RA 8791 – GENERAL BANKING LAW OF 2000

An Act Providing for the Regulation of and Organization and Operations of Banks, Quasi-
banks, Trust Entities and for other purposes.

The General Banking Law of 2000 (GBL) is the law that generally governs the regulation, organization and
operation of banks, quasi-banks, and other quasi-entities. It primarily governs Universal Banks[1] (UB) and
Commercial Banks[2] (CB), and has suppletory application to Thrift Banks (which is primarily governed by
RA 7906, the Thrift Banks Act), Rural Banks (primarily governed by RA 7353, the Rural Banks Act), and
Cooperative Banks (primarily governed by RA 6938, the Cooperative Code).[3]

1 Banks

Banks are entities engaged in the lending of funds obtained in the form of deposits from the
public.[4] This is usually referred to as “core-banking functions” of mobilizing savings (through
deposit-taking) and allocating resources (through lending).

GBL requires that banks are stock corporations and its funds are obtained from the public, i.e.
deposits of twenty (20) or more persons.[5]

In Bañas v. Asia Pacific Finance Corp.,[6] the Supreme Court said that an investment company
that engages solely in investing, reinvesting, or trading in securities is not engaged in banking.
“An investment company refers to any issuer which is or holds itself out as being engaged or
proposes to engage primarily in the business of investing, reinvesting or trading in securities. As
defined in Revised Securities Act, 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. Clearly, the transaction between petitioners and respondent was one
involving not a loan but purchase of receivables at a discount, well within the purview of
‘investing, reinvesting or trading in securities’ which an investment company, like ASIA
PACIFIC, is authorized to perform and does not constitute a violation of the General Banking
Act.”

In Republic v. Security Credit and Acceptance Corporation,[7] the Court said that “an
investment company which loans out the money of its customers, collects the interest and
charges a commission to both lender and borrower, is a bank. It is conceded that a total of 59,463
savings account deposits have been made by the public with the corporation and its 74 branches,
with an aggregate deposit of P1,689,136.74, which has been lent out to such persons as the
corporation deemed suitable therefore. It is clear that these transactions partake of the nature of
banking, as the term is used in Section 2 of the General Banking Act.”
Banks must also be contrasted from “quasi-banks” (QB). The latter refer to entities engaged in
the borrowing of funds through the issuance, endorsement or assignment with recourse or
acceptance of deposit substitutes (as defined in Sec. 95 RA 7653, the New Central Bank Act) for
purposes of relending or purchasing of receivables and other obligations. (last part of Sec. 4)
Since this is an inherent power of UBs and CBs, they do not require separate licensing or
authorization for this purpose.

Nature of Business

Section 2 of GBL provides that “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.” This consequently
means that a bank shall be subject to heavy and close supervision and/or regulation by the
Bangko Sentral ng Pilipinas,[8] and that it must exercise utmost diligence in the handling of
deposits.[9]

To promote and maintain a stable and efficient banking and financial system, there are special
rules that govern banks. Because it is indispensable to the national interest, any strike or lockout
involving banks, if unsettled after seven (7) calendar days shall be reported by the Bangko
Sentral to the Secretary of Labor who has two options: (1) he may assume jurisdiction over the
dispute or decide it or (2) certify the same to the National Labor Relations Commission for
compulsory arbitration. The law allows the President of the Philippines, at any time, to intervene
and assume jurisdiction over such labor dispute in order to settle or terminate the same.[10]

1.Authority to incorporate and operate

GBL provides that a bank or quasi-bank cannot be incorporated without authority from the BSP.
The law states that “the Securities and Exchange Commission shall not register the articles of
incorporation of any bank, or any amendment thereto, unless accompanied by a certificate of
authority issued by the Monetary Board, under its seal.”[11]

In addition, an entity performing banking and quasi-banking function cannot also operate
without a certificate of authority from the BSP.[12]

1.Classification of Banks

Section 3.2 of the GBL classifies banks into:

1.Universal Banks (UB) – banks that have the authority to exercise, in addition to the powers
authorized for a commercial bank, the powers of an investment house and the power to invest in
non-allied enterprises.[13]

2.Commercial Banks (CB) – banks that have, in addition to the general powers incident to
corporations, all such powers as may be necessary to carry on the business of commercial
banking, such as accepting drafts and issuing letters of credit; discounting and negotiating
promissory notes, drafts, bills of exchange, and 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.[14]
Rural Banks – banks that are created to make needed credit available and readily accessible in
the rural areas for purposes of promoting comprehensive rural development.[15]

1.Thrift Banks – banks that include savings and mortgage banks, private development banks,
and stock savings and loan associations.
2.Cooperative Banks – banks that primarily provide financial, banking and credit services to
cooperative organizations and their members.[16]
3.Islamic Banks – Charter of Al Amanah Islamic Investment Bank of the
Philippines.[17]

Other classification of banks as determined by the Monetary Board (MB) of the BSP.

UNIVERSAL BANKS

As to Powers

1 The powers authorized for a Commercial Bank;

2 The powers of an investment house as provided in existing laws;

and

3 The power to invest in non-allied enterprises as provided in the GBL. (Sec. 23)
4 THE GENERAL POWERS INCIDENT TO CORPORATIONS,
5 ALL SUCH POWERS AS MAY BE NECESSARY TO CARRY ON THE BUSINESS OF
COMMERCIAL BANKING, SUCH AS ACCEPTING DRAFTS AND ISSUING LETTERS OF
CREDIT; DISCOUNTING AND NEGOTIATING PROMISSORY NOTES, DRAFTS, BILLS
OF EXCHANGE, AND OTHER EVIDENCES OF DEBT;
6 SUBJECT TO SUCH RULES AS THE MB MAY PROMULGATE. THESE RULES MAY
INCLUDE THE DETERMINATION OF BONDS AND OTHER DEBT SECURITIES
ELIGIBLE FOR INVESTMENT, THE MATURITIES AND AGGREGATE AMOUNT OF
SUCH INVESTMENT. (SEC. 29)

COMMERCIAL BANKS

BSP Circular 271 (2002)

(1) invest in the equities of allied enterprises;

(2) purchase, hold and convey real estate;

(3) receive in custody funds, documents and valuable objects;

(4) act as financial agent;

(5) make collections and payments for the account of others;

(6) act as managing agent, adviser, consultant or administrator of investment

management/advisory/-consultancy accounts;

(7) rent out safety deposit boxes; and

(8) engage in quasi-banking functions.

As to Equity Investments

 A UB MAY INVEST IN THE EQUITIES OF


 ALLIED (EITHER FINANCIAL OR NON-FINANCIAL) AND NON-ALLIED
ENTERPRISES. (SEC. 24)

 EXCEPT AS THE MB MAY OTHERWISE PRESCRIBE:

 THE TOTAL INVESTMENT

 IN EQUITIES OF ALLIED

 AND NON-ALLIED

 ENTERPRISES SHALL NOT

 EXCEED 50% OF THE NET WORTH; AND

 THE EQUITY INVESTMENT IN ANY ONE ENTERPRISE, WHETHER ALLIED OR
NON-ALLIED, SHALL NOT EXCEED 25% OF THE NET WORTH OF THE BANK
(SEC. 24)

 A CB MAY INVEST ONLY IN THE EQUITIES

 OF ALLIED ENTERPRISES (EITHER

FINANCIAL OR NON-FINANCIAL). (SEC.

 EXCEPT AS THE MB MAY OTHERWISE

 PRESCRIBE:
  THE TOTAL INVESTMENT IN EQUITIES OF

 ALLIED ENTERPRISES SHALL NOT

 EXCEED 35% OF THE NET WORTH OF THE

 BANK; AND

 THE EQUITY INVESTMENT IN ANY ONE

 ENTERPRISE SHALL NOT EXCEED 25% OF

 THE NET WORTH OF THE BANK. (SEC


Equity Investments in Financial Allied Enterprises

A UB CAN OWN UP TO

100% OF THE EQUITY IN…

A THRIFT BANK,

A RURAL BANK OR

A FINANCIAL ALLIED

ENTERPRISE. (SEC. 25)

A KB MAY OWN UP TO 100% OF THE

EQUITY OF

A THRIFT BANK OR

A RURAL BANK. (SEC. 31)

WHERE THE EQUITY INVESTMENT OF A CB IS IN OTHER FINANCIAL ALLIED

ENTERPRISES, INCLUDING ANOTHER

 COMMERCIAL BANK, SUCH

 INVESTMENT SHALL REMAIN A

 MINORITY HOLDING IN THAT

  ENTERPRISE. (SEC. 31)

Equity Investments in Non-Financial Allied Enterprises

A UB OR CB MAY OWN UP TO ONE HUNDRED PERCENT (100%) OF THE

EQUITY IN A NON-FINANCIAL ALLIED ENTERPRISE. (SEC. 26 AND 32)

A UB OR CB MAY OWN UP TO ONE HUNDRED PERCENT (100%) OF THE

EQUITY IN A NON-FINANCIAL ALLIED ENTERPRISE. (SEC. 26 AND 32)

Equity Investments in QBs

TO PROMOTE COMPETITIVE CONDITIONS IN FINANCIAL MARKETS, THE MB MAY

FURTHER LIMIT TO 40% EQUITY INVESTMENTS OF UBS AND

CBS IN QBS. (SEC. 28)

TO PROMOTE COMPETITIVE CONDITIONS IN FINANCIAL MARKETS, THE MB MAY

FURTHER LIMIT TO 40% EQUITY INVESTMENTS OF UBS AND

CBS IN QBS. (SEC. 28)

Equity Investments in Non-Allied Enterprises

THE EQUITY INVESTMENT OF A UB, OR OF ITS WHOLLY OR MAJORITY-OWNED

SUBSIDIARIES, IN A SINGLE NON-ALLIED ENTERPRISE

1 shall not exceed 35% of the total

equity in that enterprise nor

2 shall it exceed 35% of the voting stock in that enterprise. (Sec. 27)

2 Functions of Banks

Deposit Function

Nature of the Function

Deposit is one of the core banking functions. While the function is referred to as deposit, it is
strictly “simple loan” where the bank is the debtor and the depositor is the creditor. Fixed,
savings and current deposits of money in banks and similar institutions shall be governed by the
provisions concerning simple loan (Article 1980, Civil Code of the Philippines).
 Since the bank is the borrower, it can make use as its own the money deposited, and the amount
is not held in trust for the depositor nor is it kept for safekeeping.[18] Bank officers cannot also
be held liable for estafa if they authorized the use of the money deposited by the depositor.[19]
Third persons who may have the right to the money deposited cannot hold the bank responsible
unless there is a court order or garnishment, since the duty of the bank is to the creditor-depositor
and not to third persons.[20]

In San Carlos Milling Co., Ltd v. BPI, the Court declared that “banks are run for gain, and they
solicit deposits in order that they can use the money for that very purpose.” For the same reason,
it has been held that “a bank has a right of set off of the deposits in its hands for the payment of
any indebtedness to it on the part of a depositor.”[21] Conversely, the depositor has every right
to apply his deposit in a bank against his loan from such bank.[22]

Kinds of Deposits

The basic types of deposit are demand deposits, savings account, time deposits, and
NOW account.

1 Demand deposits are those liabilities of banks which are denominated in Philippine currency
and are subject to payment in legal tender upon demand by presentation of checks. In here, no
interest is paid by the bank because the depositor can take out his funds any time. It is called
demand deposit because the depositor can withdraw the money he deposited on the very same
day.
2 Savings Account, which is the most common type of deposit, is usually evidenced by a
passbook. Under the fine print, if you deposit today, you cannot withdraw the amount until 60
days later. Bank pays an interest rate, but not as high as time deposits.
3 Time Deposit is an account with fixed term. The interest rate is stipulated depending on the
number of days. During this period, the money deposited cannot be withdrawn. It has a higher
rate of interest than saving account.
4 Negotiable Order of Withdrawal (NOW) Account is an interest-bearing deposit account that
combines the payable on demand feature of checks and investment feature of savings accounts.
5 Other Account is one that may be opened by one individual or by two or more persons.
Whenever two or more persons open an account, the same may be an “and/or account” or an
“and” account.

NB: A bank other than a UB or CB cannot accept or create demand deposits except upon
prior approval of, and subject to such conditions and rules as may be prescribed by the Monetary
Board.[23]

Moreover, the bank is under the obligation to treat deposit accounts of it depositors with
meticulous care. It must bear the blame for failing to discover the mistake of its employees
despite the established procedure requiring bank papers to pass through bank personnel whose
duty it is to check and countercheck them for possible errors.[24] As a business affected with
public interest and because of the nature of its functions, a bank is under obligation to treat the
accounts of its depositors with meticulous case, always having in mind the fiduciary nature of
their relationship.[25]

Note on Safety Deposit Boxes: In the case of rent of safety deposit box, the contract is a special
kind of deposit and cannot be characterized as an ordinary contract of lease because the full and
absolute possession and control of the deposit box is not given to the renters. The prevailing rule
is that the relation between the bank renting out and the renter is that of bailer and bailee the
bailment being for hire and mutual benefit.[26]

1 Loan Function

1 Basic Rules and Restrictions: A bank shall grant loans and other credit accommodations only
in amounts and for the periods of time essential for the effective completion of the operations to
be financed, consistent with safe and sound banking practices. The bank must ascertain before
granting the load or other credit accommodation the ability of the debtor to fulfill his
commitment.

2 Risk-Based Capital Ratio: The MB shall prescribe the minimum ratio which the net worth of
a bank must bear to its total risk assets which may include contingent accounts (i.e. net worth :
total risk assets).[27] The risk-based capital ratio of a bank, expressed as a percentage of
qualifying capital to risk-weighted assets, shall not be less than 10% for both solo basis (head
office plus branches) and consolidated basis (parent bank plus subsidiary financial allied
undertakings, but excluding insurance companies). The ratio shall be maintained daily.[28]

Single Borrower’s Limit (SBL): Except as the MB may otherwise prescribe for reasons of
national interest, the total amount of loans, credit accommodations and guarantees as may be
defined by the MB 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.[29] The
basis for determining compliance with SBL is the total credit commitment of the bank to the
borrower.[30]

GBL provides that, unless the MB prescribes otherwise, the total amount of loans, credit
accommodations and guarantees prescribed in the preceding paragraph may be increased by an
additional 10% of the net worth of such bank provided the additional liabilities of any borrower
are adequately secured by trust receipts, shipping documents, warehouse receipts or other similar
documents transferring or securing title covering readily marketable, non-perishable goods
which must be fully covered by insurance.[31]

1 DORSI Accounts: GBL imposes restrictions (not total prohibition) on borrowings and
security arrangement by directors, officers, and stockholders of the bank. These restrictions
apply when the loan or financial accommodation of DORSI is in excess of 5% of the capital and
surplus of the lending bank or in the maximum amount permitted by law, whichever is lower.
The GENERAL RULE is: a director or officer of any bank shall neither, directly or indirectly,
for himself or as the representative or agent of others, borrow from such bank; nor become a
guarantor, indorser or surety for loans from such bank to others, or in any manner be an obligor
or incur any contractual liability to the bank. The EXCEPTION is when there is a written
approval of the majority of all the directors of the bank, excluding the director concerned. The
required approval shall be entered upon the records of the bank and a copy of such entry shall be
transmitted forthwith to the appropriate supervising and examining department of the BSP.[32]

2 Limits on loans and other credit accommodations (collaterals): Unless otherwise

prescribed by the MB, loans and other credit accommodations against “real estate” shall not
exceed 75% of the appraised value of the respective real estate security, plus 60% of the
appraised value of the insured improvements, and such loans may be made to the owner of the
real estate or to his assignees.[33] Those against “security of chattels and intangible
properties” shall not exceed 75% of the appraised value of the security, and such loans and
other credit accommodations may be made to the title-holder of the chattels and intangible
properties or his assignees.[34]
NB: The limit on loans, credit accommodations and guarantees prescribed herein shall not apply
to loans, credit accommodations and guarantees extended by a cooperative bank to its
cooperative shareholders.[35]

1 Foreclosure of Mortgage: In the event of foreclosure, whether judicially or extrajudicially, of

any mortgage on real estate which is security for any loan or other credit accommodation
granted, the mortgagor or debtor whose real property has been sold for the full or partial payment
of his obligation shall have the right within one year after the sale of the real estate, to redeem
the property by paying the amount due under the mortgage deed, with interest thereon at the rate
specified in the mortgage, and all the costs and expenses incurred by the bank or institution from
the sale and custody of said property less the income derived therefrom. However, the purchaser
at the auction sale concerned whether in a judicial or extrajudicial foreclosure shall have the right
to enter upon and take possession of such property immediately after the date of the confirmation
of the auction sale and administer the same in accordance with law. Any petition in court to
enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this provision
shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by
the court conditioned that he will pay all the damages which the bank may suffer by the
enjoining or the restraint of the foreclosure proceeding.Notwithstanding Act 3135, juridical
persons whose property is being sold pursuant to an extrajudicial foreclosure, shall have the right
to redeem the property in accordance with this provision until, but not after, the registration of
the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be
more than 3 months after foreclosure, whichever is earlier. Owners of property that has been sold
in a foreclosure proceeding.

Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an
extrajudicial foreclosure, shall have the right to redeem the property in accordance with this
provision until, but not after, the registration of the certificate of foreclosure sale with the
applicable Register of Deeds which in no case shall be more than 3 months after foreclosure,
whichever is earlier. Owners of property that has been sold in a foreclosure sale prior to the
effectivity of the GBL shall retain their redemption rights until their expiration.
1 Loan to Banks
The guiding principle for loan on banks is enunciated in Section 81 of NCBA which reads, “The
rediscounts, discounts, loans and advances which the BSP is authorized to extend to banking
institutions under the provisions of the present article of this Act shall be used to influence the
volume of credit consistent with the objective of price stability.”

Other Functions

UB and CB may also exercise any of the following functions:

1 Receive in custody funds, documents and valuable objects;

2 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 baking business;

1 Upon prior approval of the MB, act as managing agent, adviser, consultant of administrator of
investment management/advisory/consultancy accounts; and
2 Rent out safety deposit boxes.

1 Prohibited Acts

2 GBL prohibits banks from directly engaging in insurance business as insurer.[37]

3 Directors, officers, employees, or agents of any bank are prohibited from:

(1) Making false entries in any bank report or statement or participating in any fraudulent
transaction, thereby affecting the financial interest of, or causing damage to, the bank or any
person;

(2) Without order of a court of competent jurisdiction, disclosing to any unauthorized person any
information relative to the funds or properties in the custody of the bank belonging to private
individuals, corporations, or any other entity: Provided, That with respect to bank deposits, the
provisions of existing laws shall prevail;

(3) Accepting gifts, fees or commissions or any other form of remuneration in connection with
the approval of a loan or other credit accommodation from said bank;

(4) Overvaluing or aiding the overvaluing of any security for the purpose of influencing in any
way the actions of the bank or any bank; or

(5) Outsourcing inherent banking functions.[38]

outsourcing per BSP Circular 268 (2000)
iii.Section 2.1 Outsourcing of inherent banking functions shall refer to any
contract between the bank and a service provider for the latter to supply the manpower to service
the deposit transactions of the former.

Section 2.2 Banks cannot outsource management functions except as may be authorized by the
Monetary Board when circumstances justify.

Section 3. Outsourcing of Information Technology Systems/Processes. Subject to prior approval

of the MB, banks may outsource all information technology systems and processes except for
functions excluded in Section 3.1.

Section 3.1 Functions affecting the ability of the bank to ensure the fit of

technology services deployed to meet its strategic and business objectives

and to comply with all pertinent banking laws and regulations may not be outsourced. Subject to
prior approval of the MB, consultants and/or service providers may be engaged to provide
assistance/support.

Section 4. Outsourcing of Other Banking Functions.

Section 4.1 Subject to prior approval of the MB, banks may outsource data

imaging, storage, retrieval and other related systems; clearing and processing of checks not
included in the Philippine Clearing House System; printing of bank deposit statements.

Section 4.2. Banks may outsource credit card services; printing of bank

loan statements and other non-deposit records, bank forms and promotional materials; credit
investigation and collection; processing of export, import and other trading transactions; transfer
agent services for debt and equity securities; property appraisal; property management services;
messenger, courier and postal services; security guard services; vehicle service contracts;
janitorial services.

Section 5. Service Providers. When allowed by law and under this circular,

banks may enter into outsourcing contracts only with service providers with demonstrable
technical and financial capability commensurate to the services to be rendered.

1 Prohibited Transactions of Borrowers of Bank: borrowers of banks are prohibited from –

2 Fraudulently overvaluing property offered as security for a loan or other credit accommodation
from the bank;
3 Furnishing false or misrepresenting or suppressing material facts for the purpose of obtaining,
renewing, or increasing a loan or other credit accommodation or extending the period thereof;
4 Attempting to defraud the said bank in the event of a court action to recover a loan or other
credit accommodation; or

5 Offering any director, officer, employee or agent of a bank any gift, fee, commission, or any
other form of compensation in order to influence such persons into approving a loan or other
credit accommodation application.[39]

3 Ownership of Banks
4 Foreign Ownership[40]

As to their stockholdings, foreign individuals and non-bank corporations may own or control up
to forty percent (40%) of the voting stock of a domestic bank. This rule shall apply to Filipinos
and domestic non-bank corporations.

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.

NB: Foreign banks are not subject to the 40% limitation prescribed under Sec. 11 of the GBL.
R.A. 7721 prescribes 60% are the maximum foreign bank equity. Sec. 73 of the GBL also allows
the acquisition beyond the 60% limit within a period of seven years from the effectivity of the
GBL.

1 Filipino Stockholdings

Section 11 of the GBL applies to Filipinos and domestic non-bank corporations.

NB: The restriction applies on foreigners in terms of their total equity participation, while it
applies to individual equity participation to Filipinos and non-bank corporations.