, December 18, 2006.)

23
GOVERNING LAW

3. Republic Act No. 7906, “Thrift Banks Act of 1995”

4. Republic Act No. 7353, “Rural Banks Act of 1992”

5. Cooperative Code. For Cooperative Banks, the relevant law is

Chapter XII (Cooperative Banks) of the Philippine Cooperative Code of
2008 (R.A. No. 6938, as amended by R.A. No. 9520)

24
6. R.A. No. 6848. Islamic banks are covered by R.A. No. 6848,
otherwise known as the “Chapter of Al Amanah Islamic Investment
Bank of the Philippine.”

7. R.A. No. 6426. R.A. No. 6426 (the Foreign Currency Deposit Act
of the Philippines), as amended is the law instituting a foreign
currency deposit system in the Philippines. The law governs
foreign currency deposits and the authority of banks designated by
the BSP to accept foreign currency deposits.

25
8. PDIC Law. R.A. No. 3591, as amended (The PDIC Law/ Chapter) is
the Act that established the Philippine Deposit Insurance Corporation
(PDIC). The PDIC is the Corporation mandated to provide
mandatory deposit insurance coverage for the deposit liabilities of
banks engaged in the business of receiving deposits.

9. Laws on Foreign Banks. One of the recent laws on banks is R.A.

No. 10641 allowing full entry of foreign banks in the Philippines
(Appendix 5). R.A. No. 10641, which was approved on July 14,
2014, amended specific provisions of R.A. No. 7721 (An Act
Liberalizing The Entry and Scope of Operations of Foreign Banks In
The Philippines And For Other Purposes) – Section 2 (Modes of
Entry of Foreign Banks),
26
3 (Guidelines for Approval), 4 (Capital Requirements), 8 (Equal
Treatment of Foreign Banks and Philippine Banks of the Same Category),
12 (Applicability of Other Banking Laws), 13 (Rule-Making Powers of
the Monetary Board of the Bangko Sentral ng Pilipinas and Copliance
Reports) thereof inserted a new Section 9 (Participation in Foreclosure
Proceedings), and repealed Section 6 of the same law.

10. Other Laws. Other laws relevant to the study of banks and their
operations are R.A. No. 1405, as amended (Law on Secrecy of Bank
Deposits), Act, and R.A. No. 9160 (Anti-Money Laundering Act of
2001), as amended by R.A. No. 9194 and R.A. No. 10167.

27
11. BSP Rules and Regulations. The applicable laws are implemented
by the Manual of Regulations for Banks (MORB) as well as
circulars issued by the BSP. While the responsibility to conduct the
business of the bank is reposed on its Board of Directors, officers
and the personnel, the BSP, which is the government entity charged
with bank supervision, is mandated to keep abreast with the
condition and operations of banks, to provide guidelines on the
management of risks and the conduct of safe banking operations, as
well as to provide for and assist in the correction of unsound
banking conditions and practices. BSP regulations have been issued
to meet this mandate

28
Financial Intermediation

• performed by financial intermediaries

(like financial institutions) who take
money from investors, pool it, and invest
the pooled money in other enterprises.
Financial intermediaries include
depository institutions, life insurance
companies, mutual funds and pension
funds (“Banking Law & Regulation 48
[2001] by Jonathan R. Micey, Texas al. In
the Phil., banks rank first among financial
intermediaries.
29
QUASI-BANKS

• Banks should be distinguished from “Quasi-Banks” which are entities that do not
accept deposits. Quasi-Banks refer to entities engaged in the borrowing of funds
through the issuance, endorsement or assignment with resource or acceptance of
deposit substitutes for purposes of relending or purchasing of receivables and
other obligations. Deposit substitutes are alternative forms 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. Nevertheless,
certain banks are allowed under existing laws to engage in quasi-banking in
addition to their banking functions. Universal Banks and Commercial Banks may
exercise quasi-banking functions without securing prior authority from the MB
while other banks must secure such authority.

30
Section X234.1 of the Manual of Regulations for Banks (MORB)
provide the following essential elements of quasi-banking:

1. Borrowing funds for the borrower’s own account;

2. Twenty (20) or more lenders at any one time;
3. Methods of borrowing are issuance, endorsement, or acceptance of debt
instruments of any kind, other than deposits, such as acceptances,
promissory notes, participations, certificates of assignments or similar
instruments with recourse, trust certificates, repurchase agreements, and
such other instruments as the Monetary Board may determine; and
4. The purpose of which is to (1) relending, or (2) purchasing receivables or
other obligations.

31
 Purchasing of receivables or other obligations refer to the acquisition
of claims collectible in money, including interbank borrowings or
borrowings between financial institutions, or of acquisition of securities,
of any amount and maturity from domestic or foreign sources.
Relending means extension of loan by an institution with antecedent
borrowing transactions.

It is not quasi-banking if the borrowing is made by commercial,

industrial and other non-financial companies for the limited purpose.

32
CLASSIFICATION OF BANKS

The GBL modified the classification of banks under the old law. The
General Banking Act did not use the term “universal banks”; instead it
used the term” expanded commercial banks.” Banks are classified under
Section 3.2 of the GBL into:

1. Universal Banks;

2. Commercial Banks;

33
CLASSIFICATION OF BANKS

3. Thrift banks, composed of: (i) Savings and

mortgage banks, (ii) Stock savings and loan
associations, and (iii) Private development
banks, as defined in Republic Act No. 7906;

4. Rural banks, as defined in Republic Act No.

7353;

5. Cooperative banks, as defined in Republic Act

No. 6938 (hereafter the “Cooperative Code”);
34
CLASSIFICATION OF BANKS

6. Islamic banks as defined in Republic Act

No. 6848, otherwise known as the
“Charter of Al Amanah Islamic
Investment Bank of thhe Philippines”; and

7. Other classifications of banks as

determined by the Monetary Board of the
Bangko Sentral ng Pilipinas.

35
According to Section X101 MORB (2013) and Related Laws

CLASSIFICATION OF BANKS

1. Universal Banks - have the authority to exercise, in addition to

powers granted to commercial banks,
- the powers of an investment house
- and to invest in non-allied enterprises
- may own up to 100% of the equity in a thrift bank, rural bank, financial allied
enterprises, or non-financial allied enterprise.
In case of a publicly-listed universal bank, it may own up to 100% of
the voting stock of only one (1) other universal bank or commercial
bank. (Sections 23 & 25 of the GBL)
36
“Investment House” - any enterprise which engages or purports to engage,
whether regularly or on an isolated basis, in underwriting of securities of
another person or enterprise, including securities of the Government and its
instrumentalities (P.D. No. 129)
 
“Underwriting of Securities” - is the act or process of guaranteeing distribution
and sale within the Phil. of securities of the Government or its
instrumentalities. (P. D. No. 129)
 
“Securities “ - shall include commercial papers evidencing indebtedness of any
person, financial or non-financial entity, irrespective of maturity, issued,
endorsed, sold, transferred or in any manner conveyed to another with or
without recourse, such as promissory notes. (Revised Securities Act as cited in
“Banas vs. Asia Pacific Corp. 343 SCRA 527 [2000])
37
2. Commercial Banks - banks that have, in addition to the general powers
incident to corporations, all such powers as may be necessary to carryon
the business of commercial banking, such as

- accepting drafts and issuing letters of credit

- discounting and negotiating promissory notes, drafts, bills of exchange & other
evidences of debt,
- accepting or creating demand deposits,
- receiving other types of deposits and deposit substitutes,
- buying and selling foreign exchange and gold or silver bullion,
- acquiring marketable bonds and other debt securities, and
- extending credit subject to such rules as the Monetary Board may promulgate.

(Section 29 of the GBL)

38
3. Thrift Banks - are established for the purpose

- of meeting the needs for capital, personal and investment credit or medium and long
term loans for entrepreneurs
- and promoting agriculture and industry, and
- and to place within easy reach of the people the medium and long term credit
facilities at reasonable costs. (R.A. No. 7906, section 2 [b], 1995)
- accumulating the savings of depositors and investing them, together with capital
loans secured by bonds, mortgages in real estate and chattel mortgages
- loans for personal or household finance or in financing for home building and home
development
- in readily marketable and debt securities
- and in such other investments and loans which the Monetary Board may determine

(Section 3 of the GBL)

39
4. Rural Banks - are organised

- to promote comprehensive rural development with the end in view of attaining

equitable distribution of opportunities, income and wealth;
- a sustained increase in the amount of goods and services produced by the
nation for the benefit of the people
- and in expanding productivity as a key in raising the quality of life for all,
especially the underprivileged.

The establishment of the rural banking system is designed to make

needed credit available and readily accessible in the rural areas on
reasonable terms. (R. A. 7353)

40
5. Cooperative Banks - organised for the primary purpose a wide
range of financial services to cooperatives and their members. In
addition to the powers granted by the Phil Cooperative Code of 2008
and other existing laws, any cooperative bank may perform any or
all of the banking services offered by other types of banks subject to
the prior approval of the Bangko Sentra. (R. A. No. 9520, Articles 23
(I) and 100)

41
6. Islamic Bank - The Al-Amanah Islamic Investment Bank of the
Phil. (AAIIBP) is created with the primary purpose

- of promoting and accelerating the socio-economic development of the

Autonomous Region by performing banking, financing and investment
operations - to establish and participate in agricultural, commercial and
industrial ventures based on the Islamic concept of banking.

All business dealings and activities of the AAIIBP are subject to the
basic principles and rulings of Islamic Shari’a within the purview of the
aforementioned declared policy. (R. A. No. 6848)

42
7. Government Banks - refer to universal and commercial banks
owned or controlled by the national government such as the
Development Bank if the Philippines (DBP), the LandBank of the
Philippines (LBP) and the AAIIBP. These banks are still subject to
the supervision and regulation of the Bangko Sentra pursuant to the
provisions of Section 25 of R.A. No. 7653 and their respective
charters.

43
 Before an entity may engage in banking, the need for an authority
from the BSP is indispensable. Thus, if such entity performs banking
and quasi-banking functions without the required certificate of authority
from the BSP, the officers concerned may be subject to criminal
prosecution and the Articles of Incorporation of the corporation may be
revoked (Republic of the Phil. vs. Security Credit and Acceptance
Corp., (G.R. No. L 20583, Jan. 23, 1967; Central Bank vs. Morfe, G.R.
No. L- 20119, June 30, 1967)

The determination of whether a person or entity is performing

banking or quasi- banking functions without BSP’s authority shall be
decided by the  Monetary Board (Sec. 6, GBL)

44
DISTINCTIONS

In general, banks may be distinguished as follows:

1. As to capitalization – They have different minimum capitalization
requirements. For example, the minimum capital of a Universal bank
is P5.4 Billion while the capital of a Commercial Bank is P2.8
Billion.

2. As to purpose – Some of the banks have specific purposes and social

functions. For instance, Rural banks are meant to hasten rural
development.
45
DISTINCTIONS

3. As to powers or functions – There are functions and powers that are

not exercised by one but are exercised by others. Some banks may
exercise certain powers only upon prior approval of the Monetary
Board. Thus, only universal banks and commercial banks can create
and accept demand deposits without separate authority from the
Monetary Board while other banks must secure authority from the
Monetary Board; only universal banks may act as an investment
house; generally, only universal banks and commercial Banks may
be involved in quasi-banking functions.

46
DISTINCTIONS

4. As to who can be directors – Public offers can be directors of the

Rural Banks while such officers are prohibited from being directors
or officers of other types of banks.

5. As to incorporators – Consistent with the provisions of the

Corporation Code, incorporators of banks are natural persons. The
exception is with respect to rural banks which can be organized or
established by cooperatives and corporations primarily organized to
hold equities in rural banks.

47
DISTINCTIONS

6. As to neccessity of public offering – Public offering of shares is

necessary for domestic banks seeking authority to act as universal
bank while there is no such requirement for other banks.
(Aquino, “Notes & Cases on Bangking Law & Negotiable Instruments
Law”, Vol. II, 2010)

48
FOREIGN BANKS

The entry of foreign banks in the Philippines through the

establishment of branches shall be governed by the provisions
of the “Foreign Banks Liberalization Act”.

49
 Previously, foreign banks were authorized to operate in the Philippine
banking system through the acquisition, purchase or ownership of up to 60
percent of the voting stock of an existing bank, or investment in up to 60
percent of the voting stock of a new banking subsidiary incorporated under the
laws of the Philippines, or through the establishment of a Philippine branch
with full banking authority.
RA 10641 now allows foreign banks to operate within the Philippine
banking system by (1) acquiring, purchasing, or owning up to 100 percent of
the voting stock of an existing bank (2) by investing in up to 100 percent of the
voting stock of a new banking subsidiary incorporated under Philippines laws,
or (3) by establishing branches with full banking authority. But foreign banks
can operate in the Philippines only through any one of these three modes of
entry. Still, foreign banks can now operate in the country either as branch or a
100-percent owned foreign subsidiary. A foreign bank branch now allowed to
open up to five sub-branches.
50
OTHER ACTIVITIES / SERVICES OF BANKS

a) Custodianship of Funds, Documents & Valuable Objects - ( a

custodian or depositary. The relationship between the bank as a
depositary and it’s clients is generally governed by the provisions of
the Civil Code on deposit [R.A. No. 386, Title XII, 1950])

b) Act as Financial Agent and Buyer and Seller of Shares, Evidences of

Indebtedness and Securities - (relationship with client is governed
by the Contract of Agency. “Securities” - shares of stock, bonds,
debentures  and notes

51
Investment Management Activity - refers to any activity resulting from an investment
management agreement (IMA) primarily for financial return whereby the bank (the investment
manager) binds itself to handle or manage investible funds or any investment portfolio in a
representative capacity as a financial or managing agent, adviser, consultant or administrator of
financial or investment management, advisory, consultancy or any similar arrangement which
does not create or result in a trusteeship. (MORB, Section X403 (c), 2009). Some distinguishing
features:
-the agreement is an agency and not a trust agreement;
-as such, the client shall at all times retain legal title to funds and properties subject of the
arrangement;
-the arrangement does not guarantee a yield, return or income by the investment manager,
and
-the IMA is not covered by deposit insurance, and losses if any, shall be for the account of
the client. (MORB, Section X411.1 (b)(6)(c)
“As can be seen, the arrangement is neither a trust nor an ordinary bank deposit, and no trust or-
trustee-beneficiary or even borrower-lender relationship exists between the parties.” (Panlilio
vs. Citibank, N.A., 539 SCRA 69 [2007]
52
OTHER ACTIVITIES / SERVICES OF BANKS

c) Collection and Payment Agent and Performance of Other Services -

for the account of its clients. Also as tax and customs collection
agent of the gov’t., SSS premium contributions and overseas
remittance services

d) Upon prior approval of the Monetary Board, act as managing agent,

adviser, consultant or administrator of investment
management/advisory/consultancy accounts; and

53
OTHER ACTIVITIES / SERVICES OF BANKS

e) Safety Deposit Box- is a lockbox stored in a bank’s vault to secure a

customer’s valuables. It usually takes two (2) keys, one held by the
bank and one held by the customer, to open the box. (Black’s Law
Dictionary (8th. Ed. 2009)
The bank shall perform the services permitted under Subsections 53.1
.,53.2.,53.3., and 53.4. as depository or as an agent. Accordingly, it
shall keep the funds, securities and other effects which it receives
duly separate from the bank’s own assets and liabilities. (The General
Banking Law of 2000 Republic Act No. 8791)
54
Other Banking Services. – In addition to the operations specifically
authorized in this Act, a bank may perform the following services;

• Receive in custody funds, documents and valuable objects;

• Act as financial agent and buy and sell, by order of and for the account
of their customers, shares, evidences of indebtedness and all types of
securities;

• Make collections and payments for the account of others and perform
such other services for their customers as are not incompatible with
banking business;

55
 In CA Agri-Industrial Dev. Corp. VS. C.A., G.R. No. 90027, March 3,
1993, the Supreme Court, applying Sec. 72-A of R.A. 337 explained that a
contract for the rent of a safety deposit box is not of an ordinary contract of
lease as defined in Article 1643 of the Civil Code. However, it is also not
strictly governed by the provisions of the Civil Code on deposit. The Court
said that the contract is a special kind of deposit in the concept of bailment,
specifically a bailment for hire and mutual benefit. It cannot be characterised
as lease because the full possession and control of the safety deposit box is
not given to the renters. Consequently, stipulation in the contract stating that
the bank shall not be obliged to exercise any diligence over the contents of
the safety deposit box is void.” (Ibid.)

“Bailment for hire” - is a bailment for which the bailee is compensated, as

when one leaves a car with a parking attendant.
56
As Correspondent Bank
A bank may likewise act as corespondent bank in the remittance of
funds from other countries. A bank in another country (foreign bank)
enters into an arrangement with a local bank (known as the
correspondent bank) whereby the foreign bank can ask the
correspondent bank t pay amounts to a third party. Upon payment to the
third party by the correspondent bank, the latter bank is entitled to bill
the foreign bank for reimbursement. The contract between the foreign
bank and the local bank is in the nature of an agreement “pour autrui”.
(Bank of America NT & SA VS. IAC, 145 SCRA 419 [Nov. 1996])

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 In “PNB VS. C.A. & Ramon Lopez”, 259 SCRA 174), the High Court
ruled that even if the beneficiary is indebted to the correspondent bank,
the latter cannot do a shortcut and simply intercept funds being coursed
through it, for transmittal to another bank, and eventually to be
deposited to the account of the beneficiary. The bank cannot invoke
legal compensation in such a case.

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Commercial Banks

1. Accepting Drafts - (Draft is a payment order in writing directing a

second party, the drawee, to pay a specified sum to a third party (the
payee). A draft is actually a bill of exchange, although the term draft is
ordinarily used if drawn on a bank. (BSP’s “The General Banking Law,
Annotated”

2. Issue Letters of Credit - (A letter of credit is an engagement by a bank

made at the request of a customer that the issuer will honor drafts or
other demands for payment upon compliance with the conditions
specified in the credit [Prudential Bank vs. Intermediate Appellate
Court, 216 SCRA 257])
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How a Letter of Credit Works?
- copy the procedure laid down in “Bank of America, NT & SA VS. C.A. 228
SCRA 357 [1993]

Letters of credit may either be:

(1) Commercial letters of credit - are those that are involve in the importation of
goods,
(2) Standby letters of credit - secure other obligations including loans or the
performance of some service like construction or infrastructure.

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The Code of Commerce contains few provisions on Letters of Credit.
However, international customs, primarily those embodied in the
Uniform Customs and Practice for Documentary Credits (UCP for
short) which was adopted by the International Chamber o Commerce,
has overtaken the provisions of the Code of Commerce. (“Notes and
Cases on Banking Law & Negotiable Instruments Law” by Timothy B.
Aquino, p. 254, 3rd. Ed.)

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“In commercial transactions, a letter of credit is a financial developed
by merchants as a convenient and relatively safe mode of dealing with
sales of goods to satisfy the seemingly irreconcilable interests of a
seller, who refuses to part with his goods before he is paid, and a buyer,
who wants to have control of the goods before paying.” (Transfield Phil.
Inc. VS. Luzon Hydro Corp., et.al., G.R. No. 146717, Nov. 22, 2004.)

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Parties in Commercial Credits -
There are at least three (3) parties in a Commercial Letter of Credit
Transaction, namely:

1. The Buyer-applicant - the person who procures the letter of credit

and obliges himself to reimburse the issuing bank upon receipt of
the documents of title.

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2. The “Issuing Bank” - their bank that issues the letter of credit and
undertakes to pay the seller upon receipt of the tender documents and to
surrender the documents o the buyer upon reimbursement. Unless the
contrary is expressly provided for, the liability of the issuing bank is
solitary with the buyer-applicant.

3. The Seller-beneficiary - the person who in compliance with the

contract of sale ships the goods to the buyer and delivers the documents
of title and draft to the issuing bank to recover payment.

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Other Parties -
The number of parties may increase. This include the following persons or entities:

A. The advising (notifying) bank - may be utilised to convey to the seller the existence of
the credit.
B. The confirming bank - which will lend credence to the letter of credit issued by a
lesser known issuing bank; the confirming bank is directly liable to pay the seller-
beneficiary.
C. The paying bank which is the bank that undertakes to encase the drafts draw by the
exporter/seller.
D. The negotiating bank which discounts the draft tat was agreed to be accepted and/or
paid by the issuing bank. instead of going o the place of the issuing bank to claim
payment, the buyer may approach another bank, termed the negotiating bank to have
the draft discounted.
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“Independence Principle”

There are at least three (3) independent and distinct contracts involved
in a commercial letter of credit namely:

(1) the contract of sale between the buyer and the seller,
(2) the contract of the buyer with the issuing bank, and
(3) the letter of credit proper.

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 In the second contract - between the buyer and the issuing bank - the
bank agrees t issue the letter of credit in favour of the seller subject to
reimbursement or payment by the buyer of whatever is paid to the seller
plus proper consideration agreed upon by the parties.
In the third contract which is the letter of credit proper, the bank
obligates itself to pay the seller or to the order of the seller 9that is, it
will honor the bills or drafts drawn b the seller) after presentation to the
bank of tender documents stipulated upon, which normally includes the
document of title. (Keng Hua Paper Products VS. C.A., 286 SCRA 257
[1998]). Under the independence principle, the three (3) contracts are
separate and distinct from each other. They are to be maintained in a
state of perpetual separation.

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“Margin”
• “SEC. 105. Margin Requirements Against Letters of Credit. - The
Monetary Board may at any time prescribe minimum cash margins for
the opening of letter of credit, and may relate the size of the required
margin to the nature of the transaction to be financed” (Section 105 of
the New Central Bank Act)

- “margin deposit requirement” is a BSP measure to cut off excess

currency liquidity which would create inflationary pressure;

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- it is a collateral security given by the debtor, and is supposed to be
returned t him upon his compliance with his secured obligation;
- Consequently, the bank pays. no interest in the marginal deposit,
unlike an ordinary bank deposit which earns interest in the bank, and
- Normally, no marginal deposit is required for letters of credit except in
those cases where the applicant for letter of credit is not known to the
bank or does not maintain a good credit standing therein.” (Abad VS.
C.A., 181 SCRA 191 1990]).

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Commercial Banks

3. Discount & Negotiate Promissory Notes, Drafts, Bills of Exchange

& Other Evidences of Indebtedness- ( A discount refers to interest
paid in advance)

4. Accept or Create Demand Deposits - (Demand Deposits are all

liabilities of a bank denominated in Phil. currency and are subject to
payment upon demand by the presentation of checks [R. A. No.
7653])

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Commercial Banks

5. Receive Other Types of Deposits/Deposit Substitutes - (like savings

& time Deposits, Negotiable Order of Withdrawal Account

6. Buy and sell foreign exchange and gold or silver bullion - (“foreign
exchange” is foreign money used in settlement in international trade
between countries

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Commercial Banks

7. Acquire Marketable Bonds & Other Debt Securities- (like evidences

of indebtedness of the Republic of the Phil. or the Bangko Sentral

8. Extend Credit - (lending function of banks of funds obtained

through deposit & deposit substitutes

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Textbook:
“Banking & Allied Laws” 2016 Edition by Larry P. Ignacio
(available at Central Books)

73
THANK YOU!

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