Chapter 4: Loan Function of Banks

1. Basic Concepts
The Manual of Regulations for Banks provides that it shall be the
responsibility of the board of directors of a bank to formulate written
policies on the extension of credit and risk diversification and to set the
guidelines for evaluation of risk assets.
a. Purposes of Loans
GBL Section 39
b. Credit Line
A fixed limit or ceiling that is placed on an account, provided it does not
exceed such stipulated or ceiling.
2. Terms and Conditions
2.1.Amortization
Section 44 of the GBL provides that the amortization schedule of bank
loans and other credit accommodations shall be adapted to the nature of
the operations financed.
2.2.GBL Rules on Pre-Payment and Renewal
GBL Section 45, 48, 49
2.3.Interest
The Manual of Regulations Sec. X305, X305.1, X305.2, X305.3
a. Escalation Clause
Sec. X305.2
b. Unconscionable Interest and Charges
The interest fixed by both parties may be invalidated if the same is
excessive or unconscionable.
2.4.Effect of Inflation
Article 1250 of the Civil Code applies only when there is extraordinary
inflation or deflation of the currency
Inflation has been defined as the sharp increase of money or credit or both
without a corresponding increase in business transaction.
2.5.Loan Documents as Adhesion Contracts
A contract of adhesion is so-called because its terms are prepared by only
one party while the other party merely affixes his signature signifying
adhesion thereto.
a. Duty of Borrower
Borrowers should familiarize themselves with the terms and conditions of
the loan agreement before signing the same agreement.
3. DORSI Accounts
An additional protection to the public that is imposed by the present laws
and an additional measure to prevent abuse by directors, officers and
stockholders of the bank are the restrictions imposed on the borrowings
and security arrangements of directors, officers, and stockholders and
their related interests.
3.1.Requisites
BSP Circular 170 p. 178
3.2.Persons Covered (BSP Circular 170 p. 179)
Directors
Officers
Stockholders
3.3.Transactions Covered
Under the Manual of Regulations for Banks, the terms loan, borrow,
money borrowed and credit accommodations refer to transactions which
involve the grant, renewal or extension or increase of any loan, discount,
credit or advance in any form whatsoever.
Section X327 of the Manual of Regulations for Banks

a. Credit Card Operations

Generally, the credit card operations of banks shall not be subject to the
DORSI regulations where the credit cardholder is a director, officer,
stockholder of the bank or their related interests provided that the
following are present:
1. The privilege of becoming a credit card holder is open to all qualified
persons on the basis of selective criteria which are applied by the bank
to all applicants thereof
2. The bank director, officer, or stockholder/related interest concerned
reimburses/pays the bank for the billed amount in full on or before the
payment due date in the billing or statement of account, as set by the
bank for all the other qualified credit card holders on availments made
for the same period on their credit cards.
However, the transaction shall be subject to applicable DORSI
regulations if the banks directors, officers, stockholders and their
related interests
i.
Fail to reimburse/pay the bank within the period mentioned
therein
ii.
On the outset, opt for deferred payment scheme. And the
availment is booked by the bank.
3.4.Transactions Not Covered
P. 186
3.5.Restrictions Under The GBL
Procedural Requirement. The account should be upon written approval of
all the directors of the lending bank excluding the director concerned
Arms Length Rule. The account should be upon terms not less favorable to
the bank than those offered to others
Reportorial requirement. The resolution approving the loan shall be
entered in the records of the bank and a copy of the entry shall be
transmitted forthwith to the Supervising and Examination Sector of the
BSP.
a. Reportorial Requirement
Section X335 p. 188
b. Procedural Requirement
Section X334 p. 188
c. Individual Ceiling
Section X330 p. 190
d. Aggregate Ceiling
Section X331 p.191
e. Arms Length Rule
Section X326 p. 192
f. Other Restrictions
Subsection X338.3 Other conditions/limitations p. 192
3.6.Restrictions Under Sec. 26, NCBA
a. Secrecy of Bank Deposits
The borrower shall be required by the lending bank to waive the secrecy
of his deposits of whatever nature in all banks in the Philippines.
Section X337 p. 193
b. Bank Examination
The accounts are subject to examination but any information obtained
from an examination of his deposits shall be held strictly confidential.
4. Security/Collaterals
4.1.Real and Personal Property
The loan shall not exceed 75% of the appraised value of the real property
(plus 60% of the appraised value of the improvement) or 75% of the
appraised value of the chattel.

4.2.Foreclosure of Mortgage
a. Redemption Period
1. Redemption Period for Natural Persons. P 196
2. Redemption Period for Juridical Persons. P 197
b. Effect of Estoppel and/or Agreement. It has been held, however, that a
bank may be bound by an agreement providing for a longer
redemption period. The statutory redemption period can be extended
by agreement of the parties.
c. Effect of Restraining Order. The issuance of a writ of preliminary
injunction in a baseless action will not toll the running of the
redemption period.
d. Expiration of the Period. The right to redeem becomes functus officio
on the date of its expiry. Hence, the redemptioner has nor right to
redeem after the expiration of the redemption period.
e. Redemption Price. The amount due under the mortgage deed, with
interest thereon at the rate specified in the mortgage, and all the
costs and expenses incurred by the bank or institution from the sale
and custody of said property less the income derived therefrom.
f. Possession. The purchaser at the auction sale concerned whether he
or she, in a judicial or extrajudicial foreclosure shall have the right to
enter upon and take possession of such property immediately after
the date of the confirmation of the auction sale and administer the
same in accordance with law.