BANKS AND FINANCIAL INTERMEDIARIES
JANUARY 15, 2019
A. Banks and the Business of Banking
1. Traditional / Core functions: Intermediation and Liquidity services
 Legal definition of banks – General Banking Law
3.1. "Banks" shall refer to entities engaged in the lending of funds
obtained in the form of deposits.
 BDO EPCI vs. JAPRL Development Corp, GR 179901, 14 April 2008
FACTS: After evaluating the financial statements of JAPRL for fiscal years 1998-2000, BDO-
EPCI, Inc. extended credit facilities to it amounting to P230K on March 28, 2003.
Respondents Rapid Forming Corporation (RFC) and Jose Arollado acted as JAPRLs
sureties.
JAPRL defaulted in the payment of 4 trust receipts soon after the approval of its loan.
Petitioner later learned from MRM Management, JAPRLs financial adviser, that JAPRL had
altered and falsified its financial statements. It bloated its sales revenues to post a big income
from operations for the concerned fiscal years to project itself as a viable investment. The
information alarmed petitioner. Citing relevant provisions of the Trust Receipt Agreement, it
demanded immediate payment of JAPRLs outstanding obligations amounting to P194M.
On August 30, 2003, JAPRL (and its subsidiary, RFC) filed a petition for rehabilitation in the
Regional Trial Court (RTC) of Quezon City, Branch 90 (Quezon City RTC).[10] It disclosed
that it had been experiencing a decline in sales for the three preceding years and a staggering
loss in 2002.
A stay order was issued. However, the proposed rehabilitation plan for JAPRL and RFC was
rejected by the Quezon City RTC. Because JAPRL ignored its demand for payment,
petitioner filed a complaint for sum of money with an application for the issuance of a WPA
against respondents in the RTC of Makati. Petitioner asserted that JAPRL was guilty of fraud
because JAPRL altered and falsified its financial statements.
Makati RTC denied the application for the issuance of WPA for lack of merit as petitioner was
unable to substantiate its allegations. It ordered the service of summons on respondents. The
summonses were issued and served upon respondents. Respondents moved to dismiss the
complaint due to an allegedly invalid service of summons. Because the officers return stated
that an administrative assistant had received the summons, JAPRL and RFC argued that
Section 11, Rule 14 of the Rules of Court contained an exclusive list of persons on whom
summons against a corporation must be served. An administrative assistant was not one of
them. Arollado, on the other hand, cited Section 6, Rule 14 which mandated personal service
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of summons on an individual defendant. Makati RTC noted that because corporate officers
are often busy, summonses to corporations are usually received only by administrative
assistants or secretaries of corporate officers in the regular course of business. Hence, it
denied the motion for lack of merit. Respondents filed an MR but withdrew it before the Makati
RTC could resolve the matter.
On February 20, 2006, JAPRL filed a petition for rehabilitation in the Calamba RTC. Finding
The Calamba RTC issued a stay order. In view of the order, respondents hastily moved to
suspend the proceedings pending in the Makati RTC. Makati RTC granted the motion with
regard to JAPRL and RFC but ordered Arollado to file an answer. It ruled that, because he
was jointly and solidarily liable with JAPRL and RFC, the proceedings against him should
continue. Respondents moved for reconsideration but it was denied.
On August 11, 2006, respondents filed a petition for certiorari in the CA alleging that the
Makati RTC committed grave abuse of discretion in issuing the October 10, 2005 and July 7,
2006 orders. They asserted that the court did not acquire jurisdiction over their persons due
to defective service of summons. Thus, the Makati RTC could not hear the complaint for sum
of money. CA granted the petitioner. Petitioner moved for reconsideration but it was denied.
ISSUE: WON respondents maliciously evaded the service of summonses to prevent the
Makati RTC from acquiring jurisdiction over their persons
HELD/RATIO: YES. They employed bad faith to delay proceedings by cunningly exploiting
procedural technicalities to avoid the payment of their obligations. Respondents abused
procedural technicalities (albeit unsuccessfully) for the sole purpose of preventing, or at least
delaying, the collection of their legitimate obligations. Their reprehensible scheme impeded
the speedy dispensation of justice. More importantly, however, considering the amount
involved, respondents utterly disregarded the significance of a stable and efficient banking
system to the national economy.
Banks are entities engaged in the lending of funds obtained through deposits from the public.
They borrow the publics excess money (i.e., deposits) and lend out the same. Banks
therefore redistribute wealth in the economy by channeling idle savings to profitable
investments.
Banks operate (and earn income) by extending credit facilities financed primarily by deposits
from the public. They plough back the bulk of said deposits into the economy in the form of
loans. Since banks deal with the public’s money, their viability depends largely on their ability
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JANUARY 15, 2019
to return those deposits on demand. For this reason, banking is undeniably imbued with
public interest. Consequently, much importance is given to sound lending practices and good
corporate governance.
Protecting the integrity of the banking system has become, by large, the responsibility of
banks. The role of the public, particularly individual borrowers, has not been emphasized.
Nevertheless, we are not unaware of the rampant and unscrupulous practice of obtaining
loans without intending to pay the same.
In this case, petitioner alleged that JAPRL fraudulently altered and falsified its financial
statements in order to obtain its credit facilities. Considering the amount of petitioner’s
exposure in JAPRL, justice and fairness dictate that the Makati RTC hear whether or not
respondents indeed committed fraud in securing the credit accommodation.
A finding of fraud will change the whole picture. In this event, petitioner can use the finding
of fraud to move for the dismissal of the rehabilitation case in the Calamba RTC. The
protective remedy of rehabilitation was never intended to be a refuge of a debtor guilty of
fraud. Meanwhile, the Makati RTC should proceed to hear Civil Case No. 03-991 against the
three respondents guided by Section 40 of the General Banking Law which states:
Section 40. Requirement for Grant of Loans or Other Credit Accommodations. Before
granting a loan or other credit accommodation, a bank must ascertain that the debtor is
capable of fulfilling his commitments to the bank.
Towards this end, a bank may demand from its credit applicants a statement of their assets
and liabilities and of their income and expenditures and such information as may be
prescribed by law or by rules and regulations of the Monetary Board to enable the bank to
properly evaluate the credit application which includes the corresponding financial
statements submitted for taxation purposes to the Bureau of Internal Revenue. Should such
statements prove to be false or incorrect in any material detail, the bank may terminate any
loan or credit accommodation granted on the basis of said statements and shall have the
right to demand immediate repayment or liquidation of the obligation.
Under this provision, banks have the right to annul any credit accommodation or loan, and
demand the immediate payment from borrowers guilty of fraud. Petitioner would then be
entitled to the immediate payment of P194M and other appropriate damages.
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ACCORDINGLY, the petition is hereby GRANTED. The June 7, 2007 decision and August
31, 2007 resolution of the Court of Appeals in CA-G.R. SP No. 95659 are REVERSED and
SET ASIDE.
 Bañas vs. Asia Pacific Corp, 343 SCRA 527 (2000)
FACTS: Sometime in August 1980, Teodoro Bañas executed a Promissory Note in favor of
C. G. Dizon Construction whereby for value received he promised to pay to the order of C.
G. Dizon Construction the sum of P390K in installments of "P32,500 every 25th day of the
month starting from September 25, 1980 up to August 25, 1981." Later, C. G. Dizon
Construction endorsed with recourse the said Promissory Note to Asia Pacific Finance
Corporation.
To secure the payment, C. G. Dizon Construction, through its corporate officers, executed a
Deed of Chattel Mortgage covering 3 heavy equipment units of Caterpillar Bulldozer Crawler
Tractors, and Cenen Dizon executed a Continuing Undertaking wherein he bound himself to
pay the obligation jointly and severally with C. G. Dizon Construction. In compliance
therewith, C. G. Dizon Construction made three installment payments to Asia Pacific.
Thereafter, it defaulted in the payment of the remaining installments, prompting Asia Pacific
to send a SOA to Cenen Dizon for the unpaid balance.
As the demand was unheeded, Asia Pacific filed a complaint for a sum of money against
Teodoro Bañas, C.G. Dizon Construction and Cenen Dizon. In their answer, while defendants
admitted the genuineness and due execution of the Promissory Note, the Deed of Chattel
Mortgage and the Continuing Undertaking, they nevertheless maintained that these
documents were never intended by the parties to be legal, valid and binding but a mere
subterfuge to conceal the loan with usurious interests.
During the pendency of this case, Teodoro Bañas died, and Asia Pacific assigned the
disputed Promissory Note to International Corporate Bank (now Union Bank of the
Philippines). After trial, the Pasig RTC ruled in favor of Asia Pacific. On appeal, CA affirmed
in toto the decision of the trial court.
ISSUE: WON the disputed transaction between petitioners and Asia Pacific violated banking
laws, hence, null and void; and
HELD/RATIO: No. Court ruled that the transaction between petitioners and respondent was
one involving not a loan but purchase of receivables at a discount, well within the purview of
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JANUARY 15, 2019
"investing, reinvesting or trading in securities" which an investment company, like Asia
Pacific, is authorized to perform & does not constitute a violation of the General Banking Act.
Moreover, the terms and conditions of the instrument are clear, free from any ambiguity, and
expressive of the real intent and agreement of the parties. Likewise, the Deed of Chattel
Mortgage and Continuing Undertaking were duly acknowledged before a notary public and,
as such, have in their favor the presumption of regularity. To contradict them there must be
clear, convincing and more than merely preponderant evidence. In the instant case, the
records do not show even a preponderance of evidence in favor of petitioners' claim that the
Deed of Chattel Mortgage and Continuing Undertaking were never intended by the parties to
be legal, valid and binding. Notarial documents are evidence of the facts in clear and
unequivocal manner therein expressed. The decision of the CA was AFFIRMED.
 Distinction of Banks from Quasi-Banks and Trust Entities
MORB, X234.1 Elements of quasi-banking.
The essential elements of quasi-banking are:
a. Borrowing funds for the borrower’s own account;
b. Twenty (20) or more lenders at any one (1) time;
c. Methods of borrowing are issuance, endorsement, or acceptance of debt
instruments of any kind, other than deposits, such as acceptances, promissory
notes, participations, certificates of assignments or similar instruments with
recourse, trust certificates, repurchase agreements, and such other instruments as
the Monetary Board may determine; and
d. The purpose of which is (1) relending, or (2) purchasing receivables or other
obligations.
§ X234.2 Definition of terms and phrases.
a. Borrowing shall refer to all forms of obtaining or raising funds through any of the
methods and for any of the purposes provided in Subsec. X234.1 whether the
borrower’s liability thereby is treated as real or contingent.
b. For the borrower’s own account shall refer to the assumption of liability in one’s own
capacity and not in representation, or as an agent or trustee, of another.
c. Purchasing of receivables or other obligations shall refer to the acquisition of claims
collectible in money, including interbank borrowings or borrowings between FIs, or of
acquisition of securities, of any amount and maturity, from domestic or foreign
sources.
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d. Relending shall refer to the extension of loans by an institution with antecedent
borrowing transactions. Relending shall be presumed, in the absence of express
stipulations, when the institution is regularly engaged in lending.
e. Regularly engaged in lending shall refer to the practice of extending loans, advances,
discounts or rediscounts as a matter of business, as distinguished from isolated
lending transactions.
X234.3 Transactions not considered quasi-banking. The following shall not
constitute quasi-banking:
a. Borrowing by commercial, industrial and other non-financial companies through any of the
means listed in Subsec. X234.1 hereof, for the limited purpose of financing their own needs
or the needs of their agents or dealers; and
b. The mere buying and selling without recourse of instruments mentioned in Subsec.
X234.1: Provided, That:
(1) The institution buying and selling without recourse shall indicate in conspicuous
print on its instrument the phrase without recourse, sans recourse or words of
similar import that will convey the absence of liability or guarantee by said
institution; and
(2) In the absence of the phrase “without recourse”, “sans recourse” or words of similar
import, the instrument so issued, endorsed or accepted, shall automatically be
considered as falling within the purview of these regulations: Provided, further, That
any of the following practices or practices similar and/or tantamount thereto in
connection with a without recourse transaction is hereby prohibited:
(a) Issuance of postdated checks by a financial intermediary, whether for its own
account or as an agent of the debt instrument issuer, in payment of the debt
instrument, sold, assigned or transferred without recourse; or
(b) Issuance by a financial intermediary of any form of guaranty on sale
transactions or on negotiations or assignment of debt instruments without
recourse; and
(c) Payment with its own funds by a financial intermediary which assigned, sold
or transferred the debt instrument without recourse, unless the financial
intermediary can show that the issuer has with the said financial intermediary
funds corresponding to the amount of the obligation.
§ X234.4 Pre-conditions for the exercise of quasi-banking functions. No bank shall engage in
quasi-banking functions without authority from the BSP: Provided, however, That banks
authorized by the BSP to perform universal or commercial banking functions shall
automatically have the authority to engage in quasi-banking functions: Provided, further, That
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JANUARY 15, 2019
the authority to obtain funds from the public, which shall mean twenty (20) or more persons
under Section 8.2 of R.A. 8791, is not a condition but an authorization for the bank or quasi-
bank, once the Monetary Board has granted the quasi-banking license. In addition to the
Standard Pre-qualification Requirements for the Grant of Bank Authorities enumerated in
Appendix 5, a TB securing BSP authority to engage in quasi-banking functions must meet
the following requirements:
a. The bank must have a networth or combined capital of at least P650.0
million computed in accordance with Sec. X111;
b. The bank is well capitalized with risk-based capital adequacy ratio of not
lower than twelve percent (12%) at the time of filing the application;
c. The bank’s operation during the preceding calendar year and for the
period immediately preceding the date of application has been profitable;
d. The bank has elected at least two (2) independent directors and all its
directors have attended the required seminar for directors of banks
conducted or accredited by the BSP;
e. The bank has established a risk management system appropriate to its
operations characterized by clear delineation of responsibility for risk
management, adequate risk measurement systems, appropriately
structured risk limits, effective internal controls, and complete, timely and
efficient risk reporting system; and
f. The bank has a CAMELS Composite Rating of at least “3” in the last
regular examination with management rating of not lower than “3”.
 Other non-bank financial services
 Unit trusts / mutual funds – The main difference between these
two is that UITFs are offered by banks, while mutual funds are their
own companies. By buying into a UITF, you own units of this fund.
By buying into a mutual fund, you own shares and become a
shareholder in the mutual fund company.
 Insurance – A contract of insurance is an agreement whereby one
undertakes for a consideration to indemnify another against loss,
damage or liability arising from an unknown or contingent event.
 Stock brokerage – buys and sells stocks and other securities for
both retail and institutional clients through a stock exchange or over
the counter in return for a fee or commission.
 Asset management – the direction of a client's cash and securities
by a financial services company, usually an investment bank. The
institution offers investment services along with a wide range of
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traditional and alternative product offerings that might not be
available to the average investor.
 Real estate services – refers to buildings or land intended to
generate a profit, either from capital gain or rental income.

2. Bank Powers and Liabilities
a. Corporate Powers
b. Banking and Incidental Powers
3. Classification of Banks
MORB, Sec. X101 - A. Classifications and Powers of Banks
The following are the classifications, powers and scope of authorities of banks, as
well as the prerequisites for the grant of banking authorities.
a. Classifications of banks. Banks are classified into the following subject to the
power of the Monetary Board to create other classes or kinds of banks:
(1) Universal banks (UBs);
(2) Commercial banks (KBs);
(3) Thrift banks (TBs), as defined in Republic Act (R.A.) No. 7906, which
shall be composed of: (a) savings and mortgage banks, (b) stock savings
and loan associations, and (c) private development banks;
(4) Rural banks (RBs), as defined in R. A. No. 7353;
(5) Cooperative banks (Coop Banks); and
(6) Islamic banks (IBs), as defined in R.A. No. 6848.
b. Powers and scope of authorities The following are the powers and scope of
authorities of banks.
(1) UBs. A UB shall have the authority to exercise, in addition to the powers and
services authorized for a KB as enumerated in Item “b(2)” and those provided by
other laws, the following:
(a) the powers of an investment house (IH) as provided under existing laws;
(b) the power to invest in non-allied enterprises;
(c) the power to own up to one hundred percent (100%) of the equity in a
TB, an RB, a financial allied enterprise, or a non-financial allied
enterprise; and
(d) in case of publicly-listed UBs, the power to own up to one hundred percent
(100%) of the voting stock of only one (1) other UB or KB.
A UB may perform the functions of an IH either directly or indirectly through a
subsidiary IH; in either case, the underwriting of equity securities and securities
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JANUARY 15, 2019
dealing shall be subject to pertinent laws and regulations of the Securities and
Exchange Commission (SEC): Provided, That if the IH functions are performed
directly by the UB, such functions shall be undertaken by a separate and distinct
department or other similar unit in the UB: Provided, further, That a UB cannot
perform such functions both directly and indirectly through a subsidiary.
(2) KBs. In addition to the general powers incident to corporations and those provided
in other laws, a KB shall have the authority to exercise all such powers as may be
necessary to carry on the business of commercial banking, such as accepting
drafts and issuing letters of credit; discounting and negotiating promissory notes,
drafts, bills of exchange, and other evidences of debt; accepting or creating
demand deposits; receiving other types of deposits and deposit substitutes; buying
and selling foreign exchange and gold or silver bullion; acquiring marketable bonds
and other debt securities; and extending credit, subject to such rules as the
Monetary Board may promulgate. These rules may include the determination of
bonds and other debt securities eligible for investment, the maturities and
aggregate amount of such investment.
It may also exercise or perform any or all of the following:
(a) invest in the equities of allied enterprises as provided in Sections 31 and 32
of R.A. No. 8791; (b) purchase, hold and convey real estate as specified under
Sections 51 and 52 of R.A. No. 8791;
(c) receive in custody funds, documents and valuable objects;
(d) act as financial agent & buy & sell, by order of & for the account of their
customers, shares, evidences of indebtedness & all types of securities;
(e) make collections & payments for the account of others & perform such other
services for their customers as are not incompatible with banking business;
(f) upon prior approval of the Monetary Board, act as managing agent, adviser,
consultant or administrator of investment management/advisory/consultancy
accounts;
(g) rent out safety deposit boxes; and
(h) engage in quasi-banking functions.
(4)
(3) TBs. In addition to the powers provided in other laws:
(a) grant loans, whether secured or unsecured;
(b) invest in readily marketable bonds and other debt securities, commercial
papers and accounts receivable, drafts, bills of exchange, acceptances or notes
arising out of commercial transactions;
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(c) issue domestic letters of credit;
(d) extend credit facilities to private and government employees;
(e) extend credit against the security of jewelry, precious stones and articles of
similar nature, subject to such rules and regulations as the Monetary Board
may prescribe;
(f) accept savings and time deposits;
(g) rediscount paper with the Land Bank of the Philippines (LBP), Development
Bank of the Philippines (DBP), and other government-owned or -controlled
corporations;
(h) accept foreign currency deposits as provided under R.A. No. 6426, as
amended;
(i) act as correspondent for other financial institutions (FIs);
(j) purchase, hold and convey real estate as specified under Sections 51 and
52 of R.A. No. 8791;
(k) offer other banking services as provided in Section 53 of R.A. No. 8791; and
(l) buy and sell foreign exchange. With prior approval of the Monetary Board,
and subject to such guidelines as may be established by it, TBs may also
perform the following services:
(m) open current or checking accounts;
(n) engage in trust, quasi-banking functions and money market operations;
(o) act as collection agent for government entities, including but not limited to,
the Bureau of Internal Revenue (BIR), Social Security System (SSS) and the
Bureau of Customs (BOC);
(p) act as official depository of national agencies and of municipal, city or
provincial funds in the municipality, city or province where the TB is located;
(q) issue mortgage and chattel mortgage certificates, buy and sell them for its
own account or for the account of others, or accept and receive them in
payment or as amortization of its loan;
(r) invest in the equity of allied undertakings;
(s) issue foreign letters of credit; and
(t) pay/accept/negotiate import/export draft/bills of exchange.
RBs. In addition to the powers provided in other laws::
(a) extend loans and advances primarily for the purpose of meeting the normal
credit needs of farmers, fishermen or farm families as well as cooperatives,
merchants, private and public employees;
(b) accept savings and time deposits;
(c) act as correspondent of other FIs;
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JANUARY 15, 2019
(d) rediscount paper with the LBP, DBP or any other bank, including its branches
and agencies. Said banks shall specify the nature of paper deemed acceptable
for rediscount, as well as the rediscount rate to be charged by any of these
banks;
(e) act as collection agent;
(f) offer other banking services as provided in Section 53 of R.A. No. 8791; and
(g) buy and sell foreign exchange. With prior approval of the Monetary Board, an
RB may perform any or all of the following services:
(h) accept current or checking accounts: Provided, That such RB has net assets
of at least P5.0 million;
(i) accept negotiable order of withdrawal (NOW) accounts;
(j) act as trustee over estates or properties of farmers and merchants;
(k) act as official depository of municipal, city or provincial funds in the
municipality, city or province where it is located;
(l) sell domestic drafts; and
(m) invest in allied undertakings.
(5) Coop Banks. A Coop Bank shall primarily provide financial, banking and credit
services to cooperatives and their members, although it may provide the same
services to non-members or the general public. In addition to the powers granted
to Coop Banks under existing laws, any Coop Bank may perform any or all of the
banking services offered by rural banks under Items “4.a” to “4.g” above. A Coop
Bank may likewise perform any or all of the banking services offered by rural banks
under Items “4.h” to “4.m” as well as any or all of the banking services offered by
other types of banks, subject to prior approval of the Bangko Sentral.
(6) IBs. In addition to the general powers incident to corporations and those provided
in other laws, as well as in Circular No. 105 (Appendix 44), insofar as they are not
inconsistent or incompatible with the provisions of R.A. No. 6848, an IB may
perform any or all of the following services:
(a) open savings accounts for safekeeping or custody with no participation in
profit and losses except unless otherwise authorized by the account holders to
be invested;
(b) accept investment account placements and invest the same for a term with
the IB’s funds in Islamically permissible transactions on participation basis;
(c) accept foreign currency deposits from banks, companies, organizations and
individuals, including foreign governments;
(d) buy and sell foreign exchange;
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(e) act as correspondent of banks and institutions to handle remittances or any
fund transfers;
(f) accept drafts and issue letters of credit or letters of guarantee, negotiate notes
and bills of exchange and other evidence of indebtedness under the universally
accepted Islamic financial instruments;
(g) act as collection agent insofar as the payment orders, bills of exchange or
other
commercial documents are exclusive of riba or interest prohibitions;
(h) provide financing with or without collateral by way of leasing, sale and
leaseback, or cost plus profit sales arrangement;
(i) handle storage operations for goods or commodity financing secured by
warehouse receipts presented to the bank;
(j) issue shares for the account of institutions and companies assisted by the
bank in meeting subscription calls or augmenting their capital and/or fund
requirements as may be allowed by law;
(k) undertake various investments in all transactions allowed by the Islamic
Shari’a in such a way that shall not permit the haram (forbidden), nor forbid the
halal (permissible); depository, or its branches, subdivisions and
instrumentalities and of government-owned or-controlled corporations,
particularly those doing business in the Autonomous Region;
(m) issue investment participation certificates, muquaradah (non-interestbearing
bonds), debentures, collaterals and/or the renewal and refinancing of the same,
with the approval of the Monetary Board to be used by the IB in its financing
operations for projects that will promote the economic development primarily of
the Autonomous Region;
(n) carry out financing and joint investment operations by way of mudarabah
purchasing for others on a cost-plus financing arrangement, and invest funds
directly in various projects or through the use of funds whose owners desire to
invest jointly with other resources available to the IB on a joint mudarabah basis;
(o) invest in equities of the following allied undertakings:
(1) Warehousing companies;
(2) Leasing companies;
(3) Storage companies;
(4) Companies engaged in the management of mutual funds but not in the
mutual funds themselves; and (5) Such other similar activities as the Monetary
Board has declared or may declare as appropriate from time to time,
subject to existing limitations imposed by law.