U.P.

LAW BOC BANKING COMMERCIAL LAW

6. Penalties for Violation Classification of Banks

Any violation of this law will subject offender Universal Bank (UB)
upon conviction, to an imprisonment of not As the name implies, a universal bank has the
more than five years or a fine of not more than most banking power, as it has the same powers
twenty thousand pesos or both, in the as a commercial bank, plus the powers:
discretion of the court. [Sec.5]  To operate an investment house, whether
as an integral unit or as a subsidiary.
C. GENERAL BANKING  In turn, an investment house underwrites
LAW OF 2000 (GBL) securities either on firm underwriting (good
The section numbers hereinafter generally as sold) or best efforts (excess to be
pertain to RA 8791, unless otherwise indicated. returned to the issuer)
 To invest in non-allied enterprises
1. Definition and classification
Commercial Bank (KB)
of banks Has the powers defined in Secs. 29. and 53,
infra.
a. Definition of Banks
"Banks" shall refer to entities engaged in the Thrift Bank
lending of funds obtained in the form of Thrift banks are banks that focus on basic
deposits. [Subsec. 3.1] banking services for their clients, with an
emphasis on individuals and small businesses.
How Banks are Structured Thrift banks are primarily governed by RA
Generally, banks are stock corporations. 7906, the Thrift Banks Act.
However, cooperative banks may also be
formed under the Cooperative Code. Thrift banks include:
 Savings and mortgage banks;
N.B. Note that under RA 10641, qualified  Savings and loan associations; and
foreign banks, with MB approval, may now  Private development banks.
enter the local banking system, through any of
the following modes: Rural Banks
1. Acquiring, purchasing, or owning up to These are banks that are formed for the
100% of the voting stock of an existing purpose of providing adequate credit facilities
domestic bank; to farmers and merchants, or to cooperatives
2. Investing in up to 100% of the voting of such farmers and merchants and in general,
stock of a new banking subsidiary the people of the rural communities.
incorporated under the laws of the
Philippines; or They are primarily governed by RA 7353 (Rural
3. Establishing branches with full banking Banks Act).
authority.
Cooperative Banks
However, the foreign bank must be These are banks organized as cooperatives
established, reputable, and financially sound. under RA 6938, the Cooperative Code.

Further, it must be widely-owned and publicly Islamic Banks

listed in the country of origin. There is currently only one Islamic Bank in the
Philippines, the Al-Amanah Islamic Bank,
which aims to provide banking under the
Shari’a principles governing banking.

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However, RA 11439 (An Act Providing for the Deposit-Substitute Taking or Quasi-
Regulation and Organization of Islamic Banks) Banking
was enacted in the recent past. This law Deposit-substitute taking or quasi-banking is
expressly authorizes the BSP to license more an alternative form of obtaining funds from the
Islamic banks and permit conventional banks to public, other than deposits, through the
open Islamic windows or units. issuance, endorsement, or acceptance of debt
instruments for the borrower's own account, for
Other banks as classified by the BSP the purpose of relending or purchasing of
This includes Land Bank of the Philippines, the receivables and other obligations.
Philippine Veteran’s Bank, and Development
Bank of the Philippines. These instruments may include, but need not
be limited to, bankers’ acceptances,
2. Distinction of banks from promissory notes, participations, certificates of
assignment and similar instruments with
Quasi-banks and trust entities recourse, and repurchase agreements.

Banks Quasi- Trust Deposit substitute (like deposits) are with

Banks Entities recourse to the quasi-banks (just like deposits
Entities Entities Entities are with recourse to the banks).
engaged in engaged in engaged in
taking taking deposit trust Trust entities (Manual of Regulation for
deposits and substitutes business Banks) are:
lending and lending that act as a a. Trust departments of banks perform trust
these funds these funds to trustee or and other fiduciary functions; or
to their own their own administer b. Stand-alone trust corporations, authorized
borrowers. borrowers or any trust or by the BSP to engage in trust and other
purchasing hold fiduciary functions under the GBL.
[Subsec. 3.1] receivables property in
(which makes trust or on
them the deposit for 3. Bank Powers and Liabilities
creditors of the use,
the obligors of benefit, or Corporate Powers
the behoof of Aside from the banking powers, banks,
receivables) others [Sec. generally being in the form of stock
[Sec. 4] 79] corporations, also have all the powers a stock
corporation has. [See Sec. 35 of the Revised
Quasi-banks refer to entities engaged in the Corporation Code]
borrowing of funds called “deposit substitutes”
(i.e., “quasi-deposits”) as defined in Section 95 The exception is cooperative banks, which are
of the “New Central Bank Act” for purposes of in the form of a cooperative, and have all the
relending those funds or purchasing of powers of a cooperative under the Cooperative
receivables and other obligations. Code.
 Unlike banks, quasi-banks do not accept
deposits but take deposit substitutes. Granting of loans; security requirement
 Deposit substitutes are not insured with the The GBL no longer requires credit to be
PDIC. secured only by traditional security devices
(such as a real estate mortgage or a pledge),
in order to accommodate a different security
arrangement for microfinancing. This is in
contrast to the General Banking Act it replaced,

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which requires all loans to be generally secured has the option [but not the obligation] to
by traditional security devices. exercise. [BPI v. CA and Eastern Plywood,
G.R. No. 104612 (1994)]
Banking Powers and Incidental
Powers 2. Issuing letters of credit;
3. Discounting and negotiating
A commercial bank shall have, in addition to promissory notes, drafts, bills of
the general powers incident to stock exchange, and other evidences of debt;
corporations, all such powers as may be 4. Accepting or creating demand
necessary to carry on the business of deposits;
commercial banking such as: 5. Receiving other types of deposits and
deposit substitutes;
1. Accepting Drafts;
Types of Deposits
General rule: Only a UB and a KB can a. Time or Fixed Deposit - Interest
accept or create demand deposits [Sec. 33] rate stipulated depending on the
number of days. During this period,
Exception: Banks other than a UB or KB the money deposited may not be
with prior approval of, and subject to such withdrawn without incurring
conditions and rules as may be prescribed penalty. High interest rates.
by the MB. [Sec. 33] b. Savings Deposit - Bank pays an
interest rate, but not as high as time
Fixed, savings, and current deposits of deposits.
money in banks and similar institutions c. Demand Deposits/Current or
shall be governed by the provisions Checking Accounts - No interest
concerning simple loan. [Art. 1980, NCC] is paid by the bank because the
Presumption of ownership of deposits depositor can take out his funds
It is presumed that money deposited in a any time. It is called demand
bank account belongs to the person in deposit because the depositor can
whose name the deposit account is withdraw the money he deposited
opened. on the very same day when he
deposited it or at any time
A depositor is presumed to be the owner of thereafter. [Villanueva,
funds standing in his name in a bank Commercial Law Review (2012)]
deposit account; and where a bank is not d. Negotiable Order of Withdrawal
chargeable with notice that the money Accounts – Interest-bearing
deposited in such account is the property of deposit accounts that combine the
some other person than the depositor, the payable on demand feature of
bank is justified in paying out the money to checks and investment feature of
the depositor or upon his order, and cannot savings accounts [Sec. 221,
be liable to any other person as the true Manual of Regulations for Banks]
owner. [Fulton Iron Works Co. v. China
Banking Corporation, G.R. No. 32576 6. Buying and selling foreign exchange
(1930)] and gold or silver bullion;
7. Acquiring marketable bonds and other
No duty to set-off debt securities; and
A bank is under no duty or obligation to 8. Extending credit.
make an application or set-off against the
deposit accounts of a borrower. To apply “Know your customer” rule
the deposit to the payment of a loan is a Before granting a loan or other credit
privilege, a right of set-off which the bank accommodation, a bank must ascertain that the

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debtor is capable of fulfilling its commitments to and embrace a culture of fair and responsible
the bank. [Sec. 40] dealings in the conduct of their business.
 Banks must treat depositors’ accounts with
The bank may demand from its credit meticulous care;
applicants a statement of their assets and  Banks must always to have in mind the
liabilities and of their income and expenditure fiduciary nature of its relationship with their
and such information as may be prescribed by depositors and other clients. [Metrobank v.
law or by rules and regulations of MB to enable Rosales, G.R. No. 183204 (2014);
the bank to properly evaluate the credit Comsavings Bank v. Sps. Capistrano, G.R.
application which includes the corresponding No. 170942 (2013); Equitable Banking v.
financial statements submitted for taxation Special Steel Products, G.R. No. 175350
purposes to the BIR. [Sec. 40] (2012)]

Credit enhancement Notwithstanding the degree of diligence

If the borrower is less than creditworthy, third required, a bank is not expected to be infallible.
persons may enhance his credit by providing [Prudential Bank vs. CA, G.R. No. 125536
guarantees and other security devices in favor (2000)]
of the bank. [Morales (2017)]
Failure on the part of the bank to satisfy the
In addition to the operations specifically degree of diligence required of banks may
authorized in the GBL, a bank may perform warrant the award of damages.
the following services:
(1) Receive in custody funds, documents and Examples when a bank is deemed to be
valuable objects; negligent:
(2) Act as financial agent and buy and sell, by  When the bank fails to credit funds
order of and for the account of its deposited to the depositor’s account
customers, shares, evidences of [Simex v. CA, G.R. No. 88013 (1990)];
indebtedness and all types of securities;  When the bank itself fails to follow its own
(3) Make collections and payments for the rules and procedures on withdrawals [BPI
account of others and perform such other v. IAC, G.R. No. L-66826 (1988)];
services for its customers as are not  When the bank simply relies on the face of
incompatible with banking business; SPAs before lending P200K [RBCI v.
(4) Upon prior approval of the MB, act as Melecio-Yap, G.R. No. 178451 (2014)];
managing agent, adviser, consultant or  When the teller loses the passbook
administrator of investment [Consolidated Bank v. CA, G.R. No.
management/advisory/consultancy 114286 (2011)];
accounts; and  When the bank fails to compare the
(5) Rent out safety deposit boxes. [Sec. 53] signatures on the withdrawal slip and
signature cards. [PNB v. Pike, G.R. No.
4. Diligence required of banks in 157845 (2005)]
view of fiduciary nature of Under the doctrine of last clear chance, a bank
banking may be held liable for loss despite the
negligence of a depositor. Examples of these
The banking industry is impressed with public cases are the following:
interest. As such, the highest degree of  For disbursing funds to a dishonest
diligence and standards of integrity and employee despite the employee’s failure to
performance are required. Under Section 1001 strictly abide by the bank’s internal
of the Manual of Regulations for Banks, banks procedure. [Philippine Bank of Commerce
must adhere to the highest service standards, v. CA, G.R. No. 97626 (1997)]

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 Allowing the execution of a mortgage on  Current and savings deposits are loans to
parcels of land as security for a loan not a bank because the bank can use the same
owned by the prospective borrower. and they earn interest. [BPI vs. CA, G.R.
[Canlas v. CA, G.R. No. 112160 (2000)] No. 104612 (1994)]
 Crediting the deposit in favor of another  Money deposited is commingled with other
depositor, a check where the signature of money constituting a common fund.
the drawer was forged. [Westmont Bank v.
Ong, G.R. No. 132560 (2002)]. Irregular Deposits
Bank deposits are in the nature of irregular
5. Nature of Bank Funds and deposits. Therefore, Art. 1287 of the Civil
Code, which prohibits compensation when one
Bank Deposits of the debts arises from depositum, does NOT
apply. [Serrano vs. Central Bank, G.R. No. L-
The deposit is a contract of loan with the bank 30511 (1980)]
being lent money by the depositor. Under the
Civil Code provisions on loan, this means that
the money deposited with the bank becomes 6. Grant of Loans and Security
its property, which it is free to use, subject to Requirements
the condition that the depositor can demand
repayment, in the form of withdrawals, at any Ratio of net worth to total risk
time. assets
Quasi-deposits Concept: The minimum ratio which the net
 Funds placed with bank (as deposit worth of a bank must bear to its total risk assets
substitutes), but which are not in the nature which may include contingent accounts, i.e.,
of a deposit net worth: total risk assets. [Sec. 34]
 Must be on a with recourse basis
 As UB and KB no longer have to apply for General rule: A bank must conform to the risk-
authority to accept deposit substitutes, this based capital ratio prescribed by the MB.
may now be considered a core banking
function of those banks. Exceptions: The MB may alter or suspend
compliance with such ratio whenever
Creditor-Debtor Relationship necessary for a maximum period of 1 year.
The relationship between a depositor and a 1. In case of a bank merger or consolidation;
bank is that of a creditor and debtor in relation or
to the bank’s deposit functions [Gullas vs. PNB, 2. When a bank is under rehabilitation under
G.R. No. L-43191, (1935)] and not that of a program approved by the BSP; [Sec. 34]
depositor and depositary.
Purpose
The relationship being contractual in nature, A bank must not be allowed to expand the
mandamus is therefore not an available volume of its loans and investments in a
remedy. [Maclaring Lucman vs. Alimatar manner that is disproportionate to its net worth.
Malawi, G.R. No. 159794 (2006)] [Morales (2017)]

Simple Loan Effect of non-compliance

The contract between the bank and its 1. The MB may limit or prohibit the distribution
depositor is governed by the provisions of the of net profits by such bank and may require
NCC on simple loan. [Consolidated Bank and that part or all of the net profits be used to
Trust Corporation vs. CA, G.R. No. 138569 increase the capital accounts of the bank
(2003)]. until the minimum requirement has been
met.

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2. The MB may restrict or prohibit the group. The bank is prohibited from… placing
acquisition of major assets and the making many eggs in the basket of one client. [It] is a
of new investments by the bank, with the damage-control mechanism [and] a device for
exception of purchases of readily risk amelioration. [Morales (2017)]
marketable evidences of indebtedness of
the Republic of the Philippines and the BSP Basis for Determining Compliance
and any other evidences of indebtedness The basis for determining compliance with the
or obligations the servicing and repayment SBL is the total credit commitment of the bank
of which are fully guaranteed by the to the borrower. [Subsec. 35.1]
Republic of the Philippines, until the
minimum required capital ratio has been Inclusions in the Ceiling
restored. [Sec. 34] 1. The direct liability of the maker or acceptor
of paper discounted with or sold to such
Single borrower’s limit bank and the liability of a general indorser,
drawer or guarantor who obtains a loan or
General rule: The total loans, credit other credit accommodation from or
accommodations and guarantees that may be discounts paper with or sells papers to
extended by a bank to any person, partnership, such bank;
association, or corporation or other entity shall 2. In the case of an individual who owns or
at no time exceed 20% of the net worth of such controls a majority interest in a corporation,
bank. [Subsec. 35.1] partnership, association or any other entity,
the liabilities of said entities to such bank;
Exceptions 3. In the case of a corporation, all liabilities to
1. The MB otherwise prescribes for reasons such bank of all subsidiaries in which such
of national interest. [Subsec. 35.1] Now, corporation owns or controls a majority
the single borrower’s limit is 25% of the net interest; and
worth of the lending bank. 4. In the case of a partnership, association or
2. Wholesale lending activities of government other entity, the liabilities of the members
banks to participating institutions for re- thereof to such bank. [Subsec. 35.3]
lending to end-user borrowers: separate
limit of 35% net worth. [Sec. 362.f, Manual Guidelines on the Wholesale Lending of
of Regulations for Banks] Government Banks
1. It shall apply only to loans granted by
Increase of Limit participating financial institutions (PFIs) on
The MB may increase the limit prescribed by a wholesale basis for on-lending to end-
an additional 10% of the net worth, when: user borrowers;
1. The additional liabilities of any borrower are 2. It shall apply only to loan programs funded
adequately secured by trust receipts, by multilateral, international, or local
shipping documents, warehouse receipts development agencies, organizations, or
or other similar documents transferring or institutions, especially designed for
securing title; wholesale lending activities of government
2. Covering readily marketable, non- banks;
perishable goods; and 3. The end-user borrowers of the PFIs shall
3. Which must be fully covered by insurance. be subject to the 25% SBL, not the
[Subsec. 35.2] increased ceiling of 35%; and
4. Government banks shall observe
Purpose appropriate criteria for accrediting PFIs and
To prevent the bank from making excessive for the grant/renewal of credit lines to
loans and other credit accommodations to a accredited PFIs. [Sec. 362.f, Manual of
single borrower or corporate group, including Regulations for Banks]
guarantees for the account of such borrower or

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Exclusions from the Ceiling (Non-Risk 2. Shall he become a guarantor, endorser or

Loans) surety for loans from such bank to others,
Loans and other credit accommodations— or in any manner be an obligor or incur any
1. Secured by obligations of the BSP or of the contractual liability to the bank
Philippine Government;
2. Fully guaranteed by the government as to Exceptions [Sec. 36]:
the payment of principal and interest; 1. Valid insider lending;
3. Covered by assignment of deposits 2. Loans, credit accommodations and
maintained in the lending bank and held in guarantees extended by a cooperative
the Philippines; bank to its cooperative shareholders.
4. Under letters of credits to the extent
covered by margin deposits; and Requirements for Valid Insider Lending
5. Specified by the MB as non-risk items [Sec. 1. In the regular course of business;
35.5] 2. Upon terms not less favorable to the bank
than those offered to others;
Combination of liabilities 3. There is a written approval of the majority
The MB may prescribe the combination of the of all the directors of the bank, excluding
liabilities of subsidiary corporations or the director concerned;
members of the partnership, association, entity
or such individual under certain circumstances, Exception: Not required where granted to
including but not limited to any of the following officers under a fringe benefit plan
situations: approved by the BSP.
1. The parent-corporation, partnership,
association, entity or individual guarantees 4. The required approval shall be entered
the repayment of the liabilities; upon the record of the bank and a copy of
2. The liabilities were incurred for the such entry shall be transmitted forthwith to
accommodation of the parent corporation the appropriate supervising and examining
or another subsidiary or of the partnership department of the BSP; and
or association or entity or such individual; 5. Limited to an amount equivalent to the
or DOSRI borrower’s unencumbered deposits
3. The subsidiaries though separate entities and book value of his paid-in capital
operate merely as departments or divisions contribution in the bank [Sec. 36]
of a single entity. [Subsec. 35.4]
Exceptions [Sec. 36, GBL]:
Loans and other credit accommodations, 1. Non-risk items; and
deposits maintained with, and usual 2. Loans in the form of fringe benefits.
guarantees by a bank to any other bank or non-
bank entity, whether locally or abroad, shall be Waiver of Bank Secrecy
subject to the prescribed limits. [Subsec. 35.6] A DOSRI borrower is required to waive the
secrecy of his deposits of whatever nature in all
Restrictions on bank exposure to banks in the Philippines. [Sec. 26, NCBA]
directors, officers, stockholders,
and their related interests Purpose
The general policy behind DOSRI rules is to
level the lending field between the “insiders”
General rule [Sec. 36]: No director or officer of
and the “outsiders”. The objective is to prevent
any bank:
the bank from becoming a captive source of
1. Shall, directly or indirectly, for himself or as
finance for DOSRI. [Morales (2017)]
the representative or agent of others,
borrow from such bank, nor

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Prohibited acts of borrowers stipulate that the rate of interest agreed upon
may be increased in the event that the
No borrower of a bank shall: applicable maximum rate of interest is
(1) Fraudulently overvalue property offered as increased by the Monetary Board.
security for a loan or other credit
accommodation from the bank; Provided That:
(2) Furnish false or make misrepresentation or (1) Such stipulation shall be valid only if there
suppression of material facts for the purpose is also a stipulation in the agreement that
of obtaining, renewing, or increasing a loan the rate of interest agreed upon shall be
or other credit accommodation or extending reduced in the event that the applicable
the period thereof; maximum rate of interest is reduced by law
(3) Attempt to defraud the said bank in the event or by the Monetary Board; and
of a court action to recover a loan or other (2) The adjustment in the rate of interest
credit accommodation; or agreed upon shall take effect on or after the
(4) Offer any director, officer, employee or effectivity of the increase or decrease in the
agent of a bank any gift, fee, commission, or maximum rate of interest. [Sec. 305,
any other form of compensation in order to Manual of Regulations for Banks]
influence such persons into approving a loan
or other credit accommodation application. 7. Penalties for violations
[Sec. 55.2]
Fine, imprisonment
Floating interest rates and
Escalation Clauses Unless otherwise herein provided, the violation
of any of the provisions of the GBL shall be
Floating Interest Rates subject to Sections 34, 35, 36 and 37 of the
NCBA. [Sec.66]
The rate of interest chargeable on availments
under the BSP liquidity window to banks shall Refusal to make reports or permit for
be the rate equivalent to the reference rate for examination
ninety (90) days determined and announced by Any officer, owner, agent, manager, director or
the BSP for floating rate loans, plus or minus a officer-in-charge of any institution subject to the
rate to be determined by the BSP on the basis supervision or examination by the BSP within
of the prevailing monetary situation. the purview of the NCBA who, being required
in writing by the MB or by the head of the
The additional or discount rate established for supervising and examining department
any given time shall be made public by the BSP willfully refuses to file the required report or
and applied uniformly to all borrowers during permit any lawful examination into the affairs
that period. of such institution shall be punished by:
(1) A fine of not less than Fifty thousand pesos
The additional rate to be imposed over and (P50,000) nor more than One hundred
above the reference rate shall not be less than thousand pesos (P100,000); or
two (2) percentage points, with the applicable (2) Imprisonment of not less than one (1) year
additional rate to be determined by the BSP on nor more than five (5) years; or
the basis of the prevailing monetary situation. (3) Both fine and imprisonment, in the
[Sec. 284, Manual of Regulations for Banks] discretion of the court. [Sec. 34, NCBA]

Escalation Clause False Statement

The willful making of a false or misleading
Parties to an agreement pertaining to a loan or statement on a material fact to the MB or to
forbearance of money, goods or credits may the examiners of the BSP shall be punished by:

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(1) A fine of not less than One hundred (c) suspension of lending or foreign exchange
thousand pesos (P100,000) nor more than operations or authority to accept new
Two hundred thousand pesos (P200,000); deposits or make new investments;
or (d) suspension of interbank clearing privileges;
(2) Imprisonment of not more than five (5) and/or
years; (e) revocation of quasi-banking license. [Sec.
(3) Both fine and imprisonment, at the 37, NCBA]
discretion of the court. [Sec. 35, NCBA]
Such administrative sanction may be imposed
Proceedings Upon Violation of This Act and for:
Other Banking Laws, Rules, Regulations, (1) Any willful violation of its charter or bylaws,
Orders or Instructions willful delay in the submission of reports or
Whenever a bank or quasi-bank, or whenever publications thereof as required by law,
any person or entity willfully violates this Act rules and regulations;
or other pertinent banking laws being (2) Any refusal to permit examination into the
enforced or implemented by the Bangko affairs of the institution; any willful making
Sentral or any order, instruction, rule or of a false or misleading statement to the
regulation issued by the Monetary Board, the MB or the appropriate supervising and
person or persons responsible for such examining department or its examiners;
violation shall unless otherwise provided in this (3) Any willful failure or refusal to comply with,
Act be punished by: or violation of, any banking law or any
(1) A fine of not less than Fifty thousand pesos order, instruction or regulation issued by
(P50,000) nor more than Two hundred the MB, or any order, instruction or ruling
thousand pesos (P200,000); or by the BSP Governor; or
(2) Imprisonment of not less than two (2) years (4) Any commission of irregularities, and/or
nor more than ten (10) years; or conducting business in an unsafe or
(3) Both fine and imprisonment at the unsound manner as may be determined by
discretion of the court. the MB.

Administrative Sanctions on Banks and Suspension or removal of director

Quasi-banks or officer
Without prejudice to the criminal sanctions If the offender is a director or officer of a bank,
against the culpable persons provided in quasi-bank or trust entity, the MB may also
Sections 34, 35, and 36 of the NCBA, the MB suspend or remove such director or officer.
may, at its discretion, impose upon any bank or [Sec.66]
quasi-bank, their directors and/or officers, the
following administrative sanctions, whenever Dissolution of bank
applicable:
The bank itself may be dissolved by quo
(a) fines in amounts as may be determined by warranto proceedings instituted by the Solicitor
the MB to be appropriate, but in no case to General. [Sec. 66]
exceed Thirty thousand pesos (P30,000) a
day for each violation, taking into
consideration the attendant circumstances,
such as the nature and gravity of the
violation or irregularity and the size of the
bank or quasi-bank;
(b) suspension of rediscounting privileges or
access to BSP credit facilities;

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