BANKING
(by AQUINO)
CHAPTER 24
LOAN FUNCTION OF BANKS
MORB provides that it shall be the
responsibility of the Board of Directors
of the Bank:
1. to formulate written policies on
the extension of credit and risk
diversification
2. To set the guidelines for
evaluation of risk assets
PURPOSE OF THE LOAN
Under the GBL, banks shall grant
loans and other credit
accommodations only in amounts
and for periods of time essential to
the completion of operation to be
financed.
The purpose must be stated in the
application and documentation
The proceeds of the loan shall be
utilized only for the purpose(s)
stated in the application
XPN. Such other purpose(s)
is/are among those for which
the lending bank may grant
loans under the existing laws
and regulations, and must be
with prior approval of duly
authorized
officers/committee/board of
directors of the lending bank
Requirement for Grants of loans
or other credit accommodations:
1. a bank must ascertain that the
debtor is capable of fulfilling his
commitments to the bank
2. A bank may demand from its
credit applicants a statement of
their assets and liabilities and
of their income and
expenditures (CREDIT
WORTHINESS)
Should such statements prove
to be false or incorrect in any
material details:
The bank may TERMINATE
any loan granted on the
basis of said statement
and shall have the right to
demand immediate
1 repayment or liquidation
of the liquidation
MINIMIZE RISK
FABIAN, MELISSA S - JD 3
Well-defined lending policies and
sound lending practices are essential
if a bank is to perform its lending
function effectively and minimize risk
inherent in any extension of credit.
A SYSTEM OF DOCUMENTATION is
necessary in order to identify and
monitor loans that a bank has
extended
CREDIT LINE
Banks gives CL to businessmen in
order to assist them in the
operation of their business
A fixed limit or ceiling may be
placed on the account, provided
its balance does not exceed such
stipulated limit or ceiling
REVOLVING CREDIT LINE
- is a formal commitment by a
bank to lend a borrower up to a
specified amount of money over a
given period of time.
When a borrower needs money, it
makes a DRAWDOWN or
AVAILMENT on the CL in the form
of a note or promise to pay a
certain amount
The bank may NOT unilaterally
downgrade the credit line
TERMS AND CONDITIONS
Subject to the regulations by
Monetary Board
GBL prescribes certain basic
principles
AMORTIZATION
Loans with maturities of more than
5 years
Provisions must be made for periodic
amortization payments but such
payments must be made at least
annually
when the borrowed funds are to be
used for purposes which do not
initially produce revenue
The bank may permit the
initial amortization payment
be DEFERRED but in no case
shall it be later than 5 years
from the date the loan was
granted
Loans to microfinance sectors
 BANKING
(by AQUINO)
Projected cash flow of the
borrower shall be taken into
consideration
GBL RULES ON PREPAYMENT AND
RENEWAL
At anytime prior to the agreed
maturity date, the borrower may
prepay the unpaid balance subject
to such reasonable terms and
conditions agreed upon
The MB may, by regulation,
prescribes the conditions and
limitations under which a bank
may grant extensions or renewals
of its loans
INTEREST
No Interest Ceiling
MORB provides that the rate of
interest shall not be subject to any
regulatory ceiling
Usury is presently legally non-existent
Escalation Clause
A provision in the loan document that
allows a unilateral increase of interest
rates is VOID
- violative of the principle of mutuality
of contracts
Unconscionable Interest and
Charges
The rate may be equitably reduced for
being iniquitous, unconscionable and
exorbitant
EFFECT OF INFLATION
Article 250 of the Civil Code
becomes applicable only when
there is extraordinary inflation or
deflation
INFLATION - the sharp increase of
money or credit or both without a
corresponding increase in business
transaction
When there is an increase in the
volume of money or credit relative
to available goods resulting in a
substantial and continuing rise
relative in the general price level
2 The court has held that effects of
extraordinary inflation are not to
be applied without an official
proclamation
FABIAN, MELISSA S - JD 3
It must be proven with competent
evidence and it cannot be merely
presumed
The BSP is the only competent
authority so far recognized by the
court to make the official
proclamation
LOAN DOCUMENTS AS ADHESION
CONTRACTS
CONTRACT OF ADHESION - its terms
are prepared by only one party while
the other merely affixes his signature
signifying his adhesion thereto
Usually in printed forms prepared
by the bank; thus, in case of
doubt, the doubt shall be resolved
in favor of the borrower
Just as binding as an ordinary
contract
Not invalid per se; not entirely
prohibited
The one who adheres to the
contract is in reality free to
reject it entirely
DUTY OF BORROWERS
1. familiarize themselves with the
terms and conditions of the
loan agreement before signing
the same
So long as the terms and
conditions are not illegal, the
borrower cannot complain if he
believes that a specific provision is
onerous
2. Must read the contract and learn
the manner by which the loans
should be paid and settled.
DOSRI ACCOUNTS
Restrictions are imposed on the
borrowigs and security arrangements
of directors, officers stockholders and
their related interests.
DOSRI transactions are NOT illegal
per se, but are subject to certain
restrictions
Banks were not created for the
benefit of their directors and
officers; they cannot use the asset
of the bank for their own benefit
except as may be permitted by
law
PERSONS COVERED
 BANKING
(by AQUINO)
TRANSACTIONS COVERED
Includes loan or any security
arrangement like guaranty,
suretyship and the like
Credit Card Operations of banks
NOT subject to the DOSRI
regulations where the cardholder
is a DOSRI, provided that:
1. the privilege is open to all
qualified persons on the basis
of selective criteria
2. The DOSRI concerned
reimburses/pays the bank for
the billed amount in FULL on
or before the payment due
date
SUBJECT to applicable DOSRI
regulations if the DOSRI:
1. fails to reimburse/pay the bank
within the period mentioned
herein
2. On the outset, opt for deferred
payment scheme and the
availment is booked by the bank
TRANSACTIONS NOT COVERED
1. Advances against accrued
compensation
2. Increase in the amount of
outstanding credit
accommodations as a result of
additional charges or advances
made by the bank to protect its
interest
3. Discount of BOE drawn in GF
against actually existing
values
4. Transactions with foreign bank
which has stockholdings in the
local bank where the foreign
bank acts as guarantor
RESTRICTIONS UNDER THE GBL
1. PROCEDURAL REQUIREMENT
Written approval of all the
directors of the lending bank,
excluding the director concerned
2. ARMS LENGTH RULE
3 Upon terms not less favorable to
the bank than those offered to
others
3. REPORTORIAL REQUIREMENT
FABIAN, MELISSA S - JD 3
Resolution approving the loan
shall be entered in the records of a
bank and a copy of the entry shall
be transmitted forthwith to the
Supervising and Examination
Sector of the BSP
4. INDIVIDUAL CEILING
Limited to an amount equivalent
to an amount equivalent to their
respective unencumbered
deposits and book value of their
paid-in capital contribution in the
bank
5. AGGREGATE CEILING
Total outstanding loan
-- shall not exceed 15% of the
total loan portfolio of the bank,
OR, 100% of net worth, whichever
is lower
XPN. Prior approval by the
Monetary Board
Total unsecured credit
-- in no case shall it exceed 30% of
the aggregate ceiling or the
outstanding loans, whichever is
lower
Non-compliance with the
requirements of the law on DOSRI
may subject the officer to
CRIMINAL PROSECUTION
The borrower shall be required to
WAIVE THE SECRECY of his
deposits of whatever nature in all
banks in the PH.
Only pertains to the Directors,
Officers or Stockholder, if they
themselves are the borrowers.
Not required if the borrowers
are their related interest
BANK EXAMINATION
Strictly confidential
Only in connection with
the supervisor and
examination responsibility
or by the BSP in an
appropriate action
SECURITY/COLLATERALS
Unsecured loans are allowed
under the GBL
Unsecured loans may be in the
form of microfinancing
 BANKING
(by AQUINO)
REAL AND PERSONAL PROPERTY
The loan shall not exceed 75% of
the appraised value of the real
property (plus 60% of the appraised
value of the improvement) or 75% of
the appraised value of the chattel.
FORECLOSURE OF MORTGAGE
The remedy of foreclosure is
available only if the borrower
failed to comply with his or her
obligation
foreclosure but not after the
registration of the certificate of
sale with the proper Register of
deeds, whichever is earlier
The statutory period of
redemption can be extended by
AGREEMENT of the parties
A restraining order or a writ of
preliminary injuction will NOT toll
the running of the redemption
period.

REDEMPTION PERIOD REDEMPTION PRICE

Depends whether the mortgagor is a
natural or juridical person

For NATURAL persons --- within

one year after the sale of the real
estate
For JURIDICAL persons --
(extrajudicial) three months after

FABIAN, MELISSA S - JD 3