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BANKING LAWS

TABLE OF CONTENTS
A.
B.

C.
D.
E.
F.
G.

H.

The New Central Bank Act


Republic Act No. 7653
The General Banking Act
Republic Act No. 337
In General
Establishment of Domestic Banks
Licensing of Foreign Banks
Commercial Banking Corporations and Universal Banks
Thrift Banks Act of 1996
Republic Act No. 7906
Building and Loans Associations
Rural Banks Act of 1992
Republic Act No. 7353
An Act Liberalizing the Entry of Foreign Banks
Republic Act No. 7721
Offshore Banking System Law
Pres. Decree No. 1034
Foreign Currency Deposits Act
Republic Act No. 6426, as amended
An Act Creating the PDIC
Republic Act No. 3531
The Truth in Lending
Act Republic Act No.
3765
Law on Secrecy of Bank Deposits
Republic Act No. 1405
Note: We have included several banking laws which are not in the bar coverage.
Likewise, we have incorporated several laws on non-bank financial intermediaries.
Since they are not covered by the bar exam, the reviewee has the option of not
reading them.

Two types of financing


1.
2.

equity
debt-financing
A cross-breed of the two may also occur.

Intermediaries
1.
2.
3.
4.

Banks
Non-bank financial intermediaries
Exchanges
Others i.e. secondary markets

Function of intermediaries
1.
2.
3.

Brokering or matching investors with those in need of financing


Help in diminishing risks to investors
Provide liquidity

NEW CENTRAL BANK ACT


Republic Act No. 7653
Approved 14 June 1993

IN GENERAL
Mandate

The Bangko Sentral ng Pilipinas is the States central monetary authority, mandated in
the 1987 Constitution, which shall function and operate as an independent and
accountable body corporate in the discharge of its mandated responsibilities
concerning money, banking and credit. [Section 1, RA 7653]
The Bangko Sentral shall enjoy fiscal and administrative autonomy. [Section 1, RA
7653]

Objectives
1.
2.
3.
4.

The primary objective of the Bangko Sentral is to maintain price stability conducive
to a balanced and sustainable growth of the economy.
It shall also promote and maintain monetary stability and the convertibility of the
peso.
It shall also provide policy directions in the areas of money, banking and credit.
It has supervision over banks and has regulatory powers over the operations of
finance companies and non-bank financial intermediaries performing quasi-banking
functions. [Section 3, RA 7653]
2

Typical functions of the Bangko Sentral


1.
2.

3.
4.

5.
6.
7.
8.

Supervision over banks and regulation of non-bank financial intermediaries engaged


in quasi-banking functions
Bank of issue: as such, it has the sole power and authority to issue currency
Custodian of the nations reserves of foreign currency. As such, it ensures
convertibility of the peso and back up the Philippine Currency.
It has control of credit
a. regulating money supply i.e. reserve requirements for banks
b. open market operations i.e. Tbills
c. controlling interest rate
Lender of last resort
It has a "rediscounting window, allowing banks to sell their promissory notes to it.
Custodian of cash reserves of banks
Government banker, agent and advisor
Central clearance and settlement agency

Fiscal policy v. monetary policy

Fiscal policy is concerned with revenue generation and expenditure while monetary
policy involves regulating money supply and price stability.

The Bangko Sentral will now concentrate on monetary policy and shed off fiscal
responsibilities which in the past had distracted it from its primary function. [Section
129, RA 7653]

MONETARY BOARD AND GOVERNOR


Monetary Board

The powers and functions of the Bangko Sentral are exercised by the Monetary Board.

The Board is composed of seven (7) members appointed by the President for a term
of six (6) years. No member may be reappointed more than once.

The seven members are:


1.
The Governor as Chairman;
2.
A member of the Cabinet designated by the President; and
3.
Five (5) members who shall come from the private sector, all of whom shall
serve full-time.

Qualifications of the members of the Monetary Board


1.
2.
3.
4.
5.
6.

Must be natural born citizens of the Philippines


At least thirty five (35) years of age, with the exception of the Governor who should at
least be forty (40) years old
Good moral character
Of unquestionable integrity
Of known probity and patriotism
With recognized competence in social and economic disciplines

Disqualifications

In addition to the disqualifications imposed by Republic Act No. 6713, a member of


the Monetary Board is disqualified from being a director, officer, employee,
consultant, lawyer, agent or stockholder of any bank, quasi-bank or any other
institution which is subject to supervision or examination by the Bangko Sentral, in
which case such member shall resign from, and divest himself of any and all interests
in such institution before assumption of office as member of the Monetary Board.

The member of the Monetary Board coming from the private sector shall not hold any
other public office or public employment during their tenure.

No person shall be a member of the Monetary Board if he has been connected with
any multilateral banking or financial institution or has a substantial interest in any
private bank in the Philippines, within one (1) year prior to his appointment; likewise,
no member of the Monetary Board shall be employed in any such institution within
two (2) years after the expiration of his term except when he serves as an official
representative of the Philippine Government to such institution.

Quorum in the Monetary Board

The presence of four (4) members shall constitute a quorum. However, in all cases, the
Governor or his duly designated alternate shall be among the four.

Withdrawal of persons having a personal interest

In addition to the requirements of Republic Act No. 6713, any member of the
Monetary Board with personal or pecuniary interest in any matter in the agenda of
the Monetary Board shall disclose his interest to the Board and shall retire from the
meeting when the matter is taken up. The decision taken on the matter shall be made
public. The minutes shall reflect the disclosure made and the retirement of the
member concerned from the meeting.

Responsibility and liability of the members of the Monetary Board

Members of the Monetary Board, officials, examiners, and employees of the Bangko
Sentral who willfully violate RA 7653 or who are guilty of negligence, abuses or acts of
malfeasance or misfeasance or fail to exercise extraordinary diligence in the
performance of his duties shall be held liable for any loss or injury suffered by the
Bangko Sentral or other banking institutions as a result of such violation, negligence,
abuse, malfeasance, misfeasance or failure to exercise extraordinary diligence.

Similar responsibility shall apply to members, officers and employees of the Bangko
Sentral for;

1.

The disclosure of any information of a confidential nature, or any information


on the discussions or resolutions of the Monetary Board, or about the
confidential operations of the Bangko Sentral, unless the disclosure is in
connection with the performance of official functions with the Bangko Sentral,
or is with prior authorization of the Monetary Board or the Governor; or

2.

The use of such information for personal gain or to the detriment of the
Government, the Bangko Sentral or third parties.

However, any data or information required to be submitted to the President and/or


Congress, or to be published under the provisions of RA 7653 shall not be considered
confidential.

Authority of Governor to render opinions, decisions or rulings

The Governor of the Bangko Sentral shall have the power to render opinions,
decisions, or rulings which shall be final and executory, until reversed or modified by
the Monetary Board, on matters regarding application or enforcement of laws
pertaining to institutions supervised by the Bangko Sentral and laws pertaining to
quasi-banks, as well as regulations, policies or instructions issued by the Monetary
Board, and the implementation thereof. [Section 17(e), RA 7653]

Authority of the Governor in emergencies


In case of emergencies where time is insufficient to call a meeting of the Monetary
Board, the governor with the concurrence of two other members of the Board may decide
any matter or take an action within the authority of the Board.
He shall thereafter submit a report to the President and Congress within 72 hours
after the action has been taken.
At the soonest possible time, the Governor shall call a meeting of the Monetary board
to submit his action for ratification. [Section 19, RA 7653]
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Outside interests of the Governor and the full-time members of the Board

The Governor of the Bangko Sentral and the full-time members of the Board shall
limit their professional activities to those pertaining directly to their positions with the
Bangko Sentral.
They may not accept any other employment, whether public or private, remunerated
or ad honorem.

Exceptions:
1.

Positions in eleemosynary, civic, cultural or religious organizations

2.

Whenever, by designation of the President, the Governor or the full-time


member is tasked to represent the interest of the Government or other
government agencies in matters connected with or affecting the economy or
the financial system of the country

CERTAIN OPERATIONS OF THE BANGKO SENTRAL


Supervision and examination

The Bangko Sentral shall have supervision over, and conduct periodic or special
examination of, banking institutions and quasi-banks, including their subsidiaries and
affiliates engaged in allied activities.

This power however is subject to the provision of existing laws protecting or


safeguarding the secrecy or confidentiality of bank deposits as well as investments of
persons, natural or juridical, in debt instruments issued by the Government. [Section
25, RA 7653]

Subsidiary and affiliate

A subsidiary means a corporation more than fifty percent (50%) of the voting stock of
which is owned by a bank or quasi-bank and an affiliate means a corporation the
voting stock of which, to the extent of fifty percent (50%) or less, is owned by a bank
or quasi-bank or which is related or linked to such institution or intermediary through
common stockholders or such other factors as may be determined by the Monetary
Board.

No restraining order on power of examination

No restraining order or injunction shall be issued by the court enjoining the Bangko
Sentral from examining any institution subject to supervision or examination by the
Bangko Sentral, unless there is convincing proof that the action of the Bangko Sentral
is plainly arbitrary and made in bad faith and the petitioner or plaintiff files with the
clerk or judge of the court in which the action is pending a bond executed in favor of
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the Bangko Sentral, in an amount to be fixed by the court. [Section 25, RA 7653]

Prohibitions on personnel of the Bangko Sentral

In addition to the prohibitions found in RA 3019 and 6713, personnel of the Bangko
Sentral are hereby prohibited from:
1.

Being an officer, director, lawyer or agent, employee, consultant or


stockholder, directly or indirectly, of any institution subject to supervision or
examination by the Bangko Sentral, except non-stock savings and loan
associations and provident funds organized exclusively for employees of the
Bangko Sentral, and except as otherwise provided in RA 7653;

2.

Directly or indirectly requesting or receiving any gift, present or pecuniary or


material benefit for himself or another, from any institution subject to
supervision or examination by the Bangko Sentral;

3.

Revealing in any manner, except upon orders of the court, the Congress or
any government office or agency authorized by law, or under such conditions
as may be prescribed by the Monetary Board, information relating to the
condition or business of any such institution. This prohibition shall not apply
to the giving of information to the Monetary Boar or the Governor of the
Bangko Sentral, or to any person authorized by either of them, in writing, to
receive such information; and

4.

Borrowing from any institution subject to supervision or examination by the


Bangko Sentral unless said borrowings are adequately secured, fully disclosed
to the Monetary Boar, and shall be subject to such further rules and
regulations as the Monetary Board may prescribe.

CONSERVATORSHIP V. RECEIVERSHIP
CONSERVATOR
Grounds for appointment of conservator

The Monetary Board may appoint a conservator whenever it finds that a bank or a
quasi-bank is in a state of continuing inability or unwillingness to maintain a
condition of liquidity deemed adequate to protect the interest of depositors and
creditors. [Section 29, RA 7653]

The conservator should be competent and knowledgeable in bank operations and


management. The conservatorship shall not exceed one (1) year.

Powers of conservator
1.
2.
3.
4.

Take charge of the assets, liabilities and management of the bank or quasi-bank
Reorganize the management
Collect all monies and debts due said institution
Exercise all powers necessary to restore its viability

Extent of the power of the conservator

The conservator has the power to overrule or revoke the actions of the previous
management and board of directors of the bank or quasi-bank.

However, the power cannot extend to the post-facto repudiation of perfected


transactions, otherwise they would infringe against the non-impairment clause of the
Constitution.

Section 28-A of RA No. 265 merely gives the conservator the power to revoke
contracts that are deemed to be defective under existing law (i.e., void, voidable,
unenforceable, or rescissible); hence, the conservator merely takes the place of a
banks board of directors. What the board of directors cannot do, such as repudiating
a contract validly entered into under the doctrine of implied authority, the
conservator cannot do either. [First Philippine International Bank v. CA, 252 SCRA
255 (1986)]

Termination of conservatorship
The Monetary Board shall terminate the conservatorship when it is satisfied that the
institution can continue to operate on its own and the conservatorship is no longer
necessary.
The conservatorship shall likewise be terminated should the Monetary Board
determine that the continuance in business of the institution would involve probable loss to
its depositors or creditors, in which case proceedings for receivership and liquidation shall be
pursued. [Section 29, RA 7653]

PROCEEDINGS IN RECEIVERSHIP AND LIQUIDATION


Grounds for proceedings in receivership and liquidation

The Monetary Board shall institute proceedings for receivership whenever it finds that
a bank or quasi-bank:
1.

Is unable to pay its liabilities as they become due in the ordinary course of
business; provided that this shall not include inability to pay caused by
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2.
3.
4.

extraordinary demands induced by financial panic in the banking community;


Has insufficient realizable assets to meet its liabilities;
Cannot continue in business without involving probable loss to its depositors
or creditors; or
Has willfully violated a cease and desist order that has become final, involving
acts or transactions which amount to fraud or a dissipation of the assets of the
institution.

No need of prior notice and hearing

In such cases, the Monetary Board may summarily and without need for prior hearing,
forbid the institution from doing business in the Philippines and designate the
Philippine Deposit Insurance Corporation as receiver of the banking institution.
[Section 30, RA 7653]

Who acts as receiver

For a bank, the Philippine Deposit Insurance Corporation shall serve as receiver; for a
quasi-bank, any person of recognized competence in banking or finance may be
designated as receiver.

Tasks of the receiver


and take charge of all assets and liabilities of the
institution, (2) administer the same for the benefit of its creditors, and (3) exercise the general
powers of a receiver. (4) The receiver shall determine as soon as possible, but not later than
ninety (90) days from takeover, whether the institution may be rehabilitated or otherwise
placed in such a condition so that it may be permitted to resume business with safety to its
depositors and creditors and the general public.

Resumption
Any determination for the resumption of business of the institution shall be subject to prior
approval of the Monetary Board.

Liguidation
If the receiver determines that the institution cannot be rehabilitated or permitted to resume
business, the Monetary Board shall notify in writing the board of directors of its findings and
direct the receiver to proceed with the liquidation of the institution.

Procedure for liquidation


The receiver shall then:
1.

2.

3.

File ex parte with the proper regional trial court, and without the requirement
of prior notice or any other action, a petition for assistance in the liquidation
of the institution pursuant to a liquidation plan adopted by the Philippine
Deposit Insurance Corporation in the case of a bank or by the Monetary Board
in the case of a quasi-bank;
Upon acquiring jurisdiction, the court shall, upon motion by the institution,
assist the enforcement of individual liabilities of the stockholders, directors
and officers, and decide on other issues as may be material to implement the
liquidation plan adopted; and
Convert the assets of the institution to money, dispose of the same to
creditors and other parties, for the purpose of paying the debts of such
institution in accordance with the rules on concurrence and preference of
credit under the Civil Code of the Philippines and he may, in the name of the
institution, institute such actions as may be necessary to collect and recover
accounts and assets of, or defend any action against, the institution.

Custodia legis and exemption from levy, attachment or execution


The assets of an institution under receivership or liquidation shall be deemed in custodia
legis in the hands of the receiver and shall, from the moment the institution was placed
under such receivership or liquidation, be exempt from any order of garnishment, levy,
attachment, or execution. [Section 30, RA 7653]

Actions of Monetary Board final and may be questioned only through certiorari

The actions of the Monetary Board taken regarding the designation of a conservator
and appointment of a receiver shall be final and executory and may not be restrained
or set aside by the court except on petition for certiorari on the ground that the
action taken was in excess of jurisdiction or with such grave abuse of discretion as to
amount to lack or excess of jurisdiction.

The petition for certiorari may only be filed by the stockholders of record
representing the majority of the capital stock within ten (10) days from receipt by the
board of directors of the institution of the order directing receivership, liquidation or
conservatorship.

Designation of conservator not precondition to designation of receiver

The designation of a conservator or the appointment of a receiver shall be vested


exclusively with the Monetary Board.
10

The designation of a conservator is not a precondition to the designation of a


receiver.

THE BANGKO SENTRAL AND THE MEANS OF PAYMENT


Unit of monetary value
The unit of monetary value in the Philippines is the peso.

Currency
The word "currency" is hereby defined as meaning all Philippine notes and coins issued or
circulating in accordance with the provisions of RA 7653.

Bank of issue
Sentral has the sole power and authority to issue currency within the territory
of the Philippines [Section 50, RA 7653]

against and in amounts not exceeding, the assets of the BSP. Said notes and coins shall be a
first and paramount lien on all assets of the BSP [Section 51, RA 7653]

All notes and coins issued by the BSP are fully guaranteed by the RP and shall be legal
tender in the Philippines for all debts, both public and private. [Section 52, RA 7653]

Demand deposits

"Demand deposits" means all those liabilities of the Bangko Sentral and of other
banks which are denominated in Philippine currency and are subject to payment in
legal tender upon demand by the presentation of checks.

Issue of demand deposits

Only banks duly authorized to do so may accept funds or create liabilities payable in
pesos upon demand by the presentation of checks, and such operations shall be
subject to the control of the Monetary Board in accordance with the powers granted
it with respect thereto under RA 7653.

Legal character of checks

Checks representing demand deposits do not have legal tender power and their
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acceptance in the payment of debts, both public and private, is at the option of the
creditor. [Section 60, RA 7653]
However, a check which has been cleared and credited to the account of the creditor
shall be equivalent to a delivery to the creditor of cash in an amount equal to the
amount credited to his account. [Section 60, RA 7653]

Guiding principle

DOMESTIC MONETARY STABILIZATION

The Monetary Board shall endeavor to control any expansion or contraction in


monetary aggregates which is prejudicial to the attainment or maintenance of price
stability.

Action when abnormal movements occur in the monetary aggregates, credit, or price
level
Whenever abnormal movements in the monetary aggregates, in credit, or in prices
endanger the stability of the Philippine economy or important sectors thereof, the Monetary
Board shall:
1.

Take such remedial measures as are appropriate and within the powers
granted to the Monetary Board and the Bangko Sentral;

2.

Submit to the President of the Philippines and the Congress, and make public,
a detailed report which shall includes, as a minimum, a description and
analysis of:
a.

The causes of the rise or fall of the monetary aggregates, of credit or


of prices;

b.

The extent to which the changes in the monetary aggregates, in credit,


or in prices have been reflected in changes in the level of domestic
output, employment, wages, and economic activity in general and the
nature and significance of any such changes; and

c.

The measures which the Monetary Board has taken and the other
monetary, fiscal or administrative measures which it recommends to be
adopted.

INTERNATIONAL MONETARY STABILIZATION

The Bangko Sentral shall exercise its powers to preserve the international value of the
pesos and to maintain its convertibility into other freely convertible currencies
primarily for, although not necessarily limited to, current payments for foreign trade
and invisibles. [Section 64, RA 7653]
12

International reserves

In order to maintain the international stability and convertibility of the Philippine


peso, the Bangko Sentral shall maintain international reserves adequate to meet any
foreseeable net demands on the Bangko Sentral for foreign currencies. [Section 65,
RA 7653]

Composition of the international reserves


1.
2.

Gold
Assets in foreign currencies

Action when international stability of the pesos is threatened

Whenever the international reserve of the Bangko Sentral falls to a level which the
Monetary Board considers inadequate to meet the prospective net demands on the
Bangko for foreign currencies, or whenever the international reserve appears to be in
imminent danger of falling to such a level, or whenever the international reserve is
falling as a result of payments or remittances abroad which, in the opinion of the
Monetary Board, are contrary to the national welfare, the Monetary Board shall:
1.
2.

Take such remedial measures as are appropriate and within the powers
granted to the Monetary Board and the Bangko Sentral;
Submit to the President of the Philippines and the Congress, and make public,
a detailed report which shall includes, as a minimum, a description and
analysis of:
a. The nature and causes of the existing or imminent decline;
b. The remedial measures already taken or to be taken by the Monetary
Board;
c. The monetary, fiscal or administrative measures further proposed; and
d. The character and extent of the cooperation required from other
government agencies for the successful execution of the policies of the
Monetary Board.

INSTRUMENTS OF BANGKO SENTRAL ACTION


Means of action

In order to achieve the primary objective of price stability, the Monetary Board shall
rely on its moral influence and the powers granted to it under RA 7653 for the
management of monetary aggregates.

13

Purchases and sales of gold

The Bangko Sentral may buy and sell gold in any form.

Purchases and sales of foreign exchange

The Bangko sentral may buy and sell foreign notes and coins, and documents and
instruments of types customarily employed for the international transfe rof funds.
The Bangko Sentral may engage in future exchange operations.

To whom can engage

The Bangko Sentral may engage in foreign transactions with the following entities or
persons only:
1.
Banking institutions operating in the Philippines;
2.
The Government, its political subdivisions and instrumentalities;
3.
Foreign or international financial institutions;
4.
Foreign governments and their instrumentalities; and
5.
Other entities or persons which the Monetary Board is hereby empowered to
authorize as foreign exchange dealers.

Foreign asset position of the Bangko Sentral

The Bangko Sentral shall endeavor to maintain at all times a net positive foreign asset
position so that its gross foreign exchange assets will always exceed its gross foreign
liabilities.

Emergency restrictions on foreign exchange operations

Emergency restrictions on foreign exchange operations include:


1.

Temporarily suspending or restricting sales of foreign exchange by the Bangko


Sentral;
2.
Subjecting all transactions in gold and foreign exchange to license by the
Bangko Sentral; and
3.
Requiring that any foreign exchange thereafter obtained by any person
residing or entity operating in the Philippines be delivered to the Bangko
Sentral or to any bank or agent designated by the Bangko Sentral for the
purpose, at the effective exchange rate or rates. [Section 72, RA 7653]
Emergency restrictions may be imposed for the following purposes:
1.

In order to achieve the primary objective of the Bangko Sentral;

2.

To protect the international reserves of the Bangko Sentral in the imminence


of, or during an exchange crisis, or in time of national emergency; and
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3.

To give the Monetary Board and the Government time in which to take
constructive measures to forestall, combat, or overcome such a crisis or
emergency. [Section 72, RA 7653]

Such measures may be adopted with the concurrence of at least five (5) members of
the Monetary Board and with the approval of the President of the Philippines.
[Section 72, RA 7653]

Exchange rates

The Bangko Sentral shall determine the exchange rate policy of the country.

Foreign exchange holdings of the banks

In order that the Bangko Sentral may at all times have foreign exchange resources
sufficient to enable it to maintain the international stability and convertibility of the
peso, or in order to promote the domestic investment of bank resources, the
Monetary Board may require the banks to sell to the Bangko Sentral or to other banks
all or part of their surplus holdings of foreign exchange. [Section 76, RA 7653]

LOANS TO BANKING AND OTHER FINANCIAL INSTITUTIONS


Guiding principles

The rediscounts, discounts, loans and advances, which the Bangko Sentral is
authorized to extend to banking institutions, shall be used to influence the volume of
credit consistent with the objective of price stability.

Types of credit operations


1.
2.
3.

Normal credit operations


Special credit operations
Emergency credit operations

Normal credit operations


1.
2.
3.

Commercial credits
Production credits
Other credits

Commercial credits

The Bangko Sentral may rediscount, discount, buy and sell bills, acceptances,
promissory notes and other credit instruments with maturities of not more than one
15

hundred eighty (180) days from the date of their rediscount, discount or acquisition
by the Bangko Sentral and resulting from transactions related to:
1.

The importation, exportation, purchase or sale of readily saleable goods and


products, or their transportation within the Philippines; or

2.

The storing of non-perishable goods and products which are duly insured and
deposited, under conditions assuring their preservation in authorized bonded
warehouses or in other places approved by the Monetary Board.

Production credits

The Bangko Sentral may rediscount, discount, buy and sell bills, acceptances,
promissory notes and other credit instruments having maturities of not more than
three hundred sixty (360) days from the date of their rediscount, discount or
acquisition by the Bangko Sentral and resulting from transactions related to the
production or processing of agricultural, animal, mineral, or industrial products.

Other credits

Special credit instruments not otherwise rediscountable under commercial and


production credits may be eligible for rediscounting in accordance with the rules and
regulations which the Bangko Sentral shall prescribe.

Special credit operation


1.

Loans for liquidity purposes

Loans for liquidity purposes

The Bangko Sentral may extend loans and advances to banking institutions for a
period of not more than seven (7) days without any collateral for the purpose of
providing liquidity to the banking system in times of need. [Section 83, RA 7653]

Emergency loans and advances

In periods of national and/or local emergency or of imminent financial panic which


directly threaten monetary and banking stability, the Monetary Board may, by a vote
of at least five (5) of its members, authorize the Bangko Sentral to grant extraordinary
loans or advances to banking institutions secured by assets. [Section 84, RA 7653]

The Monetary Board may, at its discretion, likewise authorize the Bangko Sentral to
grant emergency loans or advances to banking institutions, even during normal
periods, for the purpose of assisting a bank in a precarious financial condition or
under serious financial pressures brought by unforeseen events, or events which,
16

though foreseeable, could not be prevented by the bank concerned. This requires
that the Monetary Board has ascertained that the bank is not insolvent and has the
assets to secure the advances and that the concurrent vote of at least five (5)
members of the Monetary Board is obtained. [Section 84, RA 7653]

OPEN MARKET OPERATIONS FOR THE ACCOUNT OF THE BANGKO SENTRAL


Principle of open market operations

The open market purchases and sales of securities by the Bangko Sentral shall be
made exclusively in accordance with its primary objective of achieving price stability.

In pursuit of this principle, the Bangko Sentral may engage in the purchase and sale
of government securities as well as issue and negotiate obligations of the Bangko
Sentral.

BANK RESERVES
Reserve requirements

In order to control the volume of money created by the credit operations of the
banking system, all banks operating in the Philippines shall be required to maintain
reserves against their deposit liabilities.

The required reserves of each bank shall be proportional to the volume of its deposit
liabilities and shall ordinarily take the form of a deposit in the Bangko Sentral.
[Section 94, RA 7653]

No interest on bank reserves

Since the requirement to maintain bank reserves is imposed primarily to control the
volume of money, the Bangko Sentral shall not pay interest on the reserves
maintained with it unless the Monetary Board decides otherwise as warranted by
circumstances. [Section 94, RA 7653]

Deposit substitutes

The term "deposit substitutes" is defined as 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
re-lending or purchasing of receivables and other obligations.

Required reserves against foreign currency

The Monetary Board is similarly authorized to prescribe and modify the minimum
17

reserve ratios authorized applicable to deposits denominated in foreign currencies.

Increase in reserve requirements

Whenever in the opinion of the Monetary Board it becomes necessary to increase


reserve requirements against existing liabilities, the increase shall be made in a
gradual manner and shall not exceed four percentage points in any thirty-day period.

Banks and other affected financial institutions shall be notified reasonably in advance
of the date on which such increase is to become effective.

Exemption from attachment and other purposes of reserves

Deposits maintained by banks with the Bangko Sentral as part of their reserve
requirements shall be exempt from attachment, garnishment, or any other order or
process of any court, government agency or any other administrative body issued to
satisfy the claim of a party other than the Government, or its political subdivision or
instrumentalities.

SELECTIVE REGULATION OF BANK OPERATIONS

Guiding principle

The Monetary Board shall use the powers granted to it under RA 7653 to ensure that
the supply, availability and cost of money are in accord with the needs of the
Philippine economy and that bank credit is not granted for speculative purposes
prejudicial to the national interests.

Regulations on bank operations shall be applied to all banks of the same category
uniformly and without discrimination.

Margin requirements against letters of credit

The Monetary Board may at any time prescribe minimum cash margins for the
opening of letters of credit, and may related the size of the required margin to the
nature of the transaction to be financed.

FUNCTIONS AS BANKER AND FINANCIAL ADVISOR OF THE GOVERNMENT


Designation of Bangko Sentral as banker of the government

The Bangko Sentral shall act as a banker of the Government, its political subdivisions
and instrumentalities.

The Bangko Sentral shall represent the government with the International Monetary
18

Fund and other financial institutions.

Official deposits

The Bangko Sentral shall be the official depository of the Government, its political
subdivisions and instrumentalities as well as of government-owned or controlled
corporations.

THE MARKETING AND STABILIZATION OF SECURITIES FOR THE ACCOUNT OF


THE GOVERNMENT
Issue of government obligations

The issue of securities representing obligations of the Government, its political


subdivisions or instrumentalities may be made through the Bangko Sentral, which
may act as agent of, and for the account of, the Government or its respective
subdivisions or instrumentality, as the case may be.

The Bangko Sentral shall not be a member of any stock exchange or syndicate, but
may intervene therein for the sole purpose of regulating their operations in the
placing of government securities. [Section 118, RA 7653]

Servicing and redemption of public debt

The servicing and redemption of the public debt shall also be effected through the
Bangko Sentral.

Financial advice on official credit operations

Before undertaking any credit operation abroad, the Government, through the
Secretary of Finance, shall request the opinion, in writing, of the Monetary Board on
the monetary implications of the contemplated action. Such opinion must similarly be
requested by all political subdivisions and instrumentalities of the Government before
any credit operation abroad is undertaken by them.

Whenever the Government, or any of its political subdivisions or instrumentalities,


contemplates borrowing within the Philippines, the prior opinion of the Monetary
Board shall likewise be requested in order that the Board may render an opinion on
the probable effects of the proposed operation on monetary aggregates, the price
level, and the balance of payments.

In order to assure effective coordination between the economic, financial and fiscal
policies of the government and the monetary, credit and exchange policies of the
Bangko Sentral, the Deputy Governor designated by the Governor of the Bangko
Sentral shall be an ex officio member of the National Economic and Development
Authority Board.
19

PROHIBITIONS
Prohibitions

The Bangko Sentral shall not acquire shares of any kind or accept them as coolateral,
and shall not participate in the ownership or management of any enterprise, either
directly or indirectly.

The Bangko Sentral shall not engage in development banking or financing.

TRANSITORY PROVISIONS
Phaseout of fiscal agency functions

Unless circumstances warrant otherwise and approved by the Congress Oversight


Committee, the Bangko Sentral shall within a period of three (3) years but in no case
longer than five (5) years from the approval of RA 7653, phase out all fiscal agency
functions, and transfer the same to the Department of Finance. [Section 129, RA 7653]

Phaseout of regulatory powers over the operations of finance corporations and other
institutions performing similar functions

The Bangko Sentral shall within a period of five (5) years from the effectivity of RA
7653 phase out its regulatory powers over finance companies without quasi-banking
functions and other institutions performing similar functions, the same to be assumed
by the Securities and Exchange Commission. [Section 130, RA 7653]

GENERAL BANKING ACT


Republic Act No. 337, as amended
An act regulating banks and banking institutions and for other purposes Approved
February 1995

23

IN GENERAL
Rule on bank operations
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
20

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
quasi-banking 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.

2.

Entities regularly engaged in the lending of funds which receive


deposits occasionally.

3.

Trust companies, building and loan associations, and non-stock savings and
21

loan associations.

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.

22

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.

2.

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.

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


ealing 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.
23

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 thefund suppliers.
he
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.

2.

Foreclosure of mortgageThe general rule is that there is no right of redemption in judicial foreclosure of
mortgage. There is only 90 day equity redemption period.
-day equity redemption
period, banks are required to give a one-year redemption period.

Alien bank mortgage

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.

24

Classification of banks [CUT-RICO]


1.
2.

3.

Commercial banks
Thrift banks
a. Savings and mortgage banks
b. Stock savings and loan associations
c. 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.

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;

2.

that the public interest and economic conditions, both general and local,
25

justify the authorization; and


3.

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.
26

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.
2.
3.

Public and economic conditions, both general and local, justify the issuance of such
order.
The foreign bank or banking corporation is solvent and in sound financial
condition.
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.

2.

With prior approval of the Central Bank, these foreign entities may also
purchase equities in domestic banks, subject to restrictions.

27

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.

by accepting drafts and issuing letters of credit, by discounting and


negotiating promissory notes, drafts, bills of exchange, and other evidences
of debts;

2.
3.
4.

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.


28

Limitations on investments in allied undertakings:


1.

The total investment in equities shall not exceed twenty five percent (25%)
of the net worth of the bank.

2.

The equity investment in any one enterprise shall not exceed fifteen
percent (15%) of the net worth of the bank;

3.

The total equity investment of the bank in any single enterprise shall remain
a minority holding in that enterprise; and

4.

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

Warehousing companies
Storage companies
Safe deposit box companies
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.
29

By virtue of such expanded power, the universal bank may, in addition to powers
authorized for commercial banks:
1. exercise the power of an Investment House as provided in PD 129;
2. invest in the equity of a non-allied undertaking; or
3. 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.

The total investment in equities shall not exceed fifty percent (50%) of the net
worth of the bank.

2.

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.

3.

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.

4.

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.

Capitalization
Commercial bank

P 2 billion

Universal bank

P 4.5 billion

30

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.
Cash on hand;
2.
Amounts due from the Central Bank;
3.
Evidence of indebtedness of the Philippine Government or Central Bank or
any other evidence of indebtedness fully guaranteed by the Philippine
Government;
4.
Loans to the extend covered by hold-out on, or assignment of, deposits
maintained in the lending bank and held in the Philippines;
5.
Loans or acceptances under letters of credit to the extend covered by
marginal deposits; and
6.
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.
31

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;

2.

Providing short term working capital, or medium- and long-term financing


to businesses engaged in agriculture, services, industry and housing; and

3.

Providing diversified financial and allied services for its chosen market and
constituencies especially for small and medium enterprises and individuals.

Scope of authority

Thrift banks may:


1.
Accept savings and time deposits;
2.
Act as correspondent for other financial institutions;
3.
Purchase, hold and convey real estate;
4.
Open letters of credit;
5.
extend credit facilities to private and government employees;
6.
Extend credit against the security of jewelry, precious stones and
similar articles;
32

7.
8.
9.
10.
11.
12.
13.

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

P250 million
P 40 million

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

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.

33

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.

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.

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.

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
34

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.

35

Scope of authority

RURAL BANKS

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.
Accept current or checking accounts;
b.
Accept NOW accounts;
c.
Act as trustee over estates or properties of farmers and
merchants;
d.
Act as official government depository;
e.
Sell domestic drafts; and
f.
Invest in allied undertakings.

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.

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.
36

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
ewspaper publication requirements if the loan,
excluding interest due and unpaid, does not exceed P100,000.

except corporate income taxes and local taxes, fees and charges for aperiod of five years
from the date of commencement of operations.

ACT LIBERALIZING ENTRY OF FOREIGN BANKS


Republic Act No. 7721
An act liberalizing the entry and scope of operations of foreign banks in the Philippines and
for other purposes

Declaration of policy

The State shall:


1.
2.

Develop a self-reliant and independent national economy effectively


controlled by Filipinos; and
Encourage, promote and maintain a stable, competitive, efficient and dynamic
banking and financial system.

Pursuant to this policy, the Philippine banking and financial system is hereby
liberalized to create a more competitive environment and encourage greater foreign
participation through increase in ownership in domestic banks by foreign banks and
the entry of new foreign bank branches.

In allowing increased foreign participation in the financial system, it shall be the policy
of the State that the financial system shall remain effectively controlled by Filipinos.

37

Three (3) modes of entry for foreign banks

The Monetary Board may authorize foreign banks to operate in the Philippine
banking system through any of the following modes of entry:
1.

by acquiring, purchasing or owning up to sixty percent (60%) of the voting


stock of an existing bank;

2.

by investing in up to sixty percent (60%) of the voting stock of a new banking


subsidiary incorporated under Philippine laws; or

3.

by establishing branches with full banking authority.

A foreign bank or a Philippine corporation, however, may own up to sixty percent


(60%) of the voting stock of only one domestic bank or new banking subsidiary.

Guidelines for entry

In approving entry applications of foreign banks, the Monetary Board shall:


1.

ensure geographic representation and complementation;

2. consider strategic trade and investment relationships between the Philippines and
the country of incorporation of the foreign bank;
3. study the demonstrated capacity, global reputation for financial innovations and
stability in a competitive environment of the applicant;
4. see to it that reciprocity rights are enjoyed by Philippine banks in the applicants
country; and
5. consider willingness to fully share their technology.

Only those among the top one hundred fifty (150) foreign banks in the world or the
top five (5) banks in their country of origin as of the date of application shall be
allowed entry in (b) and (c) of modes of entry.

In approving entry, Monetary Board shall adopt such measures as may be necessary:
1.

2.

3.

to ensure that, at all times, the control of seventy (70%) of the resources or
assets of the entire banking system is held by domestic banks which are at
least majority-owned by Filipinos;
prevent a dominant market position by one bank or the concentration of
economic power in one or more financial institutions, or in corporations,
partnerships, groups or individuals with related interests; and
secure the listing in the Philippine Stock Exchange of the shares of stocks of
banking corporations established under (a) and (b) modes of entry.

38

To qualify to establish a branch or subsidiary, the foreign bank applicant must be


widely-owned and publicly-listed in its country of origin, unless the foreign bank
applicant is owned by the government of its country of origin.

Capital requirements

Locally incorporated subsidiaries shall have the same minimum capital requirements
as domestic banks of the same category.

For foreign bank branches, they shall permanently assign capital of not less than the
U.S. dollar equivalent of P210,000,000.00 at the exchange rate on the date of
effectivity of this law.

The permanently assigned capital shall be inwardly remitted and converted into
Philippine currency.

Branches

A foreign bank shall be entitled to three (3) branches upon remittance of minimum
capital requirement.

A foreign bank may open three (3) additional branches in locations designated by the
Monetary Board by inwardly remitting and converting into Philippine currency as
permanently assigned capital the U.S. dollar equivalent of P35,000,000.00 per
additional branch at the exchange rate on the date of effectivity of this law.

Total number of branches for each new foreign bank entrant shall not exceed six (6).

Head office guarantee

The head office of foreign bank branches shall guarantee prompt payment of all
liabilities of its Philippine branches.

Equal treatment

Foreign banks authorized to operate under the law shall perform the same functions,
enjoy the same privileges, and be subject to the same limitations imposed upon a
Philippine bank of the same category.

These limits include, among others, the single borrowers limit and capital to risk asset
ratio as well as the capitalization required for expanded commercial banking activities
under the General Banking Act and other related laws of the Philippines.

39

OFFSHORE BANKING SYSTEM LAW


Presidential Decree No. 1034
Authorizing the establishment of an offshore banking system in the Philippines
Approved 30 September 1976

Offshore banking

Offshore banking shall refer to the conduct of banking transactions in foreign


currencies involving the receipt of funds from external sources and the utilization of
such funds in transactions with non-residents or other offshore banking units.

Offshore banking unit

Offshore banking unit shall mean a branch, subsidiary or affiliate of a foreign banking
corporation which is duly authorized by the Central Bank to transact offshore banking
business in the Philippines.

Deposits

Deposits shall mean funds in foreign currencies which are accepted and held by an
offshore banking unit in the regular course of business, with the obligation to return
an equivalent amount to the owner thereof, with or without interest.

Who are qualified to operate an offshore banking unit?

Only banks which are organized under any law other than those of the Republic of
the Philippines, their branches, subsidiaries or affiliates, shall be qualified to operate
offshore banking units in the Philippines.

Local branches of foreign banks already authorized to accept foreign currency


deposits under RA 6426 may opt to apply for authority to operate an offshore
banking unit under PD 1034. However, upon their receipt of a corresponding
certificate of authority to operate as an offshore banking unit, the license to transact
business under RA 6426 shall be deemed automatically withdrawn.

Certificate of authority to operate

The Monetary Board is authorized to issue certificates of authority to operate offshore


banking units.

In issuing such certificate, the Monetary Board shall take into consideration the
applicants:
1.

liquidity and solvency position;


40

2.
3.
4.
5.
6.

net worth and resources;


management;
international banking expertise;
contribution to the Philippine economy; and
other relevant factors such as participation in equity of local commercial banks
and appropriate geographic representation.

The Central Bank is authorized to collect a fee of not less than US $20,000 upon
issuing any certificate of authority to operate and annually thereafter on the
anniversary date of such certificate.

Corporate undertaking

No application to operate as an offshore banking unit shall be considered unless the


applicant shall have first submitted to the Central Bank a sworn undertaking of its
head office or parent or holding company, duly supported by an appropriate
resolution of its board of directors, that, among other things:
1.

it will, on demand, provide the necessary specified currencies to cover liquidity


needs that may arise or other shortfall that its offshore banking unit may
incur;

2.

the operations of its offshore banking unit shall be managed soundly and with
prudence;

3.

it will train and continually educate a specific number of Filipinos in


international banking and foreign exchange trading with a view to reducing
the number of expatriates;

4.

it will provide and maintain in its offshore banking unit net office funds in the
minimum amount of US $ 1,000,000; and

5.

it will start operations of its offshore banking unit within 180 days from receipt
of its certificate of authority to operate such unit.

Transactions of offshore banking units

Transactions of offshore banking units with non-residents or with other offshore


banking units shall be freely allowed, but safeguards will be established to prevent
circumvention of foreign exchange regulations.

Transactions of offshore banking units with residents of the Philippines, including


those with local commercial banks and local branches of foreign banks authorized to
receive foreign currency deposits under RA 6426, shall be subject to applicable law
and regulations.
41

Tax and other incentives

The provisions of any law to the contrary notwithstanding, the transactions of


offshore banking units with non-residents and other offshore banking units shall be
subject to a five percent (5%) tax on the net income from such transactions which
shall be in lieu of all taxes on the said transactions.

The transactions of offshore banking units with local commercial banks, including
branches of foreign banks that may be authorized by the Central Bank to transact
business with offshore banking units, shall likewise be subject to the same tax, except
net income from such transactions as may be specified by the Secretary of Finance,
upon recommendation of the Monetary Board, to be subject to the usual income tax
payable by banks.

Any income of non-residents from transactions with said offshore banking units shall
be exempt from any tax.

In the case of transaction with residents (other than other offshore banking units or
local commercial banks including local branches of foreign banks that may be
authorized by the Central Bank to transact business with offshore banking units),
interest income from loans granted to such residents shall be subject only to a ten
percent (10%) withholding tax as final tax.

Effect of certain laws

The Usury Law, Uniform Currency Law, and PDIC law shall not apply to transactions
and/or deposits in offshore banking units in the Philippines.

The provisions of RA 1405 or the Law on Secrecy of Bank Deposits shall apply to
deposits in offshore banking units.

42

FOREIGN CURRENCY DEPOSIT ACT


Republic Act No. 6426, as amended
An act instituting a foreign currency deposit system in the Philippines and for other purposes
Approved 04 April 1974

Authority to deposit foreign currencies

Any person, natural or juridical, may deposit with such Philippine banks in good
standing, as may upon application be designated by the Central Bank for the purpose,
foreign currencies which are acceptable as part of the international reserve.

Exception

Foreign currencies which are required by the Central Bank to be surrendered in


accordance with the provisions of RA 7653 may not be deposited.

Authority of the banks to accept foreign currency deposits

The banks designated by the Central Bank shall have the authority:
1.
2.
3.
4.
5.

To accept deposits and to accept foreign currencies in trust;


To issue certificates to evidence such deposits;
To discount said certificates;
To accept said deposits as collaterals for loans subject to such rules and
regulations as may be promulgated by the Central Bank; and
To pay interest in foreign currency on such deposits.

Foreign currency cover requirements

Depositary banks shall maintain at all times a one hundred percent (100%) foreign
currency cover for their liabilities, except as the Monetary Board may otherwise
prescribe or allow.

At least fifteen percent (15%) of such cover shall be in the form of foreign currency
deposit with the Central Bank and the balance in the form of foreign currency loans or
securities, which loans or securities shall be of short term maturities and readily
marketable.

Foreign currency cover shall be in the same currency as that of the corresponding
foreign currency deposit liability, unless the Monetary Board may otherwise prescribe
or allow.

43

The Central Bank may pay interest on the foreign currency deposit, and if requested,
shall exchange the foreign currency notes and coins into foreign currency instruments
drawn on its depositary banks.

Central Bank may exempt from the 15% foreign currency cover in the form of foreign
currency deposit with the Central Bank in cases of depository banks which, on
account of their net worth, resources, past performance, or other pertinent criteria,
have been qualified by the Monetary Board to function under an expanded foreign
currency deposit system.

Said banks may also be exempt from the limitations on the maturity periods for loans
and securities subject to prior approval by the Central Bank.

Withdrawability and transferability of deposits

There shall be no restriction on the withdrawal by the depositor of his deposit or on


the transferability of the same abroad except those arising from the contract between
the depositor and the bank.

Tax exemption

All foreign currency deposits made under RA 6426, as amended, as well as foreign
currency deposits authorized under PD 1304, including interest and all other income
or earnings of such deposits, are hereby exempted from any and all taxes whatsoever
irrespective of whether or not these deposits are made by residents or non-residents
so long as the deposits are eligible or allowed under the said laws and, in the case of
non-residents, irrespective of whether or not they are engaged in trade or business in
the Philippines.

Secrecy of foreign currency deposits

All foreign currency deposits authorized under RA 6426, as amended by PD 1305, as


well as foreign currency deposits authorized under PD 1034, are hereby declared as
and considered of an absolutely confidential nature and, except upon the written
permission of the depositor, in no instance shall foreign currency deposits be
examined, inquired or looked into by any person, government official, bureau or
entity whether public or private.

Unlike the Law on Secrecy of Banks Deposits Act, there is only one exception for
foreign currency deposits and that is when there is a written permission from the
depositor.

Exemption from attachment, garnishment and other process

Foreign currency deposits shall be exempt from attachment, garnishment, or any


44

other order or process of any court, legislative body, government agency, or any
administrative body whatsoever.

Salvacion v. Central Bank of the Philippines


278 SCRA 27
FACTS:
Greg Bartelli, an American tourist, was arrested for committing four counts of rape and serious
illegal detention against Karen Salvacion. Police recovered from him several dollar checks and a dollar
account in the China Banking Corp. He was, however, able to escape from prison. In a civil case filed
against him, the trial court awarded Salvacion moral, exemplary and attorneys fees amounting to
almost P1,000,000.00.
Salvacion tried to execute the judgment on the dollar deposit of Bartelli with the China
Banking Corp. but the latter refused arguing that Section 11 of Central Bank Circular No. 960 exempts
foreign currency deposits from attachment, garnishment, or any other order or process of any court,
legislative body, government agency or any administrative body whatsoever. Salvacion therefore filed
this action for declaratory relief in the Supreme Court.
ISSUE: Should Section 113 of Central Bank Circular No. 960 and Section 8 of Republic Act No. 6426, as
amended by PD 1246, otherwise known as the Foreign Currency Deposit Act be made applicable to a
foreign transient?
HELD:The provisions of Section 113 of Central Bank Circular No. 960 and PD No. 1246, insofar as it
amends Section 8 of Republic Act No. 6426, are hereby held to be INAPPLICABLE to this case because
of its peculiar circumstances. Respondents are hereby required to comply with the writ of execution
issued in the civil case and to release to petitioners the dollar deposit of Bartelli in such amount as
would satisfy the judgment.
RATIO:
Supreme Court ruled that the questioned law makes futile the favorable judgment and award
of damages that Salvacion and her parents fully deserve. It then proceeded to show that the economic
basis for the enactment of RA No. 6426 is not anymore present; and even if it still exists, the
questioned law still denies those entitled to due process of law for being unreasonable and
oppressive. The intention of the law may be good when enacted. The law failed to anticipate the
iniquitous effects producing outright injustice and inequality such as the case before us.
The SC adopted the comment of the Solicitor General who argued that the Offshore Banking
System and the Foreign Currency Deposit System were designed to draw deposits from foreign
lenders and investors and, subsequently, to give the latter protection. However, the foreign currency
deposit made by a transient or a tourist is not the kind of deposit encouraged by PD Nos. 1034 and
1035 and given incentives and protection by said laws because such depositor stays only for a few
days in the country and, therefore, will maintain his deposit in the bank only for a short time.
Considering that Bartelli is just a tourist or a transient, he is not entitled to the protection of Section
113 of Central Bank Circular No. 960 and PD No. 1246 against attachment, garnishment or other court
processes.

45

Further, the SC said: In fine, the application of the law depends on the extent of its justice.
Eventually, if we rule that the questioned Section 113 of Central Bank Circular No. 960 which exempts
from attachment, garnishment, or any other order or process of any court, legislative body,
government agency or any administrative body whatsoever, is applicable to a foreign transient,
injustice would result especially to a citizen aggrieved by a foreign guest like accused Greg Bartelli.
This would negate Article 10 of the New Civil Code which provides that in case of doubt in the
interpretation or application of laws, it is presumed that the lawmaking body intended right and
justice to prevail.

Deposit insurance coverage

The deposits under RA 6426 shall be insured under the provisions of RA 3591, as
amended, or the Charter of the Philippine Deposit Insurance Corporation.

Insurance payment shall be in the same currency in which the insured deposits are
denominated.

46

ACT CREATING THE PHILIPPINE DEPOSIT INSURANCE CORPORATION


Republic Act No. 3591
An act establishing the Philippine Deposit Insurance Corporation, defining its
powers and duties and for other purposes
22 June 1963

Creation of PDIC

There is hereby created a Philippine Deposit Insurance System which shall insure the
deposits of all banks which are entitled to the benefits of insurance under RA 3591.

PDIC may also be appointed as receiver of a banking institution.

Deposit

The term deposit means the unpaid balance of money or its equivalent received by
a bank in the usual course of business and for which it has given or is obliged to give
credit to a commercial, checking, savings, time or thrift account or which is evidenced
by a passbook, check and/or certificate of deposit, printed or issue in accordance
with Central Bank rules and regulations and other applicable laws, together with such
other obligations of the bank which, consistent with banking usages and practices,
the Board of Directors shall determine and prescribe by regulations to be deposit
liabilities of the bank.

Provided that any obligation of a bank which is payable at the office of the bank
located outside of the Philippines shall not be a deposit for any of the purposes of
this Act or included as part of the total deposits or of insured deposits.

Provided further, that, subject to the approval of the Board of Directors, any insured
bank which is incorporated under the laws of the Philippines which maintains a
branch outside the Philippines may elect to include for insurance its deposit
obligations payable only at such branch.

Insured deposit

The term insured deposit means the net amount due to any depositor for deposits
in an insured bank (after deducting offsets) less any part thereof which is in excess of
one hundred thousand pesos (P100,000). Therefore, the maximum amount of
insured deposit for every depositor is only P100,000.

has all three types of accounts, he can only recover up to P100,000. He is considered as one
depositor.

In determining such amount due to any depositor, there shall be added together
47

all deposits in the bank maintained in the same capacity and the same right for
his benefit either in his own name or in the name of others. Banks and its
branches considered as one unit.

The provisions of any law to the contrary notwithstanding, an owner/holder of any


negotiable certificate of deposit shall be recognized as a depositor entitled to the
rights provided in this Act unless his name is registered as owner/holder thereof in
the books of the issuing bank.

Insurance of deposits in foreign currency

Deposit obligations in foreign currency of any insured bank are likewise


insured.

Deposit insurance coverage and payment for insured deposits maintained in foreign
currencies in a closed insured bank shall be determined in accordance with the
following rules:
1.

The deposit in foreign currency shall be converted into its equivalent amount
in Philippine pesos at the interbank rate obtaining on the date the bank was
closed or on insolvency, and the insurance coverage shall extend to such
computed amount, but in no case to exceed P40,000 for each depositor; and

2.

The liability of PDIC to each depositor shall be payable in Philippine pesos


in the amount of insurance coverage as computed above.

Trust funds

The term means funds held by an insured bank in a fiduciary capacity and include,
without being limited to, funds as trustee, executor, administrator, guardian or
agent.

Trust funds are not considered as insured deposits.

Deposit insurance coverage

The deposit liabilities of any bank or banking institution, which is engaged in the
business of receiving deposits, shall be insured with the PDIC.

Coverage is compulsory.

Termination of insured status

Two instances: when it fails or refuses to pay assessment and when it


becomes insolvent.
48

Should any bank fail or refuse to pay any assessment required to be paid by such
bank, and should the bank not correct such failure or refusal within 30 days after
written notice has been given by the PDIC, the insured status of such bank shall be
terminated by the Board of Directors.

The bank shall give written notice of such termination to each of the depositors
and the PDIC shall publish the notice of the termination of the insured status of
the bank.

After the termination of the insured status of the bank, deposits of each depositor
in the bank, less all subsequent withdrawals from any deposits of such depositor,
shall continue to be insured for a period of 90 days.

Unsafe or unsound practices

These refer to any action or lack of action which is contrary to generally accepted
standards of prudent operation, the possible consequences of which, if continued,
would result in abnormal risk of loss or damage to a bank, depositors and its
shareholders or even the depletion of the Insurance Fund administered by the PDIC.

Cease and desist order (CDO)

A cease and desist order shall refer to the Order issued by PDIC, through its Board of
Directors, to a member insured bank, or its directors or agents to correct (a) unsafe
or unsound practices in conducting the business of the bank, (b) violations of any law
or regulation to which the insured bank is subject, or (c) violations of the provisions
of RA 3591, as amended or any order, rule or instruction issued by the PDIC or any
written condition imposed by PDIC in connection with any transaction with or grant
by the PDIC.

The object of the CDO is to protect depositors and the PDIC against existing or
potential risk exposures from said practices or violations.

Payment of insured deposit

An insured bank shall be deemed closed on account of insolvency when


ordered closed by the Monetary Board.

Whenever an insured bank shall have been closed on account of insolvency,


payment of insured deposits in such bank shall be made by PDIC as soon as
possible either (1) by cash or (2) making available to each depositor a transferred
deposit in another insured bank in an amount equal to the insured deposit of such
depositor.
49

Proof of claims may be required by PDIC before payment. If it is not satisfied, PDIC
may require the final determination of a court of competent jurisdiction before
paying such claim.

Depositor shall retain his claim against the bank for any uninsured portion of his
deposit.

Bar of claim by depositor

If, after the PDIC shall have given at least three months notice to the depositor by
mailing a copy thereof to his last known address appearing on the records of the
closed bank, the depositor in the closed bank shall fail to file a claim for his insured
deposit from the PDIC within eighteen (18) months after the Monetary Board shall
have ordered the closure of said bank, all rights of the depositor against the PDIC
with respect to the insured deposit shall be barred, and all rights of the depositor
against the closed bank and its shareholders or the receivership estate to which the
PDIC may have become subrogated, shall thereupon revert to the depositor.

Provided, that the claimant shall enforce his duly filed claim against the PDIC within
one year after the eighteen-month period heretofore mentioned.

Subrogation

The PDIC, upon payment, shall be subrogated to all rights of the depositor against
the closed bank to the extent of such payment.

Payments made by PDIC shall be considered as a preferred credit similar to taxes.

Discharge of the PDIC

The PDIC shall be discharged from its obligation to a depositor upon payment of an
insured deposit by itself or upon payment of a transferred deposit to any person by
the new bank or by an insured bank in which a transferred deposit has been made
available.

Other powers of PDIC


1.
2.
3.
4.

Provide financial assistance to an insured bank in danger of closing.


Borrow from the Central Bank and from any bank designated as depository or fiscal
agent of the Philippine Government.
Issue bonds, debentures and other obligations with the approval of the
President of the Philippines.
Act as receiver of any banking corporation.
50

Receiver

Receiver includes a receiver, commission, person, or other agency charged by law


with the duty to take charge of the assets and liabilities of a bank which has been
forbidden from doing business in the Philippines, as well as the duty to gather,
preserve, and administer such assets and liabilities for the benefit of the depositors
and creditors of said bank, and to continue into liquidation whenever authorized
under RA 3591, as amended, or other laws, and to dispose of the assets and to wind
up the affairs of such bank.

51

THE TRUTH IN LENDING ACT


Republic Act No. 3765
An act to require the disclosure of finance charges in connection with extensions of credit
Approved 22 June 1963

Declaration of policy

It is hereby declared to be the policy of the State to protect its citizens from a lack of
awareness of the true cost of credit to the user by assuring a full disclosure of such
cost with a view of preventing the uninformed use of credit to the detriment of the
national economy.

Finance charge

Finance charge includes interest, fees, service charges discounts, and such other
charges incident to the extension of credit.

Credit

Credit means any loan, mortgage, deed of trust, advance, or discount; any
conditional sales contract; any contract to sell, or sale or contract of sale of property
or services, either for present or future delivery, under which part or all of the price is
payable subsequent to the making of such sale or contract; any rental purchase
contract; any contract or arrangement for the hire, bailment, or leasing of property;
any option, demand, lien, pledge of other claim against, or for the delivery of,
property or money; any purchase, or other acquisition of, or any credit upon the
security of, any obligation or claim arising out of any of the foregoing; and any
transaction or series of transactions having a similar purpose or effect.

Creditor

Creditor means any person engaged in the business of extending credit


(including any person who, as a regular business practice, makes loans or sells or
rents property or services on a time, credit, or installment basis, either as principal
or as agent) who requires as an incident to the extension of credit the payment of a
finance charge.

Disclosure of finance charges

Any creditor shall furnish to each person to whom credit is extended, prior to the
consummation of transaction, a clear statement in writing setting forth the following
information:
1.
the cash price or delivered price of the property or service to be
acquired;
52

2.
3.

4.
5.
6.
7.

the amounts, if any, to be credited as down payment and/or trade in;


the difference between the amounts set forth under clauses (1) and (2);
the charges, individually itemized, which are paid or to be paid by such
person in connection with the transaction but which are not incident to the
extension of credit;
the total amount to be financed;
the finance charge expressed in terms of pesos and centavos; and
the percentage that the finance charge bears to the total amount to be
financed expressed as a simple annual rate on the outstanding unpaid
balance of the obligation.

Penalty for failure to disclose prescribed information

Any creditor who, in connection with any credit transaction, fails to disclose to any
person any information in violation of Republic Act No. 3765 or any regulation
issued pursuant thereto shall be liable to such person in the amount of P100 or in
an amount equal to twice the finance charge required by such creditor in
connection with such transaction, whichever is greater, except that such liability
shall not exceed P2000 on any credit transaction.

Action to recover such penalty

Action to recover such penalty may be brought by such person within one year
from the date of occurrence of the violation in any court of competent jurisdiction.

In any such action in which any person is entitled to a recovery, the creditor shall be
liable for reasonable attorneys fees and court costs as determined by the court.

Effect of non-disclosure on contract or transaction

It shall not affect the validity or enforceability of any contract or transaction.

Willful violation of the law

Any person who willfully violates any provision of this Act or any regulation extended
thereto shall be fined by not less than P1000 nor more than P5000, or imprisonment
for not less than six (6) months nor more than one year, or both.

Consolidated Bank and Trust Corporation v. Court of Appeals


G.R. No. 91494, 14 July 1995
Banks are allowed to collect handling charges on loans over P500,000 with a maturity
of 730 days or less. However, in the case at bar, Consolidated Bank was not allowed to collect
from the private respondents handling charges because it failed to conform to the Truth in
Lending Act.

53

All banks and non-bank financial intermediaries authorized to engage in quasi-banking


functions are required to strictly adhere to the provisions of Republic Act No. 3765, otherwise known
as the Truth in Lending Act, and shall make the true and effective cost of borrowing an integral part
of every loan contract. The promissory notes signed by private respondents do not contain any
stipulation on the payment of handling charges. Petitioner bank, therefore, cannot charge private
respondent such handling charges.

International Harvester Macleod, Inc. v. Medina


G.R. No. 33623, 22 March 1990
Mariano Medina, Jr. purchase on installment 24 truck engines from International Harvester
Macleod, Inc. (IHMI). The latter imposed and collected the total sum of P325,596 as finance charges
on the installment sales as evidenced by a Retail Notes Analysis and covering transmittal letters,
which were prepared by IHMI, delivered to, and signed by Medina. In the Retail Notes Analysis, IHMI
used the works Finance Income Unearned, Finance Rate, Rate per year, Total Amount Finance,
and Date Finance Begun, to denote certain entries therein.
The trial court ruled that IHMI imposed and collected the amount of P325,596 purely as
financing charges and this is conclusive of the fact that it engaged in the business of a financing
company without authority from the Securities and Exchange Commission in gross violation of
Republic Act No. 5980 or the Finance Company Act.
The Supreme Court reversed, ruling that IHMI is not engaged in the business of a
financing company.
Evidently, the financing transactions that is regulated by Republic Act No. 5980 involves the
buying, discounting or factoring of promissory notes and sales on credit or installment. IHMI did not
purchase from itself the Retail Notes Analysis executed by Medina. IHMI only extended credit to
Medina by allowing him to pay for the 24 truck engines in installment. While the increased price of the
sale included a financing charge, that charge was simply another name for the interest to be paid by
the installment buyer on the deferred payment of the purchase price of the vehicles sold and
delivered to him by IHMI.
The use of the words finance charge, financing, or finance operation in the documents
prepared and letters sent by IHMI to Medina was in compliance with the Truth in Lending Act which
requires a creditor (or seller) to fully disclose to the debtor (or buyer) the true cost of credit with a
view of preventing the uninformed use of credit to the detriment of the national economy.
IHMI used the word finance charge instead of interest in the Retail Notes Analysis which
it delivered to Medina because that is the term used in the Truth in Lending Act.
IHMI correctly pointed out that its transaction with Medina differs from a financing
transaction under Republic Act No. 5980 in that there were only two parties in its transaction with
Medina, namely: IHMI and Medina; while in a financing transaction under Republic Act No. 5980,
there are three parties involved, namely: (1) the installment buyer; (2) the seller; and (3) the financing
company. The buyer executes a note or notes for the unpaid balance of the price of the thing
purchased by him on installment. The seller assigns the notes or discounts them with a financing

54

company which is subrogated in the place of the seller as creditor of the installment buyer.
The transaction between IHMI and Medina did not involve any discounting, factoring or
assignment of IHMIs credit against Medina to a finance company. The transaction was bilateral, not
trilateral. No financing company stepped into the shoes of IHMI as assignee or purchaser of IHMIs
credit against Medina. Medina himself, not a financing company, paid IHMI for the truck engines.
Medina made his installment payments or amortization to IHMI and not to a financing company.
Since IHMIs business of selling trucks in installment is not the business of a financing
company under Republic Act No. 5980, it did not need SEC authorization to engage in it.

55

LAW ON SECRECY OF BANK DEPOSITS


Republic Act No. 1405, as amended
An act prohibiting disclosure of or inquiry into, deposits with any banking institution and
providing penalty therefor

Policy of the law

It is hereby declared to be the policy of the Government to give encouragement to


the people to deposit their money in banking institutions and to discourage private
hoarding so that the same may be properly utilized by banks in authorized loans to
assist in the economic development of the country. [Section 1, RA 1405]

General rule

All deposits of whatever nature with banks or banking institutions in the Philippines
including investments in bonds issued by the Government of the Philippines, its
political subdivisions and its instrumentalities, are hereby considered as of an
absolutely confidential nature and may not be examined, inquired or looked into by
any person, government official, bureau or office. [Section 2, RA 1405]
It shall be unlawful for any official or employee of a bank to disclose to any person,
other than those mentioned in Section 2 hereof, any information concerning said
deposits. [Section 3, RA 1405]

Exceptions
1.

Upon written permission of the depositor, including:


a.
in determining estate of a decedent; and
b.
tax compromise cases;

2.
3.

In cases of impeachment;
Upon order of a competent court in cases of bribery or dereliction of duty of public
officials;
In cases where the money deposited or invested is the subject matter of the litigation;
and
Cases of unexplained wealth under Republic Act No. 3019 or the Anti-Graft and
Corrupt Practices Act.

4.
5.

Penalty for violation of law

Any violation of this law will subject offender upon conviction to an imprisonment of
not more than five (5) years or a fine of not more than twenty thousand pesos
(P20,000) or both, in the discretion of the court. [Section 5, RA 1405]

56

Tatalon Barrio Council v. Chief Accountant, et. al.


GR No. 18360, 31 January 1963
In this case, the Supreme Court ruled that savings and current accounts are privileged documents
which fall within the protection of Republic Act No. 1405, and their disclosure can only be
justified under any of the cases enumerated in Section 2 of the Act, which do not include the
prosecution of criminal actions for violation of the provisions of the Anti-Graft and Corrupt
Practices Act and of Article 216 of the Revised Penal Code. This has since been overturned by the
case of PNB v. Gancayco.

Philippine National Bank v. Gancayco


GR No. 18343, 30 September 1965
FACTS:
Emilio Gancayco and Florentino Flor, as special prosecutors of the Department of Justice,
required the Philippine National Bank to produce at a hearing the records of the bank deposits of
Ernesto Jimenez, former administrator of the Agricultural Credit and Cooperative Administration, who
was then under investigation for unexplained wealth.
PNB refused to disclose his bank deposits, invoking Section 2 of Republic Act No. 1405. On the
other hand, the prosecutors cited the Anti-Graft and Corrupt Practices Act, particularly Section 8
therewith, to wit:
Section 8. Dismissal due to unexplained wealth. - If in accordance with the provisions
of RA 1379, a public official has been found to have acquired during his incumbency,
whether in his name or in the name of other persons, an amount of property and/or
money manifestly out of proportion to his salary and to his other lawful income, that
fact shall be a ground for dismissal or removal. Properties in the name of the spouse
and unmarried children of such public official, may be taken into consideration, when
their acquisition through legitimate means cannot be satisfactorily shown. Bank

deposits shall be taken into consideration in the enforcement of this section,


notwithstanding any provision of law to the contrary.

PNB then filed an action for declaratory judgment in the CFI of Manila which ruled that
Section 8 of the Anti-Graft and Corrupt Practices Act clearly intended to provide an additional ground
for the examination of bank deposits. Hence, this appeal.
ISSUE: Whether or not a bank can be compelled to disclose the records of accounts of a depositor
who is under investigation for unexplained wealth?
HELD: Yes. Republic Act No. 3019 provided another exception to Section 2 of Republic Act No. 1405.
RATIO: No reconciliation is possible between Republic Act No. 1405 and Republic Act No. 3019 as the
two laws are so repugnant to each other. Thus, while Section 2 of Republic Act No. 1405 provides that
bank deposits are absolutely confidential and, therefore, may not be examined, inquired or looked
into, except in those cases enumerated therein, Section 8 of Republic Act No. 3019 (Anti-graft law)
directs in mandatory terms that bank deposits shall be taken into consideration in the enforcement of

57

this section, notwithstanding any provision of law to the contrary. The only conclusion possible is that
Section 8 of the Anti-Graft Law is intended to amend Section 2 of Republic Act No. 1405 by providing
an additional exception to the rule against the disclosure of bank deposits.
With regard to the claim that disclosure would be contrary to the policy making bank deposits
confidential, it is enough to point out that while Section 2 of Republic Act No. 1405 declares bank
deposits to be absolutely confidential, it nevertheless allows such disclosure in the following
instances: (1) Upon written permission of the depositor; (2) In cases of impeachment; (3) Upon order of
a competent court in cases of bribery or dereliction of duty of public officials; (4) In cases where the
money deposited is the subject of the litigation.
Cases of unexplained wealth are similar to cases of bribery or dereliction of duty and no
reason is seen why these two classes of cases cannot be excepted from the rule making bank deposits
confidential. The policy as to one cannot be different from the policy as to the other. This policy
expresses the notion that a public office is a public trust and any person who enters upon its discharge
does so with the full knowledge that his life, so far as relevant to his duty, is open to public scrutiny.

Banco Filipino Savings and Mortgage Bank v. Purisima


GR No. 56429, 28 May 1988
The Bureau of Internal Revenue accused Customs special agent Manuel Caturla before the
Tanodbayan of having illegal acquired property manifestly out of proportion to his salary and other
lawful income. During the preliminary investigation, the Tanodbayan issued a subpoena duces tecum
to the Banco Filipino Savings and Mortgage Bank, commanding its representative to appear at a
specified time at the Office of the Tanodbayan and furnish the latter with duly certified copies of the
records in all its branches and extension offices of the loans, savings and time deposits and other
banking transactions, in the names of Caturla, his wife, Purita, their children, and/or Pedro Escuyos.
Caturla moved to quash the subpoena for violating Sections 2 and 3 of RA 1405 which was
denied by the Tanodbayan. In fact, the Tanodbayan issued another subpoena which expanded its
scope including the production of bank records not only of the persons enumerated above but of
additional persons and entities as well.
The Banco Filipino filed an action for declaratory relief with the CFI of Manila whichwas denied
by the lower court. Thus this special civil action of certiorari in the SC.
The issue here is whether or not the Law on Secrecy of Bank Deposits precludes production by

subpoena duces tecum of bank records of transactions by or in the names of the wife, children and
friends of a special agent of the Bureau of Customs accused before the Tanodbayan of having
allegedly acquired property manifestly out of proportion to his salary and other lawful income in
violation of RA 3019?
The Supreme Court ruled in the negative.
In PNB v. Gancayco, we ruled that: while Section 2 of Republic Act No. 1405 provides that
bank deposits are absolutely confidential and, therefore, may not be examined, inquired or looked
into, except in those cases enumerated therein, Section 8 of Republic Act No. 3019 (Anti-graft law)

58

directs in mandatory terms that bank deposits shall be taken into consideration in the enforcement of
this section, notwithstanding any provision of law to the contrary. The only conclusion possible is that
Section 8 of the Anti-Graft Law is intended to amend Section 2 of Republic Act No. 1405 by providing
an additional exception to the rule against the disclosure of bank deposits.

The inquiry into illegally acquired property - or property not legitimately acquired - extends to
cases where such property is concealed by being held by or recorded in the name of other persons.
This proposition is made clear by RA 3019 which quite categorically states that the term legitimately
acquired property of a public officer or employee shall not include property unlawfully acquired by
the respondent, but its ownership is concealed by its being recorded in the name of, of held by,
respondents spouse, ascendants, descendants, relatives or any other persons.
To sustain the petitioners theory, and restrict the inquiry only to property held by or in the
name of the government official or employee, or his spouse and unmarried children is unwarranted in
the light of the provisions of the statutes in question, and would make available to persons in
government who illegally acquire property an easy and fool-proof means of evading investigation and
prosecution; all they have to do would be to simply place the property in the possession or name of
persons other than their spouse and unmarried children. This is an absurdity that we will not ascribe to
the lawmakers.

Philippine Commercial & Industrial Bank, et. al. v. Court of Appeals, et. al.
GR no. 84526, 28 January 1991
A group of laborers obtained a favorable judgment against the Marinduque Mining and
Industrial Corporation for the payment of backwages amounting to P205,853 before the National
Labor Relations Commission. A writ of execution was issued and the Deputy Sheriff served the writ, but
it was unsatisfied. The sheriff prepared on his own a Notice of Garnishment addressed to six banks in
Bacolod City, including petitioner PCIB, directing the bank concerned to issue a check in satisfaction of
the judgment.
While the in house lawyer of the Corporation warned the PCIB to withhold any release of its
deposit with the bank, the bank issued a managers check in the amount of P37,466 which was the
exact balance of the private respondents account as of that day. The said check was also encashed by
the sheriff the next day.
Marinduque Mining thus filed a complaint before the RTC of Manila against PCIB and the
deputy sheriff, alleging that its current deposit with the petitioner bank was levied upon, garnished,
and with undue haste unlawfully allowed to be withdrawn, and notwithstanding the alleged
unauthorized disclosure of the said current deposit and unlawful release thereof, the latter have failed
and refused to restore the amount of P37,466 to the formers account despite repeated demands.
Trial court rendered judgment in favor of Marinduque Mining Corporation. On appeal, the
Court of Appeals initially reversed the trial courts order but later affirmed it. Thus, this petition to the
SC.
The issue is whether or not the petitioners violated RA 1405, otherwise known as the Secrecy
of Bank Deposits Act, when they allowed the sheriff to garnish the deposit of Marinduque Mining

59

Corporation? SC held no.


The SC first ruled that the release of the deposit by the bank was not done in undue and
indecent haste. We find the immediate release of the funds by the petitioner bank on the strength of
the notice of garnishment and writ of execution, whose issuance, absent any patent defect, enjoys the
presumption of regularity.
The SC likewise did not find any violation whatsoever by the petitioners of RA 1405, otherwise
known as the Secrecy of Bank Deposits Act. The Court, in China Banking Corporation v. Ortega, had
the occasion to dispose of this issue when it stated, to wit:

It is clear from the discussion of the conference committee report on Senate Bill No.
351 and House Bill No. 3977, which later became Republic Act No. 1405, that the
prohibition against examination of or inquiry into a bank deposit under Republic Act
No. 1405 does not preclude its being garnished to insure satisfaction of a judgment.
Indeed, there is no real inquiry in such a case, and if existence of the deposit is
disclosed, the disclosure is purely incidental to the execution process. It is hard to
conceive that it was ever within the intention of Congress to enable debtors to evade
payment of their just debts, even if ordered by the Court, through the expedient of
converting their assets into cash and depositing the same in a bank.
Since there is no evidence that the petitioners themselves divulged the information that the
private respondent had an account with the petitioner bank and it is undisputed that the said
account was properly the object of the notice of garnishment and writ of execution carried out
by the deputy sheriff, a duly authorized officer of the court, we cannot therefore hold the
petitioners liable under RA 1405.

Mellon Bank v. Magsino et. al.


GR No. 71479, 18 October 1990
This case involves the erroneous transfer of US $1,000,000 to Victoria Javier instead of US
$1,000 only. Dolores Ventosa requested the transfer of $1000 from the First National Bank of West
Virginia, USA to Victoria Javier in Manila through the Prudential Bank. Accordingly, the First National
Bank requested the petitioner, Mellon Bank, to effect the transfer. Unfortunately, the wire sent by
Mellon Bank to Manufacturers Hanover Bank, a correspondent of Prudential Bank, indicated the
amount transferred as US $1,000,000.00 instead of US $1,000.00. Hence, Manufacturers Hanover
Bank transferred one million dollars less bank charges of $6.30 to the Prudential Bank for the account
of Victoria Javier.
Javier opened a new dollar account in Prudential Bank and deposited $999,943. Immediately,
thereafter, Javier and her husband made withdrawals from the account, deposited them in several
banks only to withdraw them later in an apparent plan to conceal, launder and dissipate the
erroneously sent amount. One of the things they bought was real property in California, USA which
was the subject of an action for recovery by Mellon Bank. Later, it filed a case in the Philippines for the
recovery of the whole amount, including the purchase price of the real property located in the US.
Among other things, private respondents raised the issue of whether or not, by virtue of the
principle of election of remedies, an action filed in California, USA, to recover real property located
therein and to constitute a constructive trust on said property precludes the filing in our jurisdiction of

60

an action to recover the purchase price of said real property. SC ruled that the filing of a recovery suit
in the US does not preclude the filing of an action in the Philippines for the recovery of the purchase
price.
With regard to our subject matter, Erlinda Baylosis of the Philippine Veterans Bank and
Pilologo Red, Jr. of Hongkong and Shanghai Banking Corporation were required to give testimonies
with regard to the deposits and checks issued by the private respondents Javier, et. al.. These
testimonies were questioned for being immaterial and irrelevant as well as covered by RA 1405 on
confidentiality.
SC said: Private respondents protestations that to allow the questioned testimonies to remain
on record would be in violation of the provisions of RA 1405 on the secrecy of bank deposits is
unfounded. Section 2 of said law allows the disclosure of bank deposits in cases where the money
deposited is the subject matter of the litigation. Inasmuch as the civil case is aimed at recovering the
amount converted by the Javiers for their own benefit, necessarily, an inquiry into the whereabouts of
the illegally acquired amount extends to whatever is concealed by being held or recorded in the name
of persons other than the one responsible for the illegal acquisition.

61

NON-BANK FINANCIAL INTERMEDIARIES


NON-BANK FINANCIAL INTERMEDIARIES
1.
2.
3.
4.
5.

The Investment House Law


Pres. Decree 129
Investment Company Act
Republic Act No. 2629
Financing Company Act
Republic Act No. 5580, as amended
Pawnshops
Pres. Decree No. 114
Trust Corporations
Chapter VII, General Banking Act

THE INVESTMENT HOUSES LAW


Presidential Decree No. 129
Governing the establishment, operation and regulation of Investment Houses 15
February 1973

Investment houses

An investment house is any enterprise which engages in the underwriting of securities of


other corporations.

Under its Rules and Regulations, an investment house is defined an any enterprise
which engages or purports to engage, whether regularly or on an isolated basis, in the
underwriting of securities of another person or enterprise, including securities of the
Government and its instrumentalities.

Underwriting

Underwriting is the act or process of guaranteeing the distribution and sale within the
Philippines of securities of any kind issued by another corporation.
The distribution and sale may be on public or private placement basis.

Private placement

Refers to the underwritten sale of securities to less than 20 persons or enterprises.

Public placement

Refers to the underwritten sale of securities to at least 20 persons or enterprises.

62

Organization and citizenship requirements

Investment Houses shall be organized in the form of stock corporations.

At least forty percent (40%) of the voting stock of any Investment House shall be owned
by citizens of the Philippines.

In determining the percentage of foreign-owned voting stocks in Investment Houses, the


basis for the computation shall be the citizenship of each stockholder, and, if the
stockholder is a corporation, the citizenship of the individual stockholders holding voting
rights in that corporation.

In approving foreign equity applications in Investment Houses, the SEC shall approve
such applications only if the same or similar rights are enjoyed by Philippine nationals in
the applicants country.

Foreign nationals may become members of the board of directors to the extent of the
foreign participation in the equity of said enterprise.

Capital requirements

In the case of newly-organized Investment Houses, the minimum paid-in capital shall be
three hundred million pesos (P300,000,000).

The Monetary Board may prescribe a higher minimum capitalization in order to promote
and ensure the stability of the Philippine capital market and the competitiveness of the
investment house industry in line with the national economic goals.

Requirements for registration

The Securities and Exchange Commission shall not register the articles of incorporation
of any Investment House, or any amendment thereto, unless it is satisfied from the
evidence submitted to it:
a.

That all the requirements of the PD 129 and of existing laws or regulations to
engage in the business have been complied with;

b.

That the proposed enterprise will not be in conflict with public interest and
economic growth; and

c.

That the amount of capital, the proposed organization, direction and


administration, as well as the integrity, experience and expertise of the organizers
and the proposed managerial staff, provide reasonable assurance that the
enterprise will be conducted with financial prudence.
63

Prohibition

No Investment House shall engage in banking operations as defined in Section 2 of


Republic Act No. 337, as amended.

Powers of investment houses

In addition to the powers granted to corporations in general, an Investment House is


authorized to do the following:
1.

Arrange to distribute on a guaranteed basis securities of other corporations and


of the Government or its instrumentalities.

2.

Participate in a syndicate undertaking to purchase and sell, distribute or arrange


to distribute on a guaranteed basis securities of other corporations and of the
Government or its instrumentalities.

3.

Arrange to distribute or participate in a syndicate undertaking to purchase and


sell on a best-efforts basis securities of other corporations and of the
Government or its instrumentalities.

4.

Participate as soliciting dealer or selling group member in tender offers, block


sales, or exchange offering of securities; deal in options, right or warrants relating
to securities and such other powers which a dealer may exercise under the
Securities Act.

5.

Promote, sponsor, or otherwise assist and implement ventures, projects and


programs that contribute to the economys development.

6.

Act as financial consultant, investment adviser, or broker.

7.

Act as portfolio manager and/or financial agent.

8.

Subject to prior approval by the Monetary Board, the provisions of Chapter IV of


the Central Bank Charter, and such rules and regulations as may be issued by the
Monetary Board, engage in foreign exchange operations.

9.

Act as trustee of a trust fund or trust property, subject to the provisions of the
General Banking Act.

Conversion into a commercial bank

An Investment House may be converted into a commercial bank authorized to operate


under an expanded commercial banking authority, subject to applicable laws and
64

regulations and with prior approval of the Monetary Board.

Central Bank regulatory powers

Investment Houses shall be subject to such regulations of the Central Bank on non-bank
financial intermediaries as may be promulgated.

The regulations which may include, but need not be limited to a) minimum size of fund
acceptance or receipt, b) methods of marketing and distribution, c) terms of placement
and maturities, and d) uses of funds may be modified by the Monetary Board insofar as
they apply to Investment Houses.

Quasi-banking powers

The Monetary Board may, at its discretion, determine whether Investment Houses may
be permitted to perform quasi-banking functions.

If the Monetary Board decides to permit Investment Houses to engage in quasi-banking


functions, the Board may require as a condition precedent the obtaining of a certificate
of authority for the purpose from the Monetary Board.

Whenever the Monetary Board authorizes an Investment House to engage in quasibanking functions, it may subject said Investment House to further regulations, which
may include but need not necessarily be limited to a) liquidity reserve requirements; b)
capital-to-risk assets ratios; c) interest rate ceilings; and d) such other constraints as the
Board may deem necessary.

Dealer or broker

An Investment House may engage in the business of a dealer or a broker under the
Securities Act without obtaining a separate license for the purpose.

Use of the term Investment House

No person, association, partnership or corporation other than those duly licensed as an


Investment House shall advertise or hold itself out as being engaged in the business of
an Investment House.

65

INVESTMENT COMPANY ACT


Republic Act No. 2629
Approved 18 June 1960

Investment company

Any issuer which is or holds itself out as being engaged primarily in the business of
investing, reinvesting, or trading in securities.

Nature and purpose

Investment companies are financial institutions that raise funds by selling their own
issues of securities to individual investors. The funds obtained will be used to invest in
securities of other enterprises.

The objective of an investment company is to provide individual investors with safe and
profitable use of their savings and to relieve them of the burden of direct responsibility
of managing their own savings.

Types of investment companies


1.
2.

Open-end company - also called mutual funds


Closed-end company

Powers and functions


1.

Offer for sale, sell, or deliver after sale, within the Philippines, any security or any interest
in any security, whether the issuer of such security is the investment company or another
person.

2.

Purchase, redeem, retire, or otherwise acquire or attempt to acquire, within the


Philippines, any security, or any interest in any security, whether the issuer of such
security is such investment company or another person.

Security

Any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of
interest or participation in any profit-sharing agreement, collateral trust certificate, preorganization certificate or subscription, investment contract, voting trust certificate,
certificate of deposit for a security, fractional undivided interest in oil, gas, or other
mineral rights, or, in general, any interest or instrument commonly known as a security
or any certificate of interest or participation in, temporary or interim certificate for,
receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the
foregoing. (Section 3(bb), RA 2629).
66

Note that there is an expanded definition under the Revised Securities Act.

Form

All shares of its capital stock shall be common and voting shares.

Capitalization

No public offering may be made unless the investment company has a paid up capital of
at least P500,000 (Section 13(1), RA 2629). However, Rule 2.1 provides that the minimum
subscribed and paid in capital should be at least 50 million.

FINANCING COMPANY ACT


Republic Act No. 5980, as amended
An Act Regulating the Organization and Operation of Financing Companies

Declaration of policy

It is hereby declared to be the policy of the State to regulate the activities of financing
and leasing companies:
1.
2.

3.

to place their operations on a sound, competitive, stable and efficient basis as


other financial institutions;
to recognize and strengthen their critical role in providing medium and longterm credit for investments in capital goods and equipment especially by small
and medium enterprises particularly in the countryside; and
to curtail and prevent acts or practices prejudicial to the public interest.

As such, they may be in a better position to extend efficient service in a fair manner to
the general public and to industry, commerce and agriculture and thereby more fully
contribute to the sound development of the national economy.

Financing companies

Financing companies are corporations, except banks, investment houses, savings and
loans associations, insurance companies, cooperatives, and other financial institutions
organized or operating under special laws, which are primarily organized for the purpose
of extending credit facilities to consumers and to industrial, commercial, or agricultural
enterprises.

It may extend such credit:


1.
by direct lending; or
2.
by discounting or factoring commercial papers or accounts receivable; or

67

3.
4.

by buying and selling contracts, leases, chattel mortgages, or other evidences of


indebtedness; or
by financial leasing of movable as well as immovable property.

Financial leasing

Financial leasing is a mode of extending credit through a non-cancelable lease contract


under which the lessor purchases or acquires, at the instance of the lessee, machinery,
equipment, motor vehicles, appliances, business and office machines, and other movable
or immovable property in consideration of the periodic payment by the lessee of a fixed
amount of money sufficient to amortize at least seventy percent (70%) of the purchase
price or acquisition cost, including any incidental expenses and a margin of profit over an
obligatory period of not less than two (2) years.

During the two-year period, the lessee has the right to hold and use the leased property
with the right to expense the lease rentals paid to the lessor. Lessee also bears the cost
of repairs, maintenance, insurance and preservation of the leased property.

However, lessee has no obligation or option to purchase the leased property from the
owner-lessor at the end of the lease contract.

Liability of lessors

Financing companies shall not be liable for loss, damage or injury caused by a motor
vehicle, aircraft, vessel, equipment, machinery or other property leased to a third person
or entity except where the motor vehicle, aircraft, vessel, equipment, machinery or other
property is operated by the financing company, its employees or agents at the time of
the loss, damage or injury.

Rights and powers of financing companies

Financing companies shall have the following powers, in addition to those granted by
this Act and by other laws:
1.
2.
3.
4.
5.

Engage in quasi-banking and money market operations with the prior approval
of the Bangko Sentral.
Engage in trust operations subject to the provisions of the General Banking Act
upon prior approval of the Bangko Sentral.
Issue bonds and other capital instruments subject to pertinent rules and
regulations of the Bangko Sentral.
Rediscount their paper with governmental financial institutions subject to
relevant laws, rules and regulations.
Participate in special loan or credit programs sponsored by or made available
through governmental financial institutions.
68

6.

Provide foreign currency loans and leases to enterprises who earn foreign
currency by exports or other means, subject to existing laws and rules and
regulations of the Bangko Sentral.

Form of organization and capital requirements

Financing companies shall be organized in the form of stock corporations at least forty
percent (40%) of the voting stock of which is owned by citizens of the Philippines.

They shall have paid-up capital of not less than ten million pesos (P10,000,000) in case
the financing company is located in Metro Manila and first class cities, five million pesos
(P5,000,000) in other classes of cities, and two million five hundred thousand pesos
(P2,500,000) in municipalities.

No foreign national may be allowed to own stock in any financing company unless the
country of which he is a national accords the same reciprocal rights to Filipinos in the
ownership of financing companies or their counterpart entities in such country.

Requirements for registration

Aside from requiring compliance with the provisions of the Corporation Code, the SEC
shall not register the articles of incorporation of any financing company unless its office
is satisfied on the evidence submitted to it, that:
1. All the requirements of existing laws to engage in the business for which the applicant
is proposed to be incorporated or organized have been complied with;
2. The organization, direction and administration, as well as the integrity and
responsibility of the organizers and administrators reasonably assure the protection of
the interest of the general public; and
3. All the requirements of RA 5980 have been complied with.

Revocation and suspension of registration


1.
2.

Financing company is insolvent


It violated any provision of the law

Supervision and regulation

The SEC is empowered to enforce the provisions of RA 5980, as amended, and issue
implementing regulations except insofar as the Bangko Sentral may have supervisory
authority for financing companies licensed to perform quasi-banking functions, and
insofar as the Monetary Board has authority to prescribe financing company rates and
charges.
69

Prohibited acts

of not more than six(6)months or both, at the discretion of the court, on "persons, associations,
partnerships or corporations, including managing officers thereof," upon the following unlawful
acts:

1.

Engaging in the business of finance companies without authority from the SEC
through advertisement in whatever from, or through other representations
without authority.

2.

Using trade or firm name containing the words "financing company" or "leasing
company" or "finance and leasing company" or "finance and investment
company" or any other designation that would give the public the impression
that it is engaged in the business of a financing company or leasing company
without authority.

3.

Holding themselves out to be financing companies without authority from the


SEC.

4.

Any officer, employee, or agent of a financing company who shall knowingly and
willingly make any statement in any application, report or document required to
be filed under the Act, which is false or misleading with respect to any material
fact, or overvalue or aid in overvaluing any securities for the purpose of
influencing in any way the action of the company on any loan, or discounting.

5.

Any officer, employee or examiner of the SEC directly charged with the
implementation of the Act who shall commit, connive, aid or assist in the
commission of acts enumerated above.

70

PAWNSHOPS
Presidential Decree 114
in relation to CB Circular No. 374

Pawnshop

A pawnshop is a person (single proprietorship) or entity (corporation/partnership)


engaged in the business of lending money on personal property delivered as security for
loans.

Purpose of the law

stable basis:
1.
2.
3.

To derive maximum benefit as source of credit


To prevent and mitigate practices prejudicial to the public; and
To prescribe minimum requirements

Requirements for establishing a pawnshop


1.

Registration
a.
b.
c.
d.

With DTI if single proprietorship


With SEC if corporation or partnership
In all cases, with the BSP
With the Board of Investments if there is foreign equity participation

2.

Secure a license to operate from the LGU concerned

3.

Minimum paid in capital of P100,000

4.

Citizenship
a.
b.
c.
d.

If single proprietor, must be a Filipino


If partnership, 70% of capital owned by Filipinos
If corporation, 70% of voting capital should be owned by Filipinos
If no voting stock, 70% of members entitled to vote should be Filipinos

General requirements as to operation

Owner who has other businesses not directly related or incidental to his pawnshop
business must keep the latter separate from his other businesses.
Maintain adequate security i.e. fire and burglar proof safe where pawns/records are kept.
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Insure place of business and pawns against fire and burglars.


Accountable officers/employees shall be bonded.
Accounting records
Loans cannot be less than 30% of the appraised value of the personal property unless
the borrower stipulated in writing that he is borrowing a lesser amount.

in no case to exceed 1% of the principal loan.


No other charges, fees, and commissions shall be collected by pawnshop in connection
with the loan transaction or payment thereof. Borrower shall not pay insurance
premiums.

Conduct of business
1.
2.
3.
4.
5.
6.
7.
8.
9.

Borrower offers to pledge personal property as security for loan.


Property is appraised.
Loan agreement is entered into.
Pawnshop issues receipt (pawn ticket).
Pawnshop lends money to pawner.
Pawner pays charges not to exceed P5.00.
Pawned property is placed in vault/safe.
If upon maturity, borrower fails to pay, pawnshop will wait for 90 days after maturity
before it can sell the thing pledged at a public auction.
Pawnshop has to comply with notice requirements, to wit:
a.
Before the 90-day period expires, notice to the borrower that the pawn will be
sold if not redeemed within 90 days from maturity specifying time, date, and
place of auction sale.
b.
If there is no redemption, pawnshop will sell the pawn after publishing a notice of
sale in at least two newspapers in the city/municipality of operation six (6) days
before the date of sale. In remote areas where there is no newspaper, by posting
at City Hall or Municipal Building and two other conspicuous public places where
pawnshop operates.
c.
Sale of pawn by auctioneer/notary public to higher bidder.

Supervisory powers of the Bangko Sentral

BSP official in charge of non-bank financial intermediaries or authorized agent may


inspect, examine, and investigate the records of pawnshop to ensure compliance with PD
114.
Said official or agent makes recommendations to the Monetary Board.
Impose penalties for violation of PD 114.

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TRUST CORPORATIONS
Chapter VII
General Banking Act

Trust Corporation

A trust corporation is any corporation formed or organized for the purpose of acting as
trustee, administering any trust or holding property in trust or on deposit for the use,
benefit or behooved of others.

A corporation or a bank may engage in the business of a trust corporation.

Standard of care

A trust company or any bank authorized to engaged in the business of a trust company
shall administer the funds or property under its custody with the skill, care, prudence and
diligence necessary under the circumstances then prevailing that a prudent man, acting
under like capacity and familiar with such matters, would exercise in the conduct of an
enterprise of a like character and with similar aims.

No trust company or bank engaged in the business of a trust company shall, for the
account of the trustor or the beneficiary of the trust, purchase or acquire property from,
or sell, transfer, assign or lend money or property to, or purchase debt instruments of
any of the departments, directors, officers, stockholders, or employees of the trust
company or bank, or relatives within the first degree of consanguinity or affinity, or the
related interests, of such director, officers, and stockholders, unless the transaction is
specifically authorized by the trustor and the relationship of the trustee and the other
party involved in the transaction is fully disclosed to the trustor or beneficiary of the trust
prior to the transaction.

Powers (in addition to general powers incident to corporations)


1.

To act as trustee on any mortgage or bond issued by any municipality, corporation, or


any body politic and to accept and execute any other municipal or corporate trust not
inconsistent with law.

2.

To act under the order or appointment of any court of record as guardian, receiver,
trustee or depository of the estate of any minor, insane person, idiot, habitual drunkard,
or other incompetent or irresponsible person, and as receiver and depository of any
moneys paid into court by parties to any legal proceedings and of property of any kind
which may be brought under the jurisdiction of the court by property legal proceedings.

3.

To act as the executor of any last will or testament when it is named in the last will and
testament as the executor thereof.
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4.

To act under appointment of a court of competent jurisdiction as administrator of the


estate of any deceased person, with the will annexed, or as administrator of the estate of
any deceased person when there is no will, and when in either case there is no person
qualified, competent, willing, able and entitled to accept such administration.

5.

To accept and execute any legal trust confided to it by any court of record or by any
person or corporation for the holding, management, and administration of any estate,
real or personal, and the rents, issues, and profits thereof.

6.

To establish and manage common trust funds, subject to such rules and regulations as
may be prescribed by the Monetary Board.

Commercial banking activity

A trust company may, with the approval of the Monetary Board, do a commercial
banking business, but such business must be kept separate and distinct from its trust
business.

Any banking corporation may, with the approval of the Monetary Board, be authorized
to engage in the business of a trust company, but it shall be subject to the provisions on
trust operations.

Bond/security requirements and paid in capital

Except as may otherwise be provided in this Act, no bond or other security shall be
required from any trust company for the faithful performance of its duties as trustee,
executor, administrator, guardian, receiver or depositary.

However, the court officer appointing such company as trustee, executor, administrator,
guardian, receiver or depositary may, upon proper application, showing special cause
therefor, require any corporation which shall seek to be or shall have been so appointed
to give adequate security for the protection of the funds or property confided to the
corporation and, upon failure of such corporation to give the security required, its
appointment as trustee, executor, administrator, guardian, receiver or depositary shall be
revoked.

Section 65, however, provides: As security for the faithful performance of its trust duties,
every trust company, before transacting trust business, shall carry on deposit with the
Central Bank, cash or securities approved by the Monetary Board in an amount equal to
not less than two hundred and fifty thousand pesos (P250,000). This may be increased by
the Central Bank.

Paid in capital and surplus of the company must be at least equal to the amount
required to be deposited with the central Bank.
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Separation of trust funds and property

All moneys, properties, or securities received by any trust company shall be kept
separate and distinct from all other funds, properties and assets of its general business.

The accounts of all such moneys, properties or securities shall likewise be kept separate
and distinct from the accounts of its general business.

Capital stock may be invested

The capital stock and funds of a trust company may be loaned or otherwise invested as
its by-laws prescribe; if it does a commercial banking business in addition to its trust
business, the investment of its funds other than trust funds shall be governed by the
relevant provisions of the General Banking Act.

Surplus and dividend

profits accruing since the last preceding dividend until the surplus shall amount to 20% of its
authorized capital stock and no part of the surplus shall at any time be paid out in dividends,
but losses accruing in the course of its business may be charged against the surplus.

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