GENERAL BANKING ACT Republic Act No.

337, as amended An act regulating banks and banking institutions and for other purposes Approved 23 February 1995 IN GENERAL Rule on bank operations Only entities duly authorized by the Monetary Board of the Bangko Sentral may engage in the lending of funds obtained from the public through the receipt of deposits of any kind and all entities regularly conducting such operations shall be considered as banking institutions.

Banks or banking institutions Entities engaged in the lending of funds obtained from the public through the receipt of deposits of any kind, and all entities regularly conducting such operation. Banks or banking institutions must be duly authorized by the Monetary Board of the Central Bank. Public shall mean twenty or more lenders.

Quasi-banking functions Quasi-banking functions shall mean borrowing funds, for the borrowers own account, through the issuance, endorsement or acceptance of debt instruments of any kind other than deposits, or through the issuance of participations, certificates of assignment, or similar instruments with recourse, trust certificates, or of repurchase agreements, from twenty or more lenders at any one time, for purposes of re-lending or purchasing of receivables and other obligations. However, commercial, industrial, and other non-financial companies, which borrow funds through any of these means for the limited purposes of financing their own needs or the needs of their agents or dealers, shall not be considered as performing quasibanking functions.

Financial intermediaries Financial intermediaries shall mean persons or entities whose principal functions include the lending, investing or placement of funds or evidence 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.

Non-banking financial institutions performing quasi-banking functions The following entities shall not be considered as banking institutions but shall be subject to regulation by the Monetary Board: 1. Entities regularly engaged in the lending of funds or purchasing of receivables or other obligations with funds obtained from the public through the issuance, endorsement or acceptance of debt instruments of any kind for their own account, or through the issuance of certificates of assignment or similar instruments with recourse, trust certificates, or of repurchase agreements, whether any of these means of obtaining funds from the public is done on a regular basis or occasionally. Entities regularly engaged in the lending of funds which receive deposits occasionally. Trust companies, building and loan associations, and non-stock savings and loan associations.

2. 3.

These entities will be subject to regulation by the Monetary Board which may include, but need not be limited to: 1. 2. 3. 4. 5. 6. 7. the imposition of net worth to risk assets ratios; reserve requirements; interest rate ceilings; methods of computation thereof; prescribing charges which may be collected; minimum capitalization; and submission of statistical reports.

Non-bank financial intermediaries The operations and activities of non-bank financial intermediaries, except insurance companies, shall be subject to regulation by the Monetary Board which may include, but need not be limited to, the imposition of constraints covering the: 1. 2. 3. 4. minimum size of funds received; methods of marketing and distribution; terms and maturities of funds received; and uses of funds.

If such entities are authorized by the Central Bank to perform quasi-banking functions, they may be further subject to regulation as discussed below. Note: Sec. 130 of the CB Act phasing out the regulation of MB over NBFCs not engaged in quasi-banking functions.

Determination of functions The determination of whether a person or an entity is a) performing banking or quasi-banking functions; or b) engaged in other types of financial intermediation shall be decided by the Monetary Board, subject to judicial review.

Regulation Regulation shall mean the issuance of rules of conduct or the establishment of modes or standards of operation for uniform application to all institutions or functions covered, taking into consideration in determining such coverage the distinctive character of the operations of institutions and the substantive similarities of specific functions to which such rules, modes or standards are to be applied. In some instances, these entities may be subject to special examination. Supervision Supervision shall include not only the issuance of rules but also the overseeing to ascertain that regulations are complied with, investigating or examining to determine whether an institution is conducting its business on a sound financial basis, and inquiring into the solvency and liquidity of the institution.

Relationship between bank and depositor Fixed savings and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. In other words, the relationship between the bank and the depositor is that of a debtor and creditor. In the case of rent of safety deposit box. The contract 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 bailer and bailee the bailment being for hire and mutual benefiit. [CA Agro-industrial Dev. Corp. v. CA, 219 SCRA 426 (1983)]

Types of deposits 1. Time Deposit-Interest rate stipulated depending on the number of days. During this period, the money deposited cannot be withdrawn. The bank uses this money to lend to others. That is why in these accounts, the depositor is paid higher rates of interest for the use of the money. Savings deposit-Interest fixed under the fine prints, if one deposits today, he cannot withdraw the amount not until 60 days later. The bank can lend out such funds; that is why it pays interests on such deposits.

2. 3.

Demand deposit or current accounts- No interest is fixed 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 deposited on the very same day when he deposited it. Note: As a general rule, only commercial banks can accept demand deposits on checking accounts. By way of exception, savings banks and even rural banks, are allowed by the CB to accept checking accounts because their capitalizaition may be large. Money market transactions Money market is a market dealing in standardized short-term credit instruments (involving large amounts) where lenders and borrowers do not deal directly with each other but through a mediator or dealer in the open market. It involves commercial papers which are instruments evidencing indebtedness of any person or entity which are issued, endorsed, sold or transferred or in any manner conveyed to another person or entity, with or without recourse. The fundamental function of the money market devise in its operation is to match and bring together in a most impersonal manner both the fund users and the fund suppliers. The money market is an impersonal market free from personal considerations. The market mechanism is intended to provide quick mobility of money and securities.

The General Banking Act discriminates against banks in two aspects 1. Period- Under the Civil Code, a period is presumed to be for the benefit of both parties. Insofar as banks are concerned, the period is always for the benefit of the debtor if the bank is the creditor. The debtor can compel the creditor bank to accept payment of a debt before it is due, and recover interest deducted in advance. Foreclosure of mortgage The general rule is that there is no right of redemption in judicial foreclosure of mortgage. There is only 90 day equity redemption period. The exception is with the banks aside from the 90-day equity redemption period, banks are required to give a one-year redemption period.

2.

Alien bank mortgage An alien bank can bid in a public auction of mortgaged property if such property was mortgage to it in the course of an ordinary banking transaction. If the mortgage was not within the normal banking transaction, it must be prohibited from bidding.

Mortgage loans Loans against real estate security shall not exceed 70% of the appraised value of the real estate security, plus 70 %of the appraised value of the improvements with title to the property being with the mortgagor. Loans on the security of chattels shall not exceed 50% of the appraised value of the security.

Classification of banks 1. 2. Commercial banks Thrift banks a. Savings and mortgage banks

b. c. 3.

Stock savings and loan associations Private development banks

Rural banks

Indispensable to the national interest The banking industry is hereby declared as indispensable to the national interest and, notwithstanding the provisions of any law to the contrary, any strike or lockout involving banks, if unsettled after seven (7) calendar days, shall be reported by the Central Bank to the Preside who shall immediately certify the same to the appropriate court, government agency or commission for resolution.

ESTABLISHMENT OF DOMESTIC BANKS Form of organization Domestic banking institutions, except building and loan associations, shall be organized in the form of stock corporations. No banking institution shall issue no-par value stock. The Securities and Exchange Commission shall not register the articles of incorporation of any bank, or any amendment thereto, unless accompanied by a certificate of authority issued by the Monetary Board, under its official seal. At least two thirds of the members of the board of directors of any bank or banking institution which may be established after the approval of this Act shall be Filipino citizens.

Requisites for issuance of certificate of authority Such certificate shall not issue unless the Monetary Board is satisfied from the evidence submitted to it: 1. 2. 3. that all the 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; and that 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 the interests which the public may entrust to them.

Receipt and disposition of deposits No bank which may be established and licensed to do business in the Philippines shall receive deposits, unless incorporated under the laws of the Republic of the Philippines. This prohibition, however, shall not apply to branches and agencies of foreign banks which, at the time of approval of the General Banking Act, are actually receiving deposits. After approval of the Act, all deposits so received by such branches and agencies of foreign bank shall not be invested in any manner outside the territorial limits of the Republic of the Philippines.

Voting stock requirements At least seventy percent (70%) of the voting stock of any banking institution which may be established after the approval of the Act shall be owned by citizens of the Philippines, except where a new bank is established as a result of: a) the local incorporation of any of the existing branches or agencies of foreign banks in the Philippines; or b) the consolidation of existing banks in any of which there are foreign owned voting stocks at the time of consolidation. The Monetary Board may, with the approval of the President, increase the percentage of foreign-owned voting stocks in any domestic bank from thirty percent (30%) to forty percent (40%). The percentage of foreign-owned voting stocks in a bank shall be determined by the citizenship of the individual stockholders in that bank. In the case of corporations owning bank shares, the citizenship of each stockholder in that corporation shall be the basis of computing the percentage.

Ownership of stocks in banks by corporations The total voting stocks which any corporation, including its wholly or majority owned subsidiaries, may own in any bank shall not exceed thirty percent (30%) of the voting stock of that bank. In the case of a corporation which is wholly owned, or the majority of the voting stock of which is owned, by any one person or by persons related to each other within the third degree of consanguinity or affinity, that corporation may own not more than twenty percent (20%) of the voting stock of any bank.

LICENSING OF FOREIGN BANKS License to conduct business No foreign bank or banking corporation formed, organized or existing under any law other than those of the Philippines shall be permitted to transact business in the Philippines, or maintain by itself or assignee any suit for the recovery of any debt, claims, or demand whatsoever, until after it shall have obtained, upon order of the Monetary Board, a license for that purpose from the Securities and Exchange Commission. No foreign building and loan association or building and loan association not formed, organized, or existing under the laws of the Philippines shall be permitted to transact business in the Philippines.

Requisites for issuance of license 1. Public and economic conditions, both general and local, justify the issuance of such order.

2.

The foreign bank or banking corporation is solvent and in sound financial condition.

3. A duly appointed agent in the Philippines has been authorized to accept summons and legal processes. Investment rights 1. Foreign banking institutions without branches in the Philippines, including their wholly or majority owned subsidiaries and their holding companies having majority holding in such foreign banking institutions, may invest, with prior approval of the Monetary Board, in equities of local companies engaged in financial allied undertakings. However, they shall maintain minority participation in such enterprise. With prior approval of the Central Bank, these foreign entities may also purchase equities in domestic banks, subject to restrictions.

2.

Revocation of license 1. 2. The foreign bank is in imminent danger of insolvency. Its continuance in business will involve probable loss to those transacting business with it.

CLASSIFICATION OF PRIVATE BANKS COMMERCIAL BANKING CORPORATIONS AND UNIVERSAL BANKS Commercial bank A commercial banking corporation, in addition to the general powers incident to corporations, shall have all such powers as shall be necessary to carry on the business of commercial banking: 1. 2. 3. 4. by accepting drafts and issuing letters of credit, by discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debts; by receiving deposits; by buying and selling foreign exchange and gold or silver bullion; and by lending money against personal security or against securities consisting of personal property of mortgages on improved real estate and the insured improvements thereon.

A commercial bank may also accept or create demand deposits subject to withdrawal by check. A commercial bank may offer NOW accounts (special types of savings deposit which can be withdrawn by means of a Negotiable Order of Withdrawal and is offered only to natural persons). A commercial bank may likewise acquire readily marketable bonds and other debt securities subject to such rules as the Monetary Board may promulgate. A commercial bank, finally, may invest to the extent allowed under applicable law and regulations in equities of allied undertaking, whether financial or non-financial.

Investment in allied undertakings Commercial banks, including Government banks and foreign banks with existing local branches, may invest in equities of allied undertakings. Equity investments shall not be permitted in non-related activities. Limitations on investments in allied undertakings: 1. 2. 3. 4. The total investment in equities shall not exceed twenty five percent (25%) of the net worth of the bank. The equity investment in any one enterprise shall not exceed fifteen percent (15%) of the net worth of the bank; The total equity investment of the bank in any single enterprise shall remain a minority holding in that enterprise; and The equity investment in other banks shall be deducted from the investing banks net worth for purposes of computing the prescribed ratio of net worth to risk assets.

Financial allied undertakings 1. 2. 3. 4. 5. 6. Leasing companies Banks Investment houses Financing companies Credit card operations Financial institutions catering to small and medium scale enterprises

Non-financial allied undertakings 1. 2. 3. Warehousing companies Storage companies Safe deposit box companies

4. 5. 6. 7. 8. 9.

Companies engaged in the management of mutual funds but not in the mutual funds themselves Management corporations engaged or to be engaged in activity similar to the engagement of mutual funds Companies engaged in the provision of computer services Insurance agencies Companies engaged in home building and home development Companies providing drying and/or milling facilities for agricultural crops

Universal bank or expanded commercial banking authority The Monetary Board may authorize -- to further national development objectives or support national priority projects -- a commercial bank, a bank authorized to provide commercial banking services, as well as a government owned and controlled bank, to operate under an expanded commercial banking authority. By virtue of such expanded power, the universal bank may, in addition to powers authorized for commercial banks: 1. 2. 3. exercise the power of an Investment House as provided in PD 129; invest in the equity of a non-allied undertaking; or

own a majority or all of the equity in a financial intermediary other than a commercial bank or a bank authorized to provide commercial banking services. Limitations on exercise of power as investment house Universal bank may perform the functions of an investment house either directly OR indirectly through a subsidiary investment house (it cannot perform such functions both directly and indirectly). If performed directly, such functions shall be undertaken by a separate and distinct department in the bank. If performed indirectly through an investment house, universal bank may not directly exercise such powers as are exclusively reserved to investment houses.

Limitations on equity investment of a universal bank 1. 2. 3. The total investment in equities shall not exceed fifty percent (50%) of the net worth of the bank. The equity investment in any one enterprise whether allied or non-allied shall not exceed fifteen percent (15%) of the net worth of the bank. The equity investment of the bank, or of its wholly- or majority-owned subsidiary, in a single non-allied undertaking shall not exceed thirty five percent (35%) of the total equity in the enterprise nor shall it exceed thirty five percent (35%) of the voting stock in that enterprise. The equity investment in other banks shall be deducted from the investing banks net worth for purposes of computing the prescribed ratio of net worth to risk assets.

4.

Capitalization Commercial bank Universal bank P 2 billion P 4.5 billion

Ownership in a thrift bank or rural bank A commercial bank or any bank authorized to provide commercial banking services, or to operate under an expanded commercial banking authority may own more than thirty percent (30%) of the voting stock of a thrift bank or a rural bank up to a majority or all of the equity thereof. Subject to the prior approval of the Monetary Board.

Combined capital accounts The combined capital accounts of each commercial bank shall not be less than an amount equal to ten percent (10%) of its risk assets Risk assets is defined as its total assets minus the following assets: 1. 2. 3. 4. 5. 6. Cash on hand; Amounts due from the Central Bank; Evidence of indebtedness of the Philippine Government or Central Bank or any other evidence of indebtedness fully guaranteed by the Philippine Government; Loans to the extend covered by hold-out on, or assignment of, deposits maintained in the lending bank and held in the Philippines; Loans or acceptances under letters of credit to the extend covered by marginal deposits; and Other non-risk items which the Monetary Board may, from time to time, authorize to be deducted from total assets.

Purchase, holding or conveyance of real estate

Any commercial bank may purchase, hold, and convey real estate for the following purposes: 1. 2. 3. 4. Such as shall be necessary for its immediate accommodation in the transaction of its business; Such as shall be mortgaged to it in good faith by way of security for debts; Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings; and Such as its shall purchase at sales under judgments, decrees, mortgages, or trust deeds held by it and such as it shall purchase to secure debts due to it.

However, no such bank shall hold the possession of any real estate under mortgage or trust deed, or the title and possession of any real estate purchased to secure any debt due to it, for a longer period than five years.

Establishment of branches Any commercial bank organized under Philippine laws may, with the prior approval of the Monetary Board, establish branches in the Philippines or branches and agencies outside the Philippines, and the bank shall be responsible for all business conducted in such branches to the same extent and in the same manner as though such business had all been conducted in the head office. A bank and its branches shall be treated as a unit.

THRIFT BANKS Thrift banks Thrift banks shall include savings and mortgage banks, private development banks, and stock savings and loan associations organized under existing laws and any banking corporation that may be organized for the following purposes: 1. Accumulating the savings of depositors and investing them together with capital loans secured by bonds, mortgages in real estate and insured improvements thereon, chattel mortgage, bonds, and other forms of security or in loans for personal and household finance, whether secured or unsecured, or in financing for home building and home development, in readily marketable and debt securities; in commercial papers, and accounts receivables, drafts, bills of exchange, acceptances or notes arising out of commercial transactions; and in such other investments and loans which the Monetary Board will determine as necessary in the furtherance of national economic objectives; Providing short term working capital, or medium- and long-term financing to businesses engaged in agriculture, services, industry and housing; and Providing diversified financial and allied services for its chosen market and constituencies especially for small and medium enterprises and individuals.

2. 3. Scope of authority

Thrift banks may: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. Accept savings and time deposits; Act as correspondent for other financial institutions; Purchase, hold and convey real estate; Open letters of credit; extend credit facilities to private and government employees; Extend credit against the security of jewelry, precious stones and similar articles; Accept foreign currency deposits; Invest in equity of allied undertakings; Rediscount papers with the PNB, LBP, DBP, and other GOCCs; Issue domestic letters of credit; Invest in marketable bonds and other debt securities; Grant loans, secured or not secured; and With prior approval of the Monetary Board: a. b. c. d. e. f. Open current or checking accounts; Act as collection agent for government entities; Act as official depository of national agencies and municipal, city or provincial funds where the bank is located; Issue mortgage and chattel certificates; Engage in quasi-banking and money market operations; and Offer NOW accounts.

Thrift banks may perform services similar to those offered by commercial banks under an expanded authority when permitted by the Bangko Sentral ng Pilipinas.

Capitalization Capitalization may vary according to the location of the head office: Within Metro Manila Outside Metro Manila Incentives and exemptions 1. 2. 3. 4. 5. 6. 7. Reserve requirement differential Liberalized branching rules Notices of statement of condition Tax exemptions Exemption from publication requirement Exemption from notarial charges Exemption from registration fees P250 million P 40 million

Equity ownership At least 40% of the voting stock of a thrift bank shall be owned by Filipino citizens. Exception: In case of merger or consolidation of existing Thrift Banks with foreign holdings, the resulting holding shall not be increased but may be reduced and, once reduced, shall not be increased thereafter beyond 60% of the voting stock of the Thrift Bank.

Minors as depositors Minors in their own rights and in their own names may make deposits and withdraw the same, and may receive dividends and interests. If the guardian shall give notice in writing to any thrift bank not to make payments of deposits, dividends or interest to the minor of whom he is the guardian, then such payment shall be made only to the guardian.

BUILDING AND LOAN ASSOCIATIONS Building and loan associations Building and loan associations are corporations whose capital stock is required or is permitted to be paid in by the stockholders in regular, equal periodical payments and whose purpose is: 1. 2. 3. 4. Prohibition It shall be unlawful for any building and loan association to make any loan upon property that is suitable for us only as theatre, public hall, church, convent, school, club, hotel, garage, or other public building. Monetary Board may grant exemptions in cases of public hall, school, hotel and other public buildings to facilitate the investment of idle funds. to accumulate the savings of its stockholders; to repay to said stockholders their accumulated savings and profits upon surrender of their shares; to encourage industry, frugality, and home building among its stockholders; and to loan its funds, and funds borrowed for the purpose, to stockholders on the security of unencumbered real estate and with the pledge of shares of the capital stock owned by such stockholders as collateral security.

Investment in bonds With the approval of the Monetary Board, a building and loan association may also invest such of its funds as may otherwise remain idle in bonds and obligations of the Republic of the Philippines or any of its subdivisions, or GOCCs.

Capital stock The capital stock of such associations shall be paid in by the stockholders in regular, equal, periodical payments known as dues, at such times and in such amounts as shall be provided in their by laws. The dues on each share of stock subscribed for by a stockholder shall continue to be paid by the stockholder to the association until the share has been duly withdrawn, cancelled, or forfeited or until the share has reached its matured value. Matured value is when the due paid on each share and the net earnings thereof, in accordance with the by laws, shall amount to the matured of the share.

Certificates of stock Certificates of stock shall be issued to each stockholder upon the payment of the membership fees and first installment of the dues.

Installment shares v. paid-up shares While still being paid, the shares are called installment shares. After they are fully paid, they are called paid-up shares. Once paid-up, relationship between the association and stockholder is changed into that of debtor and creditor.

Free shares and pledged shares Shares which have not been pledged as security for the payment of a loan shall be called free shares, and shares which have been so pledged shall be called pledged shares.

Surrender of shares Stockholders may surrender their shares and withdraw from the association after paying twelve (12) monthly installment of dues upon giving sixty (60) days notice in writing to the board of directors and the withdrawal value shall be the total sum of the dues paid thereon plus not less than ninety percent (90%) of all dividends earned by such shares up to the end of the last preceding fiscal period plus such interest for the time elapsed since the end of the period as shall be allowed by the board of directors. Stockholders who have not paid twelve (12) monthly installments of dues may, after giving sixty (60) days notice to the board, surrender their shares and withdraw from the association, and the withdrawal value shall be the total sum of the due paid thereon plus such dividend or interest as may be allowed by the board of directors.

RURAL BANKS Scope of authority A rural bank may perform any or all of the following services: 1. 2. 3. 4. 5. 6. 7. 8. Extend loans and advances primarily for the purpose of meeting the normal and credit needs of farmers, fishermen, or farm families as well as cooperatives, merchants, private and public employees; Accept savings and time deposits; Ac as correspondent bank of other financial institutions; Rediscount paper with the LBP, DBP, or any other bank, including its branches and agencies. Act as a collection agent; Offer other banking services as provided in Section 772 of RA 337, as amended; Extend financial assistance to private and public employees in accordance with RA 3779, as amended; and With prior approval of the Monetary Board: a. b. c. d. e. f. Rationale The rationale behind rural banking system is the need to promote comprehensive rural development with the end in view of the following: 1. 2. 3. A more equitable distribution of opportunities, income and wealth; A sustained increase of goods and services produced by the nation for the benefit of the people; and An expanding productivity as a key to raising the quality of life for all. Accept current or checking accounts; Accept NOW accounts; Act as trustee over estates or properties of farmers and merchants; Act as official government depository; Sell domestic drafts; and Invest in allied undertakings.

This can be achieved by making credit available and readily accessible in the rural areas.

Capital stock With the exception of shareholdings of corporations organized primarily to hold equities in rural banks, and of Filipino-controlled domestic banks, the capital stock of any rural bank shall be fully-owned and held by Philippine citizens or entities qualified under Phil. law to own and hold such capital stock.

Board All members of the BOD shall be Filipino citizens. However, there is no prohibition against any appointive or elective public official from serving as director, officer, consultant or in any capacity in the bank.

Incentives Foreclosure of mortgages exempt from newspaper publication requirements if the loan, excluding interest due and unpaid, does not exceed P100,000. Exempt from payment of all taxes, fees and charges of whatever nautre and description, except corporate income taxes and local taxes, fees and charges for aperiod of five years from the date of commencement of operations. Free from notarization fees Free from registration fees and DST in RD.