General Banking Law of 2000 (RA 8791)

The General Banking Law of 2000 (RA No. 8791)

• "Banks" refer to entities engaged in lending funds obtained from the public in the form of deposits.
• A lending business that gives out loans from at least 20 public lenders is considered a bank.
• Borrowing from up to 19 lenders is considered a regular lending business.

Quasi-Banking Regulations

• Taking money from many people to lend or invest is quasi-banking
• Quasi-banking entities are subject to regulation to protect the public.
• ABC Corporation taking deposits and making loans with numerous depositors suggests quasi-banking, which is subject to financial regulations.
• Engaging in illegal banking results in civil and criminal liabilities for corporations, officers, and directors, as outlined by the General Banking Act (GBA) and Central Bank Act (CBA).

Requirements for Granting a Banking License (Sec. 8)

• The entity must be organized as a stock corporation
• Its funds must come from the public
• It must meet the minimum capital requirements set by the Monetary Board for its bank category
• An entity cannot register by-laws with the SEC without a Certificate of Authority from the BSP

Number of Directors for a Stock Corporation

• A stock corporation must have a board with at least five directors
• A stock corporation must have a board with no more than 15 directors
• Stock corporations are authorized to distribute dividends to their shareholders from surplus profits.

Minimum Capital Requirements Based on Bank Category

• Universal Banks (UBs): ₱3 billion - ₱20 billion (varies by number of branches)
• Commercial Banks (KBs): ₱2 billion - ₱15 billion (varies by number of branches)
• Thrift Banks (TBs): ₱500 million - ₱2 billion (varies by location and number of branches)
• Rural Banks (RBs): ₱10 million - ₱200 million (varies by location and number of branches)

Classifications of Banks (Sec. 3.2)

• Universal Banks (UBs) are the largest, engage in a wide range of financial activities, and have the highest minimum capital requirements.
• BDO Unibank is the largest commercial bank (UB) in the Philippines in terms of assets.
• Metropolitan Bank & Trust Company (Metrobank) is another major commercial bank (UB)
• Bank of the Philippine Islands (BPI) is one of the oldest commercial banks (UB) in the country
• China Banking Corporation (China Bank) is a significant commercial bank (UB)
• Commercial Banks (KBs) offer broad services, including deposits, loans, and payments
• Philippine National Bank (PNB)is a significant commercial bank (KB) with a long history.
• Security Bank Corporation is a well-known commercial bank (KB).
• Union Bank of the Philippines is a commercial bank (KB) known for its innovative banking solutions.
• Rizal Commercial Banking Corporation (RCBC)is a prominent commercial bank (KB).
• Thrift Banks (TBs) focus on providing savings and lending services to specific sectors
• Philippine Savings Bank (PSBank) is a thrift bank (TB) focused on consumer and retail banking.
• BPI Family Savings Bank is a thrift bank (TB) that specializes in savings and loan products.
• Rural Banks (RBs) serve rural communities with basic services and have the lowest minimum capital requirements.

Domestic Banks

• Domestic banks are primarily owned by Filipino citizens or corporations
• Domestic banks are subject to regulations by the Bangko Sentral ng Pilipinas (BSP)
• Domestic banks focus on serving the local market and have extensive branch networks.

Foreign Banks

• Foreign banks are primarily owned by entities based in other countries
• Foreign banks are also regulated by the BSP, but influenced by regulations in their home countries
• Foreign banks have a broader focus, serving local and international clients
• Foreign banks may specialize in areas like corporate or investment banking

Board of Directors of Domestic Banks - Number of Directors

• Minimum: 5 directors
• Maximum: 15 directors
• At least two members of the board must be "independent directors"
• Independent directors are people other than an officer or employee of the bank. its subsidiaries or affiliates or related interests

Non-Filipino Citizens as Directors

• Non-Filipino citizens/foreigners can be elected as directors to the extent of their actual foreign equity
• The percentage of foreign-owned voting stocks in a bank is decided by the citizenship of the individual stockholders.
• The citizenship of a corporation that is a stockholder in a bank follows the citizenship of the controlling stockholders, irrespective of where it was incorporated.

Direct Foreign Ownership Example

• John Smith (US citizen) owns 20% of XX Philippine Bank
• ABC Corporation (Japanese) owns 15%
• Total foreign ownership is 35% (within the 40% limit)

Control Test – Foreign Controlled Corporation Example

• XYZ Corporation (incorporated in the Philippines) owns 30% of XX Philippine Bank
• 60% of XYZ Corporation's voting shares are owned by a Hong Kong company
• XX Philippine Bank’s total foreign ownership by the Control Test is is 30%
• XYZ Corporation is determined to be a foreign corporation under the Control test

Control Test – Domestic Controlled Corporation Example

• DEF Corporation (incorporated in the Philippines) owns 35% of the voting shares of XX Philippine Bank
• 80% of DEF Corporation's voting shares are owned by Filipino citizens
• DEF Corporation is considered a domestic corporation because it is domestically controlled under the Control Test.

Tiered Foreign Ownership Example

• GHI Corporation (incorporated in Delaware) owns 51% of JKL Corporation (incorporated in the Philippines)
• JKL Corporation owns 25% of the voting shares of XX Philippine Bank
• Total foreign ownership of XX Philippine Bank is 25% under the Control Test
• JKL corporation is considered a foreign corporation because it is controlled by a foreign entity (GHI Corp)

Foreigners as Officers

• Appointing non-Filipino citizens/foreigners as officers of a domestic bank violates the Anti-Dummy Law.

Nature of Bank Deposits

• Bank deposits are governed by the law on loans
• A creditor and debtor relationship is created between the Bank and its depositors
• Example: Ana deposited P10,000 into a savings account with BPI
• Ana is the creditor, and the BPI is the debtor

Diligence Required of Banks

• Banks must exercise more diligence than a typical "good father of a family."
• Banks must exercise the highest degree of diligence
• Banks must observe high standards of integrity and performance because their business is imbued with public interest.

Other Services Banks May Render (Section 53)

• Receive in custody funds, documents and valuable objects
• Act as financial agent and buy/sell shares/securities for customers
• Make collections and payments for others
• Act as managing agent, adviser, or consultant upon Monetary Board approval
• Rent out safety deposit boxes

Legal Relationship for Safety Deposit Box Clients

• The relationship between a bank and its safety deposit box clients is that of a bailee and bailor (bailment for hire and mutual benefit).
• A contract for the use of SDB boxes is a special kind of deposit.
• The bank must exercise the diligence of a good father of a family.

Core Function of Banks

• Banks act as intermediaries between depositors and borrowers
• They collect deposits and then lend those funds to individuals, businesses, and governments
• Banks earn income primarily through the interest they charge on loans, which is typically higher than the interest they pay on deposits.
• Loan granting is a fundamental part of a bank's operation

Limitations on the Power of the Bank to Grant Loans

• Single Borrower's Limit (SBL): The total amount of loans, credit accommodations, and guarantees that a bank extends to an entity shall not exceed 25% of the bank's net worth.
• The bank's Single Borrower Limit is 25% of its net worth

China Bank SBL Example:

• China Bank has a net worth of P2 billion
• The SBL is P500 million (25% of P2 billion)
• Prosperity Bank can lend up to P500 million to Sunshine Retailers
• Prosperity Bank can lend up to P500 million to Tech Innovations Inc
• Prosperity Bank can lend up to P500 million to Green Farms Co-op

DOSRI Rules

• DOSRI stands for Directors, Officers, Stockholders, and Related Interests
• No director or officer of any bank shall borrow from such bank
• No director or officer of any bank shall become a guarantor, endorser or surety for loans from such bank
• No director or officer of any bank shall become an obligor or incur any contractual liability to the bank
• EXCEPTION: with the written approval of the majority of all the directors of the bank, excluding the director concerned

Ceilings and Limits of DOSRI Regulations

• DOSRI regulations typically set limits on the amount of loans that can be extended to DOSRI borrowers
• These limits are often expressed as a percentage of the bank's capital.

Reporting Requirements of DOSRI

• Banks are required to report DOSRI loans to regulatory authorities, such as the Bangko Sentral ng Pilipinas (BSP) in the Philippines.
• DOSRI transactions must be conducted at "arm's length," meaning they must be on terms comparable to those offered to unrelated borrowers.

Legal Effects of Non-Compliance with DOSRI Rules

• After due notice, the office of any bank director or officer who violates the DOSRI rules may be declared vacant
• Such director or officer becomes subject to the penal provisions of the New Central Bank Act.
• Loans that don't comply with DOSRI rules are treated as valid, but subject to criminal prosecution against the erring DOSRI individual.
• In DOSRI, if the loan transaciton does not comply and/or SBL, the loan transaciton is still considered valid but without prejudice to criminal prosecution against the erring DOSRI

Mortgage

• A mortgage is a loan secured by real property
• The borrower (mortgagor) pledges the property as collateral to the lender (mortgagee)
• If the borrower fails to repay the loan, the lender can foreclose and sell the property to recover the debt.

Foreclosure of Mortgage by Banks - Three Kinds of Sale

• Ordinary Execution Sale
• Judicial Foreclosure Sale
• Extrajudicial Foreclosure Sale

Ordinary Execution Sale

• A debtor owes a bank money from an unsecured personal loan
• The debtor fails to pay, and the bank sues and obtains a court judgment
• The bank obtains a "writ of execution" from the court and sheriff levies (seizes) debtor's land
• The sheriff conducts a public auction and sells the land to the highest bidder
• The judgment is paid to the bank from sale proceeds; any remaining funds go to the debtor

Judicial Foreclosure Sale

• A debtor takes out a mortgage loan from a bank, secured by the debtor's house, and defaults
• The bank files a lawsuit for judicial foreclosure and the court issues a "judgment of foreclosure."
• The sheriff conducts a public auction of the debtor's house under the court's supervision
• The house is sold to the highest bidder, the proceeds are used to pay the mortgage debt, court costs, and related expenses
• any remaining funds go to the debtor

Extrajudicial Foreclosure Sale

• A debtor takes out a mortgage loan from a bank, secured by the debtor's condominium unit, including a "power of sale" clause, and defaults
• The bank initiates extrajudicial foreclosure, following the procedures of Act No. 3135
• The bank publishes notices of the sale and posts notices publicly; a public auction is conducted by a sheriff
• The condominium unit is sold to the highest bidder, and the proceeds are used to pay the mortgage debt and related expenses
• Any remaining funds go to the debtor

Right of Redemption in Relation to Mortgage

• The mortgagor can reacquire the mortgaged property after foreclosure sale if they pay the redemption price within the period set by law
• This right exists only in case of extrajudicial foreclosure of real estate mortgage

Equity of Redemption

• The mortgagor can retain ownership of real property by paying the mortgage debt within a court-determined period (90-120 days from entry of judgment)
• If the mortgagor defaults, the property will be sold at auction
• If the mortgagee is a bank, the mortgagor has one (1) year to redeem the property, on top of the equity of redemption beginning from the order confirming the sale of real property

Under the General Banking Law

• The mortgagor has the right to redeem the property within one year after the sale of the real estate by paying a determined amount
• If the mortgagee is a bank, that amount is the amount due with interest specified in the mortgage deed, as well as costs and expenses, LESS any income derived from the property

Reduced Redemption Period

• The period to redeem real property is reduced to three months after the foreclosure or registration of the certificate of foreclosure sale, whichever comes earlier, if all these elements are present:
  • The mortgagor is a juridical person
  • The mode of foreclosure is extrajudicial
  • The mortgagee is a bank

Powers and Liabilities of Banks

• A bank acquire, hold or convey real property mortgaged to it in good faith as security for debts
• A bank may acquire real property conveyed to it in satisfaction of debts previously contracted in the course of its dealings,
• A bank may acquire real property purchased at sales under judgments, decrees, mortgages to secure debts due it.
• A bank must dispose of any real property acquired under these circumstances within 5 years or as may be prescribed by the Monetary Board

Powers and Liabilities of Foreign Banks

• Foreign banks cannot own real property
• Foreign banks can bid/take part in foreclosure sales/take possession of mortgaged property for up to 5 years
  • The title to the bank should not be transferred to the foreign bank
• The foreign bank must transfer its rights to a qualified Philippine national during the five-year period.

On Banks Selling Insurance

• A bank shall not directly engage in insurance business as the insurer
• A bank may organize a subsidiary to engage in insurance business and cross-sell to its clients the insurance products of its subsidiary
• BDO Unibank uses extensive network to cross-sell BDO Life’s products
• Bank personnel offer life, health and other insurance products
• Clients must be aware the insurance product is from BDO Life not BDO Unibank

Prohibited Transactions Under the GBL - Disclosure

• No director, employee, or agent of any bank shall disclose client info without a court order
• No director, employee, or agent of any bank shall accept gifts, fees, or commissions for loan approvals
• A bank cannot Outsource inherent banking functions
• No bank shall employ casual or non- regular or lengthen the employment period of probationary personnel in the conduct of its business involving bank deposits.
• No bank should conduct business in an unsafe and unsound manner.

Bangko Sentral ng Pilipinas (BSP) Powers

• The BSP is a GOCC established by law to be the independent central monetary authority of the country
• The BSP shall provide policy directions in the areas of money, banking and credit
• The BSP shall supervise the operations of banks and exercise regulatory and examination powers over the quasi-banking operations of non-bank financial institutions
• The BSP shall promote and maintain monetary stability and convertibility of the peso, promote financial stability and closely work with the National Government

What are corporations powers of the BSP

• Enter into contract
• Lease or own real and personal property
• Sue and be sued

Monetary Authority

• The BSP's powers and functions are exercised by the Monetary Board
• The Monetary Board is composed of seven, 7 members appointed by the President of the Philippines for a term of six, 6 years

Legal Tender Power of Notes and Coins

• All notes and coins issued by the Bangko Sentral shall be fully guaranteed by the Government of the Republic of the Philippines
• These are legal tender for all debts, both public and private
• Coins have limits to legal tender power:
  • One peso- 20 peso coins are legal tender for obligations not exceeding P1,000
  • 1 centavo- 25 centavo coins are legal tender for obligations not exceeding P100

Secrecy of Philippine Currency Bank Deposits (RA No. 1405)

• It is unlawful for any bank official or employee to disclose or allow the examination/inquiry of any information concerning Philippine currency bank deposits without being authorized, by any person, bureau or office
• Non-bank official/employees are not covered by the prohibition
• The disclosure by a bank official/employee to a co-employee is not covered by the prohibition
• Information can is able to be disclosed in the event that there is written permission of the depositor, in cases of impeachment, or there is an order of competent court
• Information can is able to be disclosed in the event that there is a written permission of the depositor, in cases of impeachment, or there is an order of competent court relating to:
  • Bribery or dereliction of duty of public officials
  • Litigation where the money deposited is the subject matter
  • Prosecution for unexplained wealth (plunder) and violation of the Anti-Graft and Corrupt Practices Act, or violations of the Anti-Money Laundering Law
  • Garnishment of bank deposits

Exemptions regarding Taxes

• The BIR can inquire into the deposit and other related information to determine the gross estate of the deceased taxpayer for computation of estate tax;
• The BIR can also inquire into bank deposits if there is an offer of compromise of tax liability on account of financial incapacity to pay his tax liability.
• Banks can disclose to the National Treasurer information about dormant deposits under the Unclaimed Balances law