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GENERAL BANKING LAW
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BANKS – entities engaged in the lending of funds obtained in
the form of deposits.
Generally, Banks are corporations. However, cooperative
banks may also be formed under the Cooperatives Code.
NOTE: Under RA 10641, banks may now be fully foreign
owned, through any of the ff. modes of entry:
(1) Acquiring, purchasing, or owning up to 100% of the
voting stock of an existing bank;
(2) Investing in up to 100% of the voting stock of a new
banking subsidiary incorporated under the laws of the
Philippines; or
(3) Establishing branches with full banking authority.
 However, the foreign bank must be established,
reputable, and financially sound.
 Further, it must be widely-owned and publicly
listed in the country of origin.
CLASSIFICATION OF BANKS
I. Universal Bank
A universal bank has the most banking power, as it has the
same powers as a commercial bank, plus the powers:
(1) To operate an investment house, whether as an
integral unit or as a subsidiary. In turn, an investment
house underwrites securities either on firm
underwriting (good as sold) or best efforts (excess to
be returned to the firm)
(2) To invest in non-allied enterprises
II. Commercial Bank
Has the powers defined in Secs. 29. And 53, infra. - This is the
most common kind of bank.
III. Thrift Bank
 Thrift banks are banks that focus on basic banking services
for their clients, with an emphasis on individuals and small
businesses. (Some Financial Textbook since the Thrift Banks
Act doesn’t have a working definition of thrift banks)
 Thrift banks are primarily governed by RA 7906, the Thrift
Banks Act.
 Thrift banks include:
o Savings and mortgage banks o Savings and
loan associations, and
o Private development banks.
IV. Rural Bank
 Are banks that are formed for the purpose of providing
adequate credit facilities to farmers and merchants, or to
cooperatives of such farmers and merchants and in
general, the people of the rural communities.
 They are primarily governed by RA 7353, the Rural Banks
Act.
V. Cooperative Banks
Are those which are organized as cooperatives under RA 6938,
the Cooperatives Code.
VI. Islamic Banks
There is exactly one Islamic Bank in the Philippines, the Al-
Amanah Islamic Bank, which aims to provide banking under the
Shari’a principles governing banking.
VII. Other Banks as Classified by the BSP
This includes Land Bank, the Philippine Veteran’s Bank, and
Development Bank of the Philippines.
QUASI-BANKS & TRUST ENTITIES
Quasi-banks 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
Section 95 of the "New Central Bank Act" for purposes of
relending or purchasing of receivables and other obligations.
DEPOSIT SUBSTITUTES
A deposit is an alternative form of obtaining funds from the
public, other than deposits, through the issuance,
endorsement, or acceptance of debt instruments for the
borrower's own account, for the purpose of relending or
purchasing of receivables and other obligations.
- These instruments may include, but need not be
limited to, bankers acceptances, promissory notes,
participations, certificates of assignment and similar
 instruments with recourse, and repurchase
agreements o Instead, the funds are received from
investors in exchange for a financial instrument like a
bond or a loan, which will be paid at a given time.
- However, the deposit substitute must be on a with
recourse basis.
TRUST ENTITIES
Trust entity (TE) shall refer to a:
(1) Bank or an NBFI, through its specifically designated
business unit to perform trust functions; or
(2) Trust corporation, authorized by the Bangko Sentral to
engage in trust and other fiduciary business under The
General Banking Law of 2000) or to perform investment
management services under Section 53 of RA 8791.
RELATIONSHIP BETWEEN CREDITOR AND BANK
Creditor(bank) and Debtor (Depositor)
NATURE OF DEPOSITED FUNDS
Thus, the deposit is a contract of loan, with the bank being lent
money by the depositor. Under the Civil Code provisions on
loan, this means that the money deposited with the bank
becomes its property, which it is free to use, subject to the
condition that the depositor can demand repayment, in the
form of withdrawals, at any time.
QUASI-DEPOSITS
Funds placed with bank, but which is not in the nature of a
deposit o Must be on with recourse basis o As banks no longer
have to apply for authority to accept deposit substitutes, this
may now be considered a core banking function.
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POWERS OF COMMERCIAL BANK (Sec. 29)
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A commercial bank shall 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:
(1) accepting drafts;
(2) issuing letters of credit;
(3) discounting and negotiating promissory notes,
drafts, bills of exchange, and other evidences of
debt;
(4) accepting or creating demand deposits;
(5) receiving other types of deposits and deposit
substitutes;
(6) buying and selling foreign exchange and gold or
silver bullion;
(7) acquiring marketable bonds and other debt
securities; and
(8) extending credit.
Corporate Powers - Aside from the powers listed above, banks,
generally being in the form of a corporation, also have all the
powers a corporation has.
o The exception is cooperative banks, which
are in the form of a cooperative, and have all
the powers of a cooperative under the
Cooperatives Code.
Granting of Loans; Security Requirement
The General Banking Law no longer requires credit to be
secured.
Stipulations on Interest
As an accessory to its power to grant loans, banks may
stipulate interests.
 With the removal of the limit on imposable
interest under CB Circular 905, banks may impose
interest past the legal interest rate of 6% (CB
Circular 799-13)
 However, this does not give banks the right to
impose excessive interests. A stipulated interest
rate may nevertheless be equitably reduced
should the same be found to be iniquitous,
unconscionable, and exorbitant under Art. 1556
 of the CC. If such is the case, there is no stipulated
rate, and the legal rate applies. [Dio v. Japor, G.R.
No. 154129 (2005)]
 A 3% monthly interest rate has been ruled
iniquitous. [Macalinao v. BPI, G.R. No. 175490
(2009)]
 Also, while it is acceptable for banks to stipulate
that interest rates on a loan not be fixed and
instead be made dependent on market
conditions, there should always be a reference
rate upon which to peg the rates.[Consolidated
Bank v. CA, G.R. No. 114286 (2011)]
Incidental Banking Powers
In addition to the operations specifically authorized in this Act,
a bank may perform the following services:
(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;
(3) Make collections and payments for the account of
others and perform such other services for their
customers as are not incompatible with banking
business;
(4) Upon prior approval of the Monetary Board, act as
managing agent, adviser, consultant or administrator
of investment management/advisory/consultancy
accounts; and
(5) Rent out safety deposit boxes.
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BANK POWERS & LIABILITIES
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Corporate Powers
(1) Sue and be sued in its corporate name;
(2) Succession;
(3) Adopt and use a corporate seal;
(4) Amend its Articles of Incorporation;
(5) Adopt and amend by-laws;
(6) For stock corporations - issue or sell stocks to
subscribers and sell treasury stocks; for non-stock
corporation - admit members to the corporation;
(7) Purchase, receive, take or grant, hold, convey, sell,
lease, pledge, mortgage and otherwise deal with such
real and personal property, pursuant to its lawful
business;
(8) Enter into merger or consolidation with other
corporations as provided in the Code;
(9) Make reasonable donations, including those for the
public welfare or for hospital, charitable, cultural,
scientific, civic, or similar purposes: Provided, no
corporation, domestic or foreign, shall give donations
in aid of any political party or candidate or for
purposes of partisan political activity;
(10) Establish pension, retirement, and other plans for the
benefit of its directors, trustees, officers and
employees; and
(11) Exercise such other powers as may be essential or
necessary to carry out its purposes
Banking and Incidental Powers
All such powers as may be necessary to carry on the business
of commercial banking [Sec. 29, GBL]
(1) Accepting drafts
(2) Issuing letters of credit
(3) Discounting and negotiating promissory notes,
drafts, bills of exchange, and other evidence of debt
(4) Accepting or creating demand deposits
(5) Receiving other types of deposits and deposit
substitutes
(6) Buying and selling foreign exchange and gold or
silver bullion
(7) Acquiring marketable bonds and other debt
securities
(8) Extending credit
Accepting or Creating Demand Deposits
General rule: Only a UB KB can accept or create demand
deposits [Sec. 33, GBL]
Exception: Banks other than a UB or KB with prior approval of,
and subject to such conditions and rules as may be prescribed
by the Monetary Board [Sec. 33, GBL]
Fixed, savings, and current deposits of money in banks and
similar institutions shall be governed by the provisions
concerning simple loan. [Art. 1980, NCC]
Presumption of Ownership of Deposits
It is presumed that money deposited in a bank account belongs
to the person in whose name the deposit account is opened.
A depositor is presumed to be the owner of funds standing in
his name in a bank deposit; and where a bank is not chargeable
with notice that the money deposited in such account is the
property of some other person than the depositor, the bank is
justified in paying out the money to the depositor or upon his
order, and cannot be liable to any other person as the true
owner. [Fulton Iron Works Co. v. China Banking Corporation,
G.R. No. 32576 (1930)]
No duty to set-off
A bank is 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 [but not the obligation]
to exercise. [BPI v. CA and Eastern Plywood, G.R. No. 104612
(1994)]
Safety deposit boxes
The rent of safety deposit boxes 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 bailor and bailee the bailment being for hire and
mutual benefit. [CA Agroindustrial Dev. Corp. v. CA, G.R. No.
90027 (1993)]
Receiving Other Types of Deposits and Deposit Substitutes
Types of Deposits:
(1) Time Deposit - Interest rate stipulated depending on
the number of days. During this period, the money
deposited may not be withdrawn without incurring
penalty. High interest rates.
(2) Savings Deposit - Bank pays an interest rate, but not
as high as time deposits.
(3) Demand Deposits/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 the depositor can withdraw the money he
deposited on the very same day when he deposited it
or at any time thereafter. [Villanueva, Commercial
Law Review (2012)]
(4) Negotiable Order of Withdrawal Accounts – Interest-
bearing deposit accounts that combine the payable
on demand feature of checks and investment feature
of savings accounts [Sec. X223, Manual of Regulations
for Banks]
Extending Credit
“Know your customer” rule
Before granting a loan or other credit
accommodation, a bank must ascertain that the
debtor is capable of fulfilling its commitments to
the bank. [Sec. 40, GBL]
The bank may demand from its credit applicants
a statement of their assets and liabilities and of
their income and expenditure and such
information as may be prescribed by law or by
rules and regulations of MB to enable the bank to
properly evaluate the credit application which
includes the corresponding financial statements
submitted for taxation purposes to the BIR. [Sec.
40, GBL]
Credit enhancement
If the borrower is less than creditworthy, third
persons may enhance his credit by providing
guarantees and other security devices in favor of
the bank. [Morales (2004)]
A bank cannot lend pesos to a non-resident [BSP
Circular No. 22; Sec. 22, Manual of Regulations on
Foreign Exchange Transactions]. [Morales (2004)]
 Material misrepresentation Purpose of Loans

If there is material misrepresentation, bank— (1)
May terminate any loan or other credit
accommodation granted on the basis of said
statements; and (2) Shall have the right to
demand immediate repayment or liquidation of
the obligation [Sec. 40, GBL]
The purpose shall be stated in the application and in the
contract between the bank and the borrower. [Sec. 39, GBL]
Effect of Usage of Loan Proceeds for Purposes Other Than
Those Agreed Upon With the Bank

The bank shall have the right to terminate the loan or other
credit accommodation and demand immediate repayment of
Limit on Loans and Credit Guarantees the obligation. [Sec. 39, GBL]

Amortization on loans and other credit accommodations

General rule: Shall not exceed
75% of the appraised value of (1) Loans and other credit accommodations with
the respective real estate maturities of more than 5 years – Requirement:
security, plus 60% of the Provisions must be made for periodic amortization
appraised value of the insured payments, but such payments must be made at least
improvements, and such loans annually. Special rule: That when the borrowed funds
Against Real may be made to the owner of are to be used for purposes which do not initially
estate the real estate or to his produce revenues adequate for regular amortization
assignees payments therefrom, the bank may permit the initial
amortization payment to be deferred until such time
Exception: Where the as said revenues are sufficient for such purpose.
Monetary Board otherwise
Exception to the special rule: In no case shall the
prescribes [Sec. 37, GBL]
initial amortization date be later than 5 years from the
date on which the loan or other credit
General rule: Shall not exceed accommodation is granted.
75% of the appraised value of (2) In case of loans and other credit accommodations to
On security of the security, and such loans microfinance sectors – The schedule of loan
chattels and and other credit amortization shall take into consideration the
intangible accommodations may be made projected cash flow of the borrower and adopt this
properties to the title-holder of the into the terms and conditions formulated by banks.
(patents, chattels and intangible [Sec. 44, GBL]
trademarks, properties or his assignees
trade names, All are subject to such rules as the Monetary Board may
and copyrights) Exception: The Monetary promulgate. [Sec. 29, GBL]
Board otherwise prescribes
[Sec. 38, GBL]

Grant of Loans

(1) Only in amounts and for the periods of time essential

for the effective completion of the operations to be
financed; and
(2) (2) Consistent with safe and sound banking practices.
[Sec. 39, GBL]
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DILIGENCE REQUIRED OF BANKS
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Sec. 2. Declaration Of Policy. - The State
recognizes the vital role of banks 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. In
furtherance thereof, the State shall promote and
maintain a stable and efficient banking and
financial system that is globally competitive,
dynamic and responsive to the demands of a
developing economy.
- Under the old General Banking Act, no standard was given.
However, jurisprudence consistently held that banks were
to be held to the “highest degree of diligence.”
- Under the General Banking Law of 2000, however, the
standard, as emphasized above, is merely “high standards
of integrity and performance.”
- In theory, this only means that a higher standard of
diligence than ordinary diligence, but not necessarily the
highest degree of diligence.
- In practice, however, the SC has consistently imposed the
duty on banks to observe the “utmost fidelity” in handling
the deposits in their hands.
- However, the distinction seems to have been clarified by
BSP Circular 857, which says that financial institutions must
adhere to the highest service standards.
-
RELEVANT JURISPRUDENCE (ALSO A HISTORY OF THE
STANDARDS REQUIRED OF A BANK.)
“Meticulous Care, Always Having in Mind the Fiduciary Nature
of the Relationship”
When the bank fails to credit funds deposited to the depositor’s
account, it is negligent, because the bank has the obligation to
treat the accounts of its depositors with meticulous care, always
having in mind the fiduciary nature of their relationship. [Simex
v. CA, G.R. No. 88013 (1990)]
Likewise, it is negligent for withdrawals to be allowed from an
account, if the bank itself failed to follow its own rules and
procedures [BPI v. IAC, G.R. No. L-66826 (1988)]
“Utmost Fidelity”
The bank is not expected to be infallible but it must hear the
blame for not discovering the mistake of its teller despite the
established procedure requiring the papers and bank books to
pass through a battery of bank personnel whose duty it is to
check and countercheck them for possible errors. The depositor
expects the bank to treat his account with the utmost fidelity.
(BPI v. CA)
“Diligence Higher Than That of a Good Father of a Family”
When the teller lost the passbook, the bank failed to meet the
high standards of integrity and performance, pursuant to its
fiduciary duty under the law. The fiduciary nature of banking
requires banks to assume a degree of diligence higher than that
of a good father of a family. [Consolidated Bank v. CA, G.R. No.
114286 (2011)]
Failure to meet these high standards bars the bank from
claiming due diligence in the selection and supervision of the
employees. [Phil. Banking Corp v. CA, G.R. No. 112392 (2000)]
As is failure to compare the signatures on the withdrawal slip
and signature cards. [PNB v. Pike, G.R. No. 157845 (2005)]
“Highest Degree of Care Diligence”
Banks were first made subject to the highest degree of care and
diligence in Samsung Construction v. FEBTC [G.R. No. 129015
(2004)].
Because of this, banks can’t rely on the mirror principle of LTD,
i.e. it cannot rely on the certificate of title when dealing with
real estate. [Heirs of Manlapat v. CA, G.R. No. 125585 (2005)]
ACTS NOT CONSTITUTING NEGLIGENCE
Closing a bank account after the depositor handled his account
improperly. [Far East Bank and Trust v. Pacilan, G.R. No. 157314
(2005)]
Failure to pay interest after bank suspension by the BSP (Fidelity
Savings v. Cenzon, G.R. No. L-46208 (1990)
The banking industry is impressed with public interest. As such,
the highest degree of diligence is expected, and high standards
of integrity and performance are even required. Banks must
treat depositors’ accounts with meticulous care and always to
have in mind the fiduciary nature of its relationship with them.
[Metrobank v. Rosales, G.R. No. 183204 (2014); Comsavings
Bank v. Sps. Capistrano, G.R. No. 170942 (2013); Equitable
Banking v. Special Steel Products, G.R. No. 175350 (2012)]
The Rural Bank of Cabadbaran should not have simply relied on
the face of SPAs since its undertaking to lend P200k as a banking
institution requires a greater degree of diligence. [RBCI v.
Melecio-Yap, G.R. No. 178451 (2014)]
The fiduciary nature of banking requires banks to assume a
degree of diligence higher than that of a good father of a family.
[People v. Go, G.R. No. 168539 (2014); Metrobank v. Centro
Development, G.R. No. 180974 (2012)]
Banks are required to observe a higher standard of diligence.
[Land Bank v. Poblete, G.R. No. 178347 (2013)]
The banking business is so impressed with public interest where
the trust and confidence of the public in general is of paramount
importance such that the appropriate standard of diligence
must be very high, if not the highest degree of diligence. [Far
East Bank and Trust Company v. Tentmakers, G.R. No. 171050
(2012)]
The degree of diligence required of banks is more than that of a
good father of a family where the fiduciary nature of their
relationship with their depositors is concerned. [PNB v. Tria,
G.R. No. 193250 (2012)]
Banks assume a degree of diligence higher than that of a good
father of a family. Its fiduciary duty imposes upon it a higher
level of accountability than that expected of a depositor.
[Philippine Banking Corporation vs. CA, G.R. No. 127469 (2004)]
The General Banking Law of 2000 requires of banks the highest
standards of integrity and performance. The banking business is
impressed with public interest. Of paramount importance is the
trust and confidence of the public in general in the banking
industry. Consequently, the diligence required of banks is more
than that of a bonus pater familias or a good father of a family.
The highest degree of diligence is expected. [Philippine
Commercial Bank vs. Balmaceda, G.R. No. 158143, September
21, 2011]
Notwithstanding the degree of diligence required, a bank is not
expected to be infallible [Prudential Bank vs. CA, G.R. No.
125536 (2000)].
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FIDICIARY DUTY
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(1) Failure on the part of the bank to satisfy the degree of
diligence required of banks may warrant the award of
damages.
(2) Under Sec. 2, the degree of diligence is “high standards of
integrity and performance” and no longer “highest degree
of diligence” as was decided prior to the effectivity of the
General Banking Law of 2000 but also [mistakenly] even
thereafter. In numerous cases, the Supreme Court has held
that the highest degree of diligence and care is expected
from banks [Simex International v. CA, G.R. No. 88013
(1990); Philippine Bank of Commerce v. CA, G.R. No. 97626.
(1997); Philippine Savings Bank v. Chowking Food
Corporation, G.R. No. 177526 (2008); Bank of America NT
&SA v. Philippine Racing Club (2009)].
The fiduciary nature of banking requires banks to assume a
degree of diligence higher than that of a good father of a family.
[People v. Go, G.R. No. 168539 (2014); Metrobank v. Centro
Development, G.R. No. 180974 (2012)]
The degree of diligence required of banks is more than that of a
good father of a family where the fiduciary nature of their
relationship with their depositors is concerned. [PNB v. Tria,
G.R. No. 193250 (2012)]
The law’s policy recognizes the fiduciary nature of banking. [Sps.
Serfino v. Far East Bank and Trust Company, G.R. No. 171845
(2012)]
As a business affected with public interest and because of the
nature of its functions, the bank is under obligation to treat the
accounts of its depositors with meticulous care, always having
in mind the fiduciary nature of their relationship.
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. This has to be done if the
account is to reflect at any given time the amount of money the
depositor can dispose as he sees fit, confident that the bank will
deliver it as and to whomever he directs. A blunder on the part
of the bank, such as the failure to duly credit him his deposits as
soon as they are made, can cause the depositor not a little
embarrassment if not financial loss and perhaps even civil and
criminal litigation [Simex International v. CA, G.R. No. 88013
(1990)].
This fiduciary relationship 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 [Philippine Banking Corporation vs. CA, G.R.
No. 127469, January 15, 2004].
Banks are expected to exercise the highest degree of diligence
in the selection and supervision of their employees [Philippine
Commercial International Bank v. CA, G.R. No. 121413, 121479
and 128604 (2001)].
It cannot be over emphasized that the banking business is
impressed with public interest. Of paramount importance is the
trust and confidence of the public in general in the banking
industry. Consequently, the diligence required of banks is more
than that of a Roman pater familias or a good father of a family.
The highest degree of diligence is expected [Phil. Savings Bank
v. Chowking Food Corporation, G.R. No. 177526 (2008)
The banking business is so impressed with public interest where
the trust and confidence of the public in general is of paramount
importance such that the appropriate standard of diligence
must be a high degree of diligence, if not the utmost diligence
[Bank of America NT&SA v. Phil. Racing Club, GR No. 150228
(2009)].
Under the doctrine of last clear chance, a bank may be held
liable for loss despite the negligence of a depositor. Examples of
these cases are the following:
(1) For disbursing funds to a dishonest employee despite the
employee’s failure to strictly abide with the bank’s internal
procedure. [Philippine Bank of Commerce v. CA, G.R. No.
97626 (1997)]
(2) Allowing the execution of a mortgage on parcels of land as
security for a loan not owned by the prospective borrower.
[Canlas v. CA, G.R. No. 112160 (2000)]
(3) Crediting the deposit in favor of another depositor, a check
where the signature of the drawer was forged. [Westmont
Bank v. Ong, G.R. No. 132560 (2002)]
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NATURE OF BANK FUNDS AND BANK DEPOSITS
___________________________________________________
The relationship between a depositor and a bank is that of a
creditor and debtor in relation to the bank’s deposit functions
[Gullas vs. PNB, G.R. No. L-43191, (1935)] and not that of
depositor and depositary.
The contract between the bank and its depositor is governed
by the provisions of the NCC on simple loan [Consolidated Bank
and Trust Corporation vs. CA, G.R. No. 138569 (2003)].
Bank deposits are in the nature of irregular deposits [Serrano
vs. Central Bank, G.R. No. L30511 (1980)]. Therefore, Art. 1287
of the Civil Code, which prohibits compensation when one of
the debts arises from depositum, does not apply.
Current and savings deposits are loans to a bank because the
bank can use the same and they earn interest [BPI vs. CA, G.R.
No. 104612 (1994)].
The relationship being contractual in nature, mandamus is
therefore not an available remedy since mandamus does not
lie to enforce the performance of contractual obligations
[Maclaring Lucman vs. Alimatar Malawi, G.R. No. 159794
(2006)]
Money deposited is commingled with other money
constituting a common fund.
__________________________________________________
STIPULATION ON INTEREST
___________________________________________________
The Monetary Board may prescribe the maturities, as well as
related terms and conditions for various types of bank loans
and other credit accommodations.
Any change by the Board in the maximum maturities shall
apply only to loans and other credit accommodations made
after the date of such action.
The Monetary Board shall regulate the interest imposed on
micro finance borrowers by lending investors and similar
lenders such as, but not limited to, the unconscionable rates of
interest collected on salary loans and similar credit
accommodations [Sec. 43, GBL]
GRANT OF LOANS AND SECURITY REQUIREMENTS
(PRUDENTIAL MEASURES)
Ratio of Net Worth to Total Risk
ASSETS Concept: 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] [Sec. 34,
GBL]
General rule: A bank must conform to the risk-based capital
ratio prescribed by the MB
Expectations: The MB may alter or suspend compliance with
such ratio whenever necessary for a maximum period of 1
year.
(1) In case of a bank merger or consolidation; OR
(2) When a bank is under rehabilitation under a program
approved by the BSP; [Sec. 34]
Purpose
A bank must not be allowed to expand the volume of its loans
and investments in a manner that is disproportionate to its net
worth. [Morales (2004)]
Effect of Non-Compliance
(1) The MB may limit or prohibit the distribution of net
profits by such bank and 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.
(2) The MB may restrict or prohibit the acquisition of
major assets and the making of new investments by
the bank, with the exception of purchases of readily
marketable evidences of indebtedness of the RP and
the BSP and any other evidences of indebtedness or
obligations the servicing and repayment of which are
fully guaranteed by the RP, until the minimum
required capital ratio has been restored. [Sec. 34,
GBL]
Single Borrower’s Limit
General rule: The total loans, credit accommodations and
guarantees that may be extended by a bank to any person,
partnership, association, or corporation or other entity shall at
no time exceed 20% of the net worth of such bank. [Sec. 35.1,
GBL]
Exceptions:
(1) The Monetary Board otherwise prescribes for reasons
of national interest. [Sec. 35.1] Now, the single
borrower’s limit is 25% of the net worth of the lending
bank.
(2) Wholesale lending activities of government banks to
participating institutions for relending to end-user
borrowers: separate limit of 35% net worth. [BSP
Circular No. 425 dated March 25, 2004]
Increase in Limit
The Monetary Board may increase the limit prescribed by an
additional 10% of the net worth, when: (1) The additional
liabilities of any borrower are adequately secured by trust
receipts, shipping documents, warehouse receipts or other
similar documents transferring or securing title; (2) Covering
readily marketable, nonperishable goods; and (3) Which must
be fully covered by insurance [Sec. 35.2]
Purpose
To prevent the bank from making excessive loans and other
credit accommodations to a single borrower or corporate
group, including guarantees for the account of such borrower
or group. The bank is prohibited from… placing many eggs in
the basket of one client. [It] is a damage-control mechanism
[and] a device for risk amelioration. [Morales (2004)]
Basis for Determining Compliance (4) Under letters of credits to the extent covered by
margin deposits; and (5) Specified by the Monetary
The basis for determining compliance with the SBL is the total
Board as nonrisk items [Sec. 35.5, GBL]
credit commitment of the bank to the borrower. [Sec. 35.1,
GBL]
Combination of Liabilities

The MB may prescribe the combination of the liabilities of

Inclusions in the Ceiling
(1) The direct liability of the maker or acceptor of paper
discounted with or sold to such bank and the liability
of a general indorser, drawer or guarantor who
obtains a loan or other credit accommodation from or
discounts paper with or sells papers to such bank;
(2) In the case of an individual who owns or controls a
majority interest in a corporation, partnership,
association or any other entity, the liabilities of said
entities to such bank;
(3) In the case of a corporation, all liabilities to such bank
of all subsidiaries in which such corporation owns or
controls a majority interest; and
(4) In the case of a partnership, association or other
entity, the liabilities of the members thereof to such
bank. [Sec. 35.3, GBL]
Guidelines on the Wholesale Lending of Government Banks
subsidiary corporations or members of the partnership,
association, entity or such individual under certain
circumstances, including but not limited to any of the following
situations:
(1) The parent-corporation, partnership, association,
entity or individual guarantees the repayment of the
liabilities;
(2) The liabilities were incurred for the accommodation
of the parent corporation or another subsidiary or of
the partnership or association or entity or such
individual; or
(3) The subsidiaries though separate entities operate
merely as departments or divisions of a single entity.
[Sec. 35.4, GBL]
Loans and other credit accommodations, deposits maintained
with, and usual guarantees by a bank to any other bank or non-
bank entity, whether locally or abroad, shall be subject to the
prescribed limits. [Sec. 35.6, GBL]

(1) It shall apply only to loans granted by participating

financial institutions [PFIs] on a wholesale basis for
on-lending to end-user borrowers;
(2) It shall apply only to loan programs funded by
multilateral, international, or local development
agencies, organizations, or institutions, especially
designed for wholesale lending activities of
government banks;
(3) The end-user borrowers of the PFIs shall be subject to
the 25% SBL, not the increased ceiling of 35%; and
(4) Government banks shall observe appropriate criteria
for accrediting PFIs and for the grant/renewal of
credit lines to accredited PFIs. [BSP Circular No. 425
dated March 25, 2004]

Exclusions From the Ceiling (Non-risk Loans)

Loans and other credit accommodations—

(1) Secured by obligations of the BSP or of the Philippine

Government;
(2) Fully guaranteed by the government as to the
payment of principal and interest;
(3) Covered by assignment of deposits maintained in the
lending bank and held in the Philippines;
__________________________________________________ Purpose

RESTRICTIONS ON BANK EXPOSURE TO DORSI The general policy behind DOSRI rules is to level the lending
field between the “insiders” and the “outsiders”. The objective
(Directors, Officers, Stockholders and Other Related
is to prevent the bank from becoming a captive source of
Interests)
finance for DOSRI. [Morales (2004)]
___________________________________________________

LOAN-LOSS PROVISIONING
General rule [Sec. 36, GBL]: No director or officer of any bank—
The following are subject to regulation by the Monetary Board:
(1) Shall, directly or indirectly, for himself or as the
(1) The amount of reserves for bad debts or doubtful
representative or agent of others, borrow from such
accounts or other contingencies; and
bank, nor
(2) The writing off of loans, other credit
(2) Shall he become a guarantor, endorser or surety for
accommodations, advances and other assets. [Sec.
loans from such bank to others, or in any manner be
49, GBL]
an obligor or incur any contractual liability to the bank
Purpose
Exceptions [SEC. 36, GBL]:
For effective banking supervision. There is a problem of
(1) Valid insider lending;
mismatch when a loan becomes non-performing. The bank is
(2) Loans, credit accommodations and guarantees
paying interest on the money it borrowed from the depositors
extended by a cooperative bank to its cooperative
or other placers of funds, but is not recouping that interest
shareholders.
from the loan it made. Eventually, the bank may have to write
off loan losses against profits. To cushion this eventuality, the
bank is required to set aside reserved for bad debts and other
REQUIREMENTS FOR VALID INSIDER LENDING doubtful accounts or contingencies. [Morales (2004)]
(1) In the regular course of business; To address the non-performing asset problem, RA 9182 Special
(2) Upon terms not less favorable to the bank than those Purpose Vehicle Act was passed. The Monetary Board
offered to others; approved certain accounting guidelines on the sale by banks
(3) There is a written approval of the majority of all the and other financial institutions for housing under the said Act.
directors of the bank, excluding the director [Morales (2004)] [N.B. RA 9182 is no longer in effect.]
concerned.
Exception: Not required where granted to officers
under a fringe benefit plan approved by the BSP;
RESERES
(4) The required approval shall be entered upon the
record of the bank and a copy of such entry shall be Purpose
transmitted forthwith to the appropriate supervising
(1) To control the volume of money created by the credit
and examining department of the BSP;
operations of the banking system, the BSP requires all
(5) Limited to an amount equivalent to the DOSRI
banks to maintain reserves against their deposit and
borrower’s unencumbered deposits and book value
deposit-substitute liabilities.
of his paid-in capital contribution in the bank [Sec. 36]
(2) As a ready source of funds that will respond to
Exceptions [SEC. 36, GBL]: unusually large number of withdrawals or
preterminations of deposits or deposit-substitutes,
(1) Non-risk items; and
taking in the shape of a bank run. [Morales (2004)]
(2) Loans in the form of fringe benefits.

UNIFIED RESERVE
WAIVER OF BANK SECRECY
(1) Statutory or legal and liquidity reserve [N.B. The two
A DOSRI borrower is required to waive the secrecy of his
reserves have been combined or unified: 18% for deposits
deposits of whatever nature in all banks in the Philippines.
[Sec. 26, NCBA]
 and deposit substitutes] [BSP Circular No. 753 dated General Universal Bank Commercial Bank
March 29, 2012] Rule
(a) For deposit-substitutes evidenced by repurchase [Allied & Non-Allied [of Allied enterprises]
agreements covering government securities: 2% [BSP Total enterprises]
Circular No. 444 dated August 18, 2004] investment Not exceeding 35% of
(b) For foreign currency deposit units: 100% [BSP Circular in equities: Not exceeding 50% the net worth of the
No. 1389 dated April 13, 1993, as amended]; 30% of of the net worth of bank
the bank
this cover must be in the form of liquid assets [BSP
The equity [Allied/Non-Allied] [Allied]
Circular-Letter dated June 6, 1997, as cited in Morales
investment
(2004)]
in any one Not exceeding 25% Not exceeding 25% of
(2) Reserve: The required reserves are to be kept in the form enterprise of the net worth of the net worth of the
of deposits placed in the banks’ Demand Deposit Account the bank bank
with the BSP [BSP Circular No. 753 dated March 29, 2012]

Net Worth – The total of the unimpaired paid in capital

including paid-in surplus, retained earnings and undivided
INTEREST ON RESEREVES
profit, net of valuation reserves and other adjustments. [Sec.
General rule: The BSP shall not pay interest on the reserves 24, GBL]
maintained with it.
The acquisition of such equity is subject to the prior approval
Exception: Unless the Monetary Board decides otherwise as of the MB. [Sec. 24, GBL]
warranted by circumstances.

The equity investment of a Universal Bank in—

PDIC INSURANCE
Concept: Banks are required to insure their deposit liabilities
with the PDIC [Philippine Deposit Insurance Corporation].
Partial Insurance: Each depositor is a beneficiary of the
insurance for a maximum amount of P500,000, or its foreign
currency equivalent in the case of an FCDU deposit. [Act
Amending PDIC Charter, 2009, RA 9576]
Coverage: PDIC only insures deposit [not deposit substitute]
liabilities of a bank or banking institution [Sec. 5, RA 3591, as
amended]
Purpose: Full insurance might encourage risky banking
activities. A limited insurance of bank deposits serves to limit
moral hazard.
(1) Financial Allied Enterprises – Up to 100% of the
equity in a thrift bank, rural bank, or financial allied
enterprise. A publicly-listed UB or KN may own up to
100% of the voting stock of only one other UB or KB.
[Sec. 25, GBL]
(2) Non-Financial Allied Enterprises – Up to 100% of the
equity of that enterprise [Sec. 26, GBL]
(3) Non-Allied Enterprises – Not exceeding 35% of the
total equity in a single non-allied enterprise not shall
it exceed 35% of the voting stock in that enterprise.
This extends to investments by the UB’s wholly or
majority-owned subsidiaries. [Sec 27 GBL]
(4) Quasi-banks – 40% of the equity of quasi-banks [Sec.
28, GBL]

The equity investment of Commercial Banks in—

EQUITY INEVESTMENT LIMITS (Allied v. Non-Allied)
This is a prudential measure by limiting the exposure of banks
in different businesses for the purpose of control, affiliation or
other continuing business advantage.
(1) Financial Allied enterprises – Up to 100% of the equity
of a thrift or rural bank. [Sec 31 GBL]. Special rule:
Where the equity investment of a KB is in other
financial allied enterprises, including other KBs, such
investment shall remain a minority holding in that
enterprise. [Sec. 31, GBL]
(2) Non-Financial Allied enterprises – Up to 100% of the
equity of said enterprises. [Sec. 32, GBL] (3) Quasi-
banks – 40% of the equity of quasi-banks. [Sec. 28,
GBL]