General Banking Law of 2000 (R.A. No.

8791)

1. Definition and Classification of Banks

 Primarily governs: Universal Banks and Commercial Banks

- It has suppletory application to thrift banks, rural banks and other banks, the organization,
ownership, capital powers, supervision and general conduct of business of which continue to be
primarily governed by the Thrift Banks Act, Rural Banks Act and other special laws.

 Declaration of Policy
a. Vital role of banks in providing an environment conducive to the sustained development of
the national economy.
b. Fiduciary nature of banks that requires highest standards of integrity and performance.

Republic of the Philippines vs. Security Credit and Acceptance Corporation, G.R. No. L-20583, January
23, 1967

When a corporation loans out the money obtained from almost 60,000 savings account deposits
opened by the public with the said corporation, it is clear that these transactions partake the nature
of banking, as defined by the law. Accordingly, the corporation has violated the law by engaging in
banking without securing the administrative authority required in R.A. No. 337.

 Banks
- It refers to entities engaged in the lending of funds obtained in the form of deposits, and are
classified as follows:
 Universal Banks
- They can exercise the powers of an investment house and invest in non-allied enterprises and have
the highest capitalization requirement.

 Commercial Banks
- It has a lower capitalization requirement than universal banks and can neither exercise the powers
of an investment house nor invest in non-allied enterprises.

 Thrift Banks
o Savings and mortgage banks
o Stock savings and loan associations
o Private development banks

 Rural Banks
- These are mandated to make needed credit available and readily accessible in the rural areas on
reasonable terms and which the Rural Banks Act of 1992 primarily governs.

 Cooperative Banks
- Banks whose majority shares are owned and controlled by cooperatives primarily to provided
financial and credit services to cooperatives.
- It shall include cooperative rural banks and shall be primarily governed by Cooperative Code.
  Islamic Banks
- Banks whose business dealings and activities are subject to the basic principles and rulings of Islamic
Shari’ a, such as the Al Amanah Islamic Investment Bank of the Philippines (RA 6848).

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

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

 Extent of ownership of foreign individuals and non-bank corporations in a bank: 40% of the
voting stock of a domestic bank.

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

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

XPN:

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

b. A corporation whose shares are listed in the stock exchange can own up to 60% of the
bank. (once only)
c. If the corporation is in existence for 10 years it can own up to 60% of the bank. (once
only)
d. The Monetary Board may authorize foreign banks to operate in the Philippines.
(Foreign Bank Liberalization Law)

 Rule on Bank Operations:

- No person or entity shall engage in banking operations or quasi-banking functions without the
authority from the BSP.

o XPN: an entity authorized by BSP to perform universal or commercial banking functions

shall likewise have the authority to engage in quasi-banking functions.
- No person, association, or corporation unless duly authorized to engage in the business of a bank,
quasi-bank, trust entity, or savings and loan associations:
 Shall advertise or hold itself out as being engaged in business as such.
 Use in connection with it business title, the word(s) “bank”, “banking”, “banker”,
etc. or transact in any manner business of any such bank, corporation or
association.

 Authority and Powers of BSP:

 Issuance of rules of conduct or standards of operation for uniform application to all
institutions or functions covered.
 Conduct of examination to determine compliance with laws and regulations.
 Overseeing compliance with laws and regulations
 Regular investigation to determine whether an institution is conducting its business on
safe or sound basis.
 Requiring into solvency and liquidity of the institution
 Enforcing prompt corrective action
  Different Classification of banks:
Universal Commerci
Thrift Banks
Banks al Banks
Governi Thrift Banks
GBL GBL
ng laws Act
1. Has the To All the
authority to engage in powers of a
exercise allied commercial
powers of a undertaki bank,
commercial ngs and, except:
bank. in
2. To act as an addition 1. To issues
investment to the imported
house – a general L/C
corporation powers 2. To accept
that sells and incident or open
guarantees to a checking
sale of corporati account
Powers
securities and on, may except with
shares of exercise prior
stocks. all such approval by
3. To engage power as the MB
in a non-allied may be which
undertaking – necessary requires at
which is not to carry least a net
related at all on the asset worth
to banking. business of 28M.
of
commerci
al
banking.
1. Metro
Manila – 1
Billion
Capitaliz 2. Cebu &
4.95 Billion 2.4 Billion
ation Davao – 5
Million
3. Elsewhere
– 250 Million
Can be a stock Only Only allied
Equity holder in both allied undertaking
Investm allied and undertaki
ent non-allied ng
undertaking
Can Invest but Cannot Cannot
Non- shall not invest invest
Allied exceed 25% of
Transact the investee
ions (receiving)
corporation
 Total Not to exceed Not to Not to
Amount 50% of the exceed exceed 35%
of bank’s net 35% of of bank’s net
Investm worth bank’s worth
ent net worth
Equity
Not to
Single exceed Not to
Not to exceed
Equity 25% of exceed 25%
25% of bank’s
Investm bank’s of bank’s net
net worth.
ent net worth.
worth.

 Capital Structures of Banks and Quasi-Banks:

a. Organization of Banks – MB may authorize organization of a bank or quasi-bank subject to following

conditions:
 Entity is a stock corporation, issuing only par value shares
 Funds are obtained from the public, which shall mean 20 or more persons
 Minimum capital requirements prescribed by MB for each category of banks are satisfied.

b. Prohibition on Treasury Stocks:

- MB may prescribe rules and regulations on the types of stock a bank may issue.
- Banks shall issue par value stocks only.

GR: No bank shall purchase or acquire shares of its own capital stock or accept its own shares as a
security for loan.
XPN: When authorized by MB.

2. Distinction of Banks from Quasi-Banks and Trust Entities

 Quasi-bank
- These are entities engaged in the borrowing of funds through the issuance, endorsement or
assignment with recourse or acceptance of deposit substitutes for purposes of re-lending or
purchasing of receivables and other obligations.
- It does not accept deposits. Neither funds obtained insured with the PDIC.

 Trust Entities
- These are entities engaged in trust business that act as a trustee or administer any trust or hold
property in trust or on deposit for the use, benefit, or behalf of others. A bank does not act as a
trustee.

Teodoro Bañas vs. Asia Pacific Finance Corporation, G.R. No. 128703, October 18, 2000

Transactions involving purchase of receivables at a discount, well within the purview of investing,
reinvesting or trading in securities, which as investment company is authorized to perform, does not
constitute a violation of the General Banking Act. In this case, the funds supposedly lent have not
 been shown to have been obtained from the public by way of deposits, hence, it cannot be said that
the investment company was engaged in banking.

First Planters Pawnshop, Inc.,vs. Commissioner of Internal Revenue, G.R. No. 174134, July 30, 2008

R.A. No. 8791 or the General Banking Law of 2000 provided that banks shall refer to entities engaged
in the lending of funds obtained in the form of deposits. Financial intermediaries, on the other hand,
are defined as persons or entities whose principal functions include the lending, investing or
placement of funds or evidences of indebtedness or equity deposited with them, acquired by them,
or otherwise coursed through them, either for their own account or for the account of others;
pawnshops fall under this category.

3. Bank Powers and Liabilities

a. Corporate Powers

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

Register of Deeds of Manila vs. China Banking Corporation, 4 SCRA 1145 (1962)

An alien-owned commercial bank is allowed to purchase and hold real estate conveyed to it in
satisfaction of debts previously contracted in the course of its dealings such as loans and other
similar transactions. The civil liability arising from the criminal offense committed by the bank’s
former employee is not a debt contracted in the course of a bank’s dealings and thus, the transfer
made by the employee is not allowed.

Banco de Oro-EPCI, Inc. vs. JAPRL Development Corporation, G.R. No. 179901, April 14, 2008

Banks are entities engaged in the lending of funds obtained through deposits from the public and it
is for this reason that their viability depends largely on their ability to return those deposits on
demand. In this case, when the borrower is proven to have committed fraud by altering and
falsifying its financial statements in order to obtain its credit facilities, the bank has the right to
annul any credit accommodation or loan, and demand the immediate payment thereof.

b. Banking and Incidental Powers

 Certificate of Authority to Register

- This is a requirement before a bank may register or amend their articles of incorporation with SEC.
- The ff. must be proven by the bank to satisfy the MB and in order for the latter to grant such
certificate:
  All requirements of existing laws and regulations to engage in the business for which the
applicant is proposed to be incorporated have been complied with.
 That the public interest and economic conditions, both general and local, justify the
authorization.
 The amount of capital, the financing, organization, direction and administration, as well as
the integrity and responsibility of the organizers and administrators reasonably assure the
safety of deposits and the public interest.
 Foreign individuals and non-bank corporations may own or control up to 40% of the voting
stock of a domestic bank.
 Stockholdings of individuals related to each other within the 4th degree of consanguinity
or affinity, legitimate or common-law, shall be considered family groups or related
interests and must be fully disclosed in all transactions by such corporations or related
groups of persons with the bank.
 Two or more corporations owner or controlled by the same family group or same group of
persons shall be considered related interests and must be fully disclosed in all transactions
by such corporations or related group of persons with the bank.

Spouses Raul and Amalia Panlilio vs. Citibank, N.A., G.R. No. 156335, November 28, 2007

An investment management agreement, which created a principal-agent relationship between

petitioners as principals and respondent as agent for investment purposes, is not a trust or an
ordinary bank deposit; hence, no trustor-trustee-beneficiary or even borrower-lender
relationship existed. Banks may legally exercise investment management activities but the
Monetary Board may regulate such operations to insure that said operations do not endanger
the interests of the depositors and other creditors of the banks.

4. Diligence Required of Banks—Relevant Jurisprudence

GR: Banks are expected to exercise extraordinary diligence in its dealings with depositors. Consequently,
the diligence required of banks is more than that of a good father of a family.

- It applies only to cases where banks act in their fiduciary capacity, that is, as depositary of the
deposits of their depositors.

 Effect when the teller gave the passbook to a wrong person:

- The bank is presumptively failed to observe such high degree of diligence in safeguarding the
passbook and insuring its return to the party authorized to receive the same.
- XPN: Depository’s contributory negligence such as allowing a withdrawal slip signed by authorized
signatories to fall into the hands of an impostor.

 Banks are Liable for the Torts Committed by their Officers and Employees:
GR: A banking corporation is liable for the wrongful or tortuous acts and declarations of its officers
or agents within the course and scope of their employment.

Pacific Bank vs. Hart, 173 SCRA 102 (1989)

Where a bank officer ordered the premature foreclosure of a pledge after he had given an indefinite
extension of time for the payment of the loan, the officer and the bank were liable for damages
arising from quasi-delict, because the foreclosure of the pledge was an act of bad faith.
Simex International (Manila) Inc. vs. Court of Appeals, 183 SCRA 360 (1990)

In every case, the depositor expects the bank to treat his account with the utmost fidelity,
whether such account consists only of a few hundred pesos or of millions; the bank must record
every single transaction accurately, down to the last centavo, and as promptly as possible.
When the bank’s negligence caused the dishonor of the checks issued by its client, which
eventually resulted to the latter’s embarrassment and financial loss, the bank should be held
liable for damages.

Luzan Sia vs. Court of Appeals, G.R. No. 102970, May 13, 1993

In the absence of any stipulation, the depositary’s responsibility for the safekeeping of the objects
deposited would require the diligence of a good father of a family; hence, any stipulation exempting
the depositary from any liability arising from the loss of the things deposited on account of fraud,
negligence or delay would be void for being contrary to law and public policy. The bank’s negligence
in failing to notify the depositor aggravated the injury or damage to the stamp collection which was
inundated by floodwaters, thus, the bank should be held liable.

Gregorio Reyes vs. Court of Appeals, G.R. No. 118492, August 15, 2001

The degree of diligence required of banks, which should be more than that of a good father of a
family is grounded on the fiduciary nature of the relationship between the bank and its depositors
on account of the bank’s obligation as a depositary of its clients’ deposits. Nevertheless, in a sale
and issuance of foreign exchange demand draft, the same degree of diligence is not required
because the nature of the transaction does not involve the bank’s fiduciary relationship with its
depositors.

Consolidated Bank and Trust Corporation vs. Court of Appeals, G.R. No. 138569, September 11, 2003

The fiduciary nature of a bank-depositor relationship does not convert the contract between
the banks and its depositors from a simple loan to a trust agreement. Failure by the bank to
pay the depositor is failure to pay a simple loan, and not a breach of trust.

Banks must exercise a high degree of diligence in insuring that they return the passbook only to
the depositor or his authorized representative. The tellers should know that the rules on savings
account provide that any person in possession of the passbook is presumptively its owner. If the
teller gives the passbook to the wrong person, facilitating unauthorized withdrawals by that
person. For failing to return the passbook to the authorized representative of the depositor, the
Bank presumptively failed to observe such high degree of diligence in safeguarding the passbook
and in insuring its return to the party authorized to receive the same. However, the Bank’s
liability is mitigated by the depositor’s contributory negligence in allowing a withdrawal slip
signed by its authorized signatories to fall into the hands of an impostor.

Citibank, N.A. vs. Spouses Luis & Carmelita Cabamongan, G.R. No. 146918, May 2, 2006
Allowing the pretermination of the account despite noticing discrepancies in the signature and
photograph of the person claiming to be the depositor, accompanied by the failure to surrender the
original certificate of time deposit, amounted to negligence on the part of the bank. A bank that fails
to exercise the degree of diligence required of it becomes liable for damages.

Philippine Savings Bank vs. Chowking Food Corporation, G.R. No. 177526, July 4, 2008

No less than the highest degree of diligence is required of banks by reason of the fact that the
banking business is impressed with public interest. Banks are expected to treat the accounts of
its depositors with meticulous care, hence, when checks are encashed by the employees of the
bank without the necessary documents, any loss resulting from the transactions should be borne
by the bank by reason of its negligence.

Philippine National Bank vs. Erlando T. Rodriguez, et. al., G.R. No. 170325, September 26, 2008

A bank that regularly processes checks that are neither payable to the customer nor duly
indorsed by the payee is apparently grossly negligent in its operations. The degree of
responsibility, care and trustworthiness expected of the banks’ employees and officials is far
greater than those of ordinary clerks and employees; thus, the banks are expected to exercise
the highest degree of diligence in the selection and supervision of their employees.

Central Bank of the Philippines vs. Citytrust Banking Corporation, G.R. No. 141835, February 4, 2009

The fiduciary relationship between the bank and the depositor means that the bank’s obligation to
observe high standards of integrity and performance is deemed written into every deposit
agreement between a bank and its depositor. When the bank failed to perform a routine verification
of the signature affixed in the cash transfer slip, the bank should be held liable for a withdrawal
made by an unauthorized agent of the depositor.

Central Bank of the Philippines vs. Citytrust Banking Corporation, 578 SCRA 27 (2009)

The bank should be held liable for a withdrawal made by an unauthorized agent of the depositor
because it was made possible by the bank’s failure to perform a routine verification of the signature
affixed by such agent in the cash transfer slip.

Bank of America, NT and SA vs. Associated Citizens Bank, G.R. No. 141018, May 21, 2009

When the drawee bank pays a person other than the payee named on the check, it does not comply
with the terms of the check and violates its duty to charge the drawer’s accounts only for properly
payable items. In disregarding established banking rules and regulations, the bank was clearly
negligent, thus, should be made liable.

Equitable PCI Bank vs. Arcelito B. Tan, G.R. No. 165339, August 23, 2010

The premature debiting of the postdated check by the bank which resulted to insufficiency of
funds that brought about the dishonor of two checks, which caused the electric supply to be
cut-off and affected business operations, indicates the negligence of the bank. For its failure to
exercise extra-ordinary diligence, which is required of banks, it should be made liable.
 Comsavings Bank vs. Spouses Danilo and Estrella Capistrano, G.R. No. 170942, August 28, 2013

A banking institution serving as an originating bank for the Unified Home Lending Program (UHLP)
of the Government owes a duty to observe the highest degree of diligence and a high standard of
integrity and performance in all its transactions with its clients because its business is imbued with
public interest.

Land Bank of the Philippines vs. Emmanuel Oñate, G.R. No. 192371, January 15, 2014

As a business affected with public interest and by reason 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. A bank that mismanages the trust accounts of its client
cannot benefit from the inaccuracies of the reports resulting therefrom; it cannot impute the
consequence of its negligence to the client which resulted to miscrediting of funds.

Development Bank of the Philippines vs. Guariña Agricultural and Realty Development Corporation,
G.R. No. 160758, January 15, 2014

The mortgagee, as a banking institution, owed it to Guariña Corporation to exercise the highest
degree of diligence, as well as to observe the high standards of integrity and performance in all its
transactions because its business was imbued with public interest. The bank failed in its duty by
prematurely foreclosing the mortgages and unwarrantedly causing the foreclosure sale of the
mortgaged properties despite the mortgagor not being yet in default.

5. Nature of Bank Funds and Bank Deposits

 Deposit function of banks:

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

 Types of Deposits:
a) Time Deposit – interest rate stipulated depending on the number of days, which may be 30, 60,
90, 180, 360 or 540 days.
- Money cannot be withdrawn. The banks used this money to lend to others.
b) Saving Deposit – If you deposit, you cannot withdraw the amount not until 60 days later. The
bank can lend such funds; that is why it pays interests on such deposits.

c) Demand Deposits or Current Accounts – no interest is paid by the bank because the depositor
can take out his funds any time. It is called demand deposit because depositor can withdraw
the money deposited on the very same day when he deposited it.

d) Certificate of Deposit - A written acknowledgment by a bank of the receipt of a sum of money

on deposit which the bank promises to pay to the depositor, to the order of the depositor, or
to some other person on his order, whereby the relation of debtor and creditor between the
bank and depositor is created.
 Relationship Between Bank and Depositor:
1) As debtor - creditor
- Bank deposits accounts do not create deposit or trust relationships, but one of loan (mutuum) -
irregular deposit (bank is not required to return the very same currency bill that was deposited).

2) Special Kinds of Deposits

 Demand Deposits
 Saving deposits
 Negotiable order of withdrawal account – interest-bearing deposit accounts that
combine the payable on demand feature of checks and investment feature of saving
accounts.
 Time Deposit

3) As Trustee-Trustor

 Trust Account – a savings account, established under a trust agreement containing funds administered
by the bank for the benefit of the trustor or another person/s.

Nevertheless, Bank-Depositor Relationship is not one of trust – The law simply imposes on the
bank a higher standard of integrity and performance in complying with its obligations under
the contract of simple loan, beyond those required on non-bank debtors under a similar
contract of simple loan.
4) As agent-principal
a) Deposit of checks for collection
b) Deposit for specific purpose
c) Deposit for safekeeping

 Freezing of Accounts Based on Suspicion on Fraud

- PCI Bank vs. Balmaceda: A bank does not have a unilateral right to freeze the account of a depositor
based on its mere suspicion that the funds therein were the proceeds of some shady transactions.

 Dealings with Checking Account

- Firestone Tire & Rubber Co. vs. CA: Demand Deposit Accounts; Withdrawal Issues – When it is
withdrawal slips and not checks that are deposited in the current account, the depositary bank was
not obliged to accept such withdrawal slips as valid mode of deposit; but having erroneously
accepted them as such, it must bear the risk attendant to the acceptance of such instruments.

- Associated Bank vs. Tan: Banks should not allow withdrawal of deposited checks prior to its
clearance – banks bears the loss.

 Rights of Banks of Off-Set

- BPI vs. CA: A bank in under no duty or obligation to make an application or set-off against the
deposit accounts of a borrower. To apply the deposit to the payment of a loan is a privilege, a right
of set-off which the bank has the option to exercise, but not the obligation.

 Rights and Obligations of Collecting Banks

 - Associated Bank vs. Tan: A collecting bank generally has a right of set-off over the deposits therein
for the payment of any withdrawals on the part of a depositor.

Consolidated Bank and Trust Corporation vs. Court of Appeals, G.R. No. 138569, September 11, 2003

The fiduciary nature of a bank-depositor relationship does not convert the contract between the
bank and its depositors from a simple loan to a trust agreement, whether express or implied; hence,
failure by the bank to pay the depositor is failure to pay a simple loan, and not a breach of trust. The
law simply imposes on the bank a higher standard of integrity and performance in complying with
its obligations under the contract of simple loan, beyond those required of non-bank debtors under
a similar contract of simple loan.

Suan vs. Gonzales, 518 SCRA 82 (2007)

The filing of an intra-corporate case before the RTC and a complaint with the BSP ( to compel a bank
to disclose its stockholdings ) invoking BSP’s supervisory powers over banking operations which does
not amount to judicial proceeding does not constitute forum shopping.

6. Stipulation on Interests

o Circular no. 799 (July 1, 2013) – rate of interest for the loan or forbearance of any money, goods, or
credits and the rate allowed in judgments, in the absence of an express contract as to such rate of
interest, shall be 6% per annum.

 Bank was forbidden by CB to do business is NOT obligated to pay interest on deposit –

- Fidelity & Savings and Mortgage Bank vs. Cenzon: A bank lends money, engages in international
transactions, acquires foreclosed mortgaged properties or their proceeds and generally engages in
other banking and financing activities in order that it can derive income therefrom. Therefore,
unless a bank can engage in those activities from which it can carry on a depository obligated to
pay interest on money deposited with it.

Fidelity Savings and Mortgage Bank vs. Hon. Pedro Cenzon, G.R. No. L-46208, April 5, 1990
A bank lends money, engages in international transactions, acquires foreclosed mortgaged properties
or their proceeds and generally engages in other banking and financing activities in order that it can
derive income therefrom. Therefore, unless a bank can engage in those activities from which it can derive
income, it is inconceivable how it can carry on as a depositor obligated to pay interest on money
deposited with it. Thus, a bank forbidden by Central bank to do business has no obligation to pay interest
on deposit.

A banking institution which has been declared insolvent and subsequently ordered closed by the Central
Bank of the Philippines cannot be held liable to pay interest on bank deposits which accrued during the
period when the bank is actually closed and non-operational. However, the bank is still liable for the
interest on bank deposits which accrued up to the date of its closure.

Ileana Macalinao vs. Bank of the Philippine Islands, G.R. No. 175490, September 17, 2009

When the stipulation on the interest rate is void, it is as if there was no express contract thereon; hence,
courts may reduce the interest rate as reason and equity demand, which would depend on the
circumstances of each case. In the present case, the fact that petitioner made partial payments makes
the stipulated penalty charge of 3% per month or 36% per annum, in addition to regular interests,
iniquitous and unconscionable.

Heirs of Estelita Burgos-Lipat namely: Alan B. Lipat and Alfredo B. Lipat, Jr. vs. Heirs of Eugenio D.
Trinidad namely: Asuncion R. Trinidad, et. al., G.R. No. 185644, March 2, 2010

Section 78 of the General Banking Act requires payment of the amount fixed by the court in the order of
execution, with interest thereon at the rate specified in the mortgage contract, which shall be applied
for the one-year period reckoned from the date of registration of the certificate of sale. Nonetheless,
when the period to exercise the right of redemption was effectively extended beyond one year, it is only
fair and just to require the payment of 12% interest per annum beyond the one-year period up to the
date of consignment of the redemption price with the RTC.

Asia Trust Development Bank vs. Carmelo H. Tuble, G.R. No. 183987, July 25, 2012

The General Banking Act applies insofar as the redemption price is concerned, when the mortgagee is a
bank and the latter cannot dictate or alter the terms of redemption by imposing additional charges and
including other loans. The foreclosure and sale of the mortgaged property extinguishes the mortgage
indebtedness; hence, the bank can no longer invoke its provisions or even refer to the 18% annual interest
charged in the promissory note, an obligation allegedly covered by the terms of the Contract.

Advocates for Truth in Lending vs. BSP, G.R. No. 192986, January 15, 2013

The CB Circular No. 905 merely suspended the effectivity of the Usury Law, thereby allowing the parties
to freely stipulate on the rate of interest. Nonetheless, the lifting of the ceilings for interest rates does
not authorize stipulations charging excessive, unconscionable, and iniquitous interest.
 7. Grant of Loans and Security Requirements

a. Single Borrower’s Limit

The total amount of loans, credit accommodations and guarantees that may be extended by a bank
to any person, partnership, association, corporation or other entity shall at no time exceed twenty
five percent (25%) of the net worth of such bank. The basis for determining compliance with the
single borrower’s limit (SBL) is the total credit commitment of the bank to or on behalf of the
borrower.

 Limit on Loans, Credit Accommodations and Guarantees

1. GR: Single Borrower’s Limit – The total amount of loans, credit accommodations and guarantees that
may be extended by a bank to any person, partnership, association, corporation or other entity shall at
no time exceed 20% of the Net Worth of such bank.

XPN:

a) As the MB may otherwise prescribe for reasons of national interest.

b) Deposits of rural banks with GOCC financial institutions like LBP, DBP, and PNB.
 Excluded:
 Secured by obligations of BSP or of Philippine Government
 Fully guaranteed by Government on both principal and interest
 Covered by assignment of deposits maintained in lending bank and held in the Philippines
 Under L/C to the extent covered by margin deposits
 Those which MB may from time to time specify as non-risk items.

2. May be increased by an additional 10% of Net Worth, provided additional amount is supported
adequately 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, which shall include:

 Direct liability of maker or acceptor of paper discounted with or sold to such

document and liability of general indorser, drawer or guarantor who obtains a
loan or other credit accommodation from or discounts paper with or sells papers
to such bank.
 Of individual who owns or controls a majority interest in a corporation,
partnership, association, or any other entity, the liabilities to such bank.
 In case of the corporation, all liabilities to such bank of all subsidies in which such
corporation owns or controls a majority interest.
 In case of partnership, association or other entity, the liabilities of the members
thereof to such bank.

3. Loans and other credit accommodations secured by REM shall not exceed 75% of the appraised value
of the real estate security plus 60% of the appraised value of the insured improvements.

4. Loan being contractual, the period of payment may be subject to stipulation by the parties.
 Grant and Purpose of Loans and Other Credit Accommodations:
a) Safe and Sound Banking Practices – Bank shall grant loans and other credit accommodations only in
amount and for periods essential for effective completion of the operations to be financed.
b) Ascertainment of Borrower’s Capability – Bank must ascertain that debtor is capable of fulfilling
commitments.
c) Nature of Bridge Financing – To obtain funds through an interim loan, while the main loan is not yet
available.

2. Restrictions on Bank Exposure to DOSRI (Directors, Officers, Stockholders and their Related
Interests

GR: No Director or officer of any bank shall, directly or indirectly, for himself or as the representative or
agent of others:

a) Borrow from such bank;

b) Shall he become a guarantor, indorser or surety for loans from such bank to others;
nor
c) In manner be an obligor or incur any contractual liability of the bank.

XPN: With written approval of majority of all Directors of the bank, excluding director concerned.

 Requirements:

A. Procedural requirement – Loan must be approved by the majority of all the directors including the
director concerned. CB approval is not necessary; however, there is a need to inform them prior to the
transaction. Loan must be entered in the books of the corporation.

B. Substantive requirement – Loan must not exceed the paid in contribution and unencumbered
deposits.

Go vs. BSP (2009): It was held that the requirements are the ff.:
 Approval requirement which means that the DOSRI transaction must be approved by
at least majority of the directors excluding the director concerned.
 Reportorial requirement means that the transaction must be recorded in the books of
the bank and reported to the BSP.
 Ceiling requirement which means that the amount of the loan shall not exceed the
book valued of the paid-in contribution and the amount of the unencumbered
deposits.

NB: Exclude all laws on special banks

Banco de Oro vs. Bayuga, 93 SCRA 443 (1979)

If the bank finds that the borrower has not employed the funds borrowed for the purpose agreed
upon between the bank and the borrower, the bank may terminate the loan and demand immediate
payment.
 People vs. Jalandoni, 122 SCRA 588 (1983)

Where it is established that a depositor had been granted overdraft or drawn against uncollected
deposit privileges, no criminal fraudulent intent can be inferred from her deposit of her personal
check in one bank which were drawn payable to the order of cash against the depositor’s current
account at another bank.

Jose C. Go vs. BSP, G.R. No. 178429, October 23, 2009

Under the law on DOSRI transactions, the following elements must be present to constitute a violation:
1) the offender is a director or officer of any banking institution; 2) the offender, either directly or
indirectly, for himself or as representative or agent of another, borrows from the bank, becomes a
guarantor, indorser, or surety or becomes in any manner an obligor for money borrowed from bank or
loaned by it; 3) the offender has performed any of such acts without the written approval of the majority
of the directors of the bank, excluding the offender, as the director concerned. The language of the law
is broad enough to encompass either the act of borrowing or guaranteeing, or both.

Jose C. Go vs. BSP, G.R. No. 178429, October 23, 2009

The law on DOSRI transactions imposes three restrictions: a) the approval requirement, which refers
to the written approval of the majority of the bank’s board of directors, excluding the director
concerned; b) the reportorial requirement, which mandates that the approval should be entered
upon the records of the corporation, and a copy of the entry be transmitted to the appropriate
supervising department; and c) the ceiling requirement, which limits the amount of credit
accommodations to an amount equivalent to the respective outstanding deposits and book value of
the paid-in capital contribution in the bank. Failure to observe the three requirements constitutes
commission of three separate and different offenses.

Hilario P. Soriano vs. People of the Philippines, et. al., G.R. No. 162336, February 1, 2010

The rule on DOSRI transactions covers loans by a bank director or officer which are made either: (1)
directly, (2) indirectly, (3) for himself, (4) or as the representative or agent of others. The bank officer’s
act of indirectly securing a fraudulent loan application by using the name of an unsuspecting person and
without prior compliance with the requirements of the law would make the officer liable not only for
violation of the law on DOSRI transactions but also for estafa through falsification of commercial
documents.

Republic of the Philippines vs. Sandiganbayan, et. al., G.R. No. 166859/G.R. No. 169203/G.R. No.
180702, April 12, 2011

There must be competent evidence to establish that the loans granted were in the nature of DOSRI
or were issued in violation of the Single Borrower’s Limit; nonetheless, even assuming that they were
of such nature, the loans would not be void for that reason. Instead, the bank or the officers
responsible for the approval and grant of the DOSRI loan would be subject to sanctions under the
law.
 Philippine Amanah Bank (Now Al-Amanah Islamic Investment Bank of the Philippines, also known as
Islamic Bank) vs. Evangelista Contreras, G.R. No. 173168, September 29, 2014

In the present case, however, nothing in the documents presented by Calinico would arouse the
suspicion of PAB to prompt a more extensive inquiry. When the Ilogon spouses applied for a loan,
they presented as collateral a parcel of land evidenced by an OCT issued by the Office of the Register
of Deeds… and registered in the name of Calinico. This document did not contain any inscription or
annotation indicating that Contreras was the owner or that he has any interest in the subject land.
In fact, he admitted that there was no encumbrance annotated on Calinico’s title at the time of the
latter’s loan application. Any private arrangement between Calinico and him regarding the proceeds
of the loan was not the concern of PAB, as it was not a privy to this agreement. If Calinico violated
the terms of his agreement with Contreras on the turn-over of the proceeds of the loan, then the
latter's proper recourse was to file the appropriate criminal action in court.

3. Ratio of Net Worth to Total Risk Assets

 Net Worth – the total of the unimpaired paid-in plus surplus, retained earnings and undivided
profits, net of valuation reserves and other adjustments as may be required by the BSP.
 Risk based capital – The minimum ratio prescribed by the MB which the net worth of a bank
must bear to its total risk assets which may include contingent accounts.

 Effect of non-compliance:
 Distribution of net profits may be limited or prohibited and MB may require that part
or all of the net profits be used to increase the capital accounts of the bank until the
minimum requirement has been met.
 GR: Acquisition of major assets and making of new investments may be restricted.
XPN: Purchases of evidence of indebtedness guaranteed by the Government can be
exempted from restrictions.

 Penalties for violations

- Whenever applicable, the MB may impose the following sanctions

1. fines in amounts as the MB may determine but not to exceed P 30,000 a day for each
violation;
2. Suspension of rediscounting privileges, lending or foreign exchange operations or authority
to accept new deposits or make new investment, interbank clearing privileges and/or
revocation of quasi-banking license;
3. Dissolution of the bank through a quo warranto proceeding
4. If the offender is a director or officer, the MB may also remove or suspend such director or
officer.
5. Penal sanction
 D. Miscellaneous Topics

1. Philippine Deposit Insurance Corporation

 Basic policy: Promote and safeguard the interest of the depositing public by way of providing
permanent and continuing insurance coverage on all insure deposits.

 Concept of insured deposits

- The term “Insured deposits “ means the amount due to any bona fide depositor for legitimate
deposits in an insured bank net of any obligation of the depositor to the insured bank as of the date
of the closure but not to exceed P 500,000.

 Liability to depositors

- PDIC can only be liable if the insured bank actually receives deposit and the bank is ordered closed
by BSP.

 Deposit liabilities required to be insured with PDIC

- The term “ deposit “ means the unpaid balance of money or its equivalent received by a bank in the
usual course of business and for which it has given or is obliged to give credit to a commercial,
checking, savings time or thrift account.
- The deposit must give rise to creditor-debtor relationship between the bank and the depositor.
Deposits in a branch of domestic bank outside the Philippines shall not be covered unless the
insured bank elects to include the same for insurance subject to approval of the PDIC.

 Commencement of liability
- PDIC shall commence the determination of insured deposits due to the depositors of the
closed bank upon its actual take-over of the closed bank.

 Deposit accounts not entitled to payment

- PDIC shall not pay deposit insurance for the following accounts or transactions whether
denominated, documented, recorded or booked as deposit by the bank;

1. investment products such as bonds and securities, trust accounts, and other similar
instruments;
2. Deposit accounts or transactions which are unfunded, or that are fictitious or fraudulent;
3. Deposit accounts or transactions constituting unsafe and unsound banking practices as
determined by PDIC, in consultation with BSP, after due notice and hearing, and publication of
a cease and desist order issued by the PDIC against such deposit accounts or transactions; and
4. Deposits that are determined to be the proceeds of an unlawful activity as defined under the
Anti-Money Laundering law
5.

Extent of liability

Determination of insured deposits

Calculation of liability
 b. per depositor, per capacity rule

c. joint accounts

1. Deduct any loan of the depositor from the deposit with the insured bank to determine net
insured deposit
2. Individually owned deposit account is insured separately from joint accounts regardless of
whether the conjunction “ and “, “ or “ , “ and/or “ is issued. In determining such amount due
to the depositor, there shall be added together all deposits in the bank maintained in the same
right and capacity for his benefit either in his own name or in the name of others.
3. If the account is held jointly by two or more natural persons or two or more juridical entities,
the maximum insured deposit shall be divided into as many equal shares as there are many
individuals or juridical entities, unless a different sharing is stipulated in the deposit document.
4. If the account is held by a juridical person jointly with a natural person, the maximum insured
deposit shall be presumed to belong entirely to the juridical person.
5. The aggregate of the interests of each co-owner over several joint accounts, whether owned
by the same or different combination of individuals, juridical persons or entities shall likewise
be subject to the maximum insured deposit of P 500,000

d. mode of payment

Whenever an insured bank shall have been closed by the MB, payment of the insured deposits shall be made by
PDIC as soon as possible either by 1 ) cash or 2 ) making available to each depositor a transferred deposit in
another insured bank in an amount equal to insured deposit of such depositor, subject to submission of proof
of claims.

e. effect of payment of insured deposits

PDIC, upon the payment of any depositor, shall be subrogated to all the rights of the depositor against the closed
bank to the extent of such payment. Subrogation shall include the right on the part of PDIC to receive the same
dividends from the proceeds of the assets of such closed bank and recoveries on account of stockholders’ equity
as would have been payable to the depositor on a claim for the insured deposit but such depositor shall retain
his claim for any uninsured portion of his deposit.

 Failure to settle claim of insured depositor

The failure to settle the claim within six months from date of filing of the claim for insured deposit whether such
failure was due to grave abuse of discretion, gross negligence, bad faith or malice shall, upon conviction, subject
the directors, officers or employees of PDIC responsible for the delay, to imprisonment from six months to one
year; provided that the period shall not apply if the validity of the claim requires the resolution of issues of facts
and/or law by PDIC or another office, subject further to the remedy of PDIC to require final determination of a
court of competent jurisdiction if PDIC is no satisfied as to the viability of the claim for insured deposit.

 Failure of depositor to claim insured deposits

Unless otherwise waived by PDIC, if the depositor in the closed bank shall fail to claim his insured deposit with
PDIC within two years from actual take over of the closed bank by the receiver or does not enforce his claim
filed with PDIC within two years after the two year period to file a claim, all rights of the depositor against the
PDIC with respect to the insured deposit shall be barred; however, all rights of the depositor against the closed
bank and its shareholders or the receivership estate to which the PDIC may have become subrogated shall
thereupon revert to the depositor.

 Examination of banks and deposit accounts

PDIC may conduct examination of banks with prior approval of the MB provided that no examination can be
conducted within 12 months from the last examination date; provided however that PDIC may, in coordination
with BSP conduct a special examination if there is a threatened or impending closure of a bank.

Notwithstanding RA 1405, RA 8791, RA 6426 and other laws, PDIC and/or BSP may inquire into or examine
deposit accounts and all information related thereto in case there is a finding of unsafe and unsound banking
practice

 Prohibition against splitting of deposits

Splitting of deposits occurs whenever a deposit account with an outstanding balance of more than the statutory
maximum amount of insured deposit maintained under the name of natural or juridical persons is broken down
and transferred into two or more accounts in the name/s of natural or juridical persons or entities who have no
beneficial ownership on transferred deposits in their names within 120 days immediately preceding or during a
bank declared holiday or immediately preceding a closure order by the BSP for the purpose of availing of the
maximum deposit insurance coverage. Such splitting of deposit is punishable by imprisonment and/or fine.

 Prohibition against issuance of TRO

No court, except the Court of Appeals, shall issue any temporary restraining order, preliminary injunction or
preliminary mandatory injunction against PDIC for any action on its part under the PDIC charter. The Supreme
Court may issue a temporary restraining order or injunction when the matter is of extreme urgency involving a
constitutional issues such that unless a TRO is issued, grave injustice or irreparable injury will arise.

The actions of PDIC with respect to determination of insured deposit accounts shall be final and executory and
may not be set aside or restrained by the court except on petition for certiorari on the ground that the action
was taken in excess of jurisdiction or with grave abuse of discretion as to amount to lack or excess of jurisdiction.
The petition for certiorari may only be filed within 30 days from notice of denial of claim for deposit insurance.

Philippine Deposit Insurance Corporation vs. Court of Appeals, 283 SCRA 462. 1998

Where no deposit as defined in Section 3(f) of Republic Act No. 3591 came into existence, PDIC
cannot be held liable for the value of time deposit certificates. The liability of Philippine Deposit
Insurance Corporation (PDIC) for insured deposits is statutory and under Republic Act no. 3591, as
amended, such liability rests upon the existence with the insured bank, not on the negotiability or
non-negotiability of the certificates evidencing these deposits. The term “deposit” means the unpaid
balance of money or equivalent received by a bank in the usual course of business and for which it
has given or is obliged to give credit to a commercial, checking, savings, time or thrift account or
which is evidenced by passbook, check and/or certificate of deposit printed or issued in accordance
with Central bank rules and regulations and other applicable laws, together with such other
obligations of a bank which, consistent with banking usage and practices, the board of directors
shall determine and prescribe by regulations to be deposit liabilities of the Bank.
 PDIC vs. Court of Appeals, 402 SCRA 194 (2003)

Under its charter (RA 3591), PDIC is liable only for deposits received by a bank “in the usual course
of business”. Even though a bank was prohibited by CB from doing further business on the ground
of insolvency, the bank and its clients could be given the benefit of the doubt that they were not
aware that the Monetary Board resolution had been passed, given the necessity of confidentiality
of placing a banking institution under receivership. If on the next banking day following the issuance
of the Monetary Board Resolution, the depositor pre-terminated his time deposits and re-deposited
the funds into smaller denominations; said deposits were still for a consideration and covered by the
PDIC insurance coverage.

2. Truth in Lending

Consolidated Bank and Trust Company vs. Court of Appeals, 246 SCRA 193 (1995)

Banks and non-bank financial intermediaries authorized to engage in quest-banking functions are
required to strictly adhere to the provisions of the “Truth in Lending Act”. Where the promissory note
signed by the borrowers do not contain any stipulation on the payment of handling charges, the
bank cannot collect the same even though a CB Circular 504 authorized banks to collect handling
charges on loans over P500,000.

Development Bank of the Philippines vs. Arcilla Jr., 462 SCRA 599 (2005)

Section 1 of R.A. No. 3765 provides that prior to the consummation of a loan transaction, the bank,
as creditor, is obliged to furnish a client with a clear statement, in writing, setting forth, to the
extent applicable and in accordance with the rules and regulations prescribed by the Monetary
Board of the Central Bank of the Philippines, the following information:

1. The cash price or delivered price of the property or service to be acquired;

2. The amounts, if any, to be credited as down payment and/or trade-in;
3. The difference between the amounts set forth under clauses 1 and 2;
4. The charges, individually itemized which are paid or to be paid by such person in connection
with the transaction but which are not incident to the extension of credit;
5. The total amount to be financed;
6. The finance charges expressed in terms of pesos and centavos;
7. The percentage that the finance charge bears to the total amount to be financed expressed as
a simple annual rate on the outstanding unpaid balance of the obligation.

If the borrower is not duly informed of the data required by R. A. No. 3765 prior to the consummation
of the availment or drawdown, the lender will have no right to collect such charge or increases
thereof, even if stipulated in the promissory note. However, such failure shall not affect the validity
or enforceability of any contract or transaction.

UCPB vs. Spouses Beluso, 530 SCRA 567 (2007)

A promissory note which grants the creditor the power to unilaterally fix the interest rate means
that the promissory note does not contain a clear statement in writing of the finance charge. Such
provision is illegal not only because it violates the provisions of the Civil Code on mutuality of
contracts but also because it violates the Truth in Lending Law. The penalty for the violation of the
law is P100.00 or an amount equal to twice the finance charge required by such creditor in
connection with such transaction, whichever is greater, except that such liability shall not exceed P
2,000 on any credit transaction. The action to recover the penalty should be brought within one year
from the date of the occurrence of the violation. As the penalty depends on the finance charge
required of the borrower, the borrower’s cause of action would only accrue when such finance
charge is required. The action to recover the penalty may be instituted by the aggrieved private
person separately and independently from the criminal case for the same offense.

Spouses Eduardo and Lydia Silos vs. Philippine National Bank, G.R. No. 181945, July 2, 2014

Plainly, with the subject credit agreement, the element of consent or agreement by the borrower
is now completely lacking, which makes [PNB’s] unlawful act all the more reprehensible.
Accordingly, [Spouses Silos] are correct in arguing that estoppels should not apply to them, for
estoppels cannot be predicated on an illegal act. As between the parties to a contract, validity
cannot be given to it by estoppels if it is prohibited by law or public policy. It appears that by its
acts, PNB violated the Truth in Lending Act or Republic Act No. 3765 which was enacted to
protect citizens from a lack of awareness of the true cost of credit to the use by using a full
disclosure of such cost with a view of preventing the uninformed use of credit to the detriment
of the national economy.