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BANKING LAWS
TABLE OF CONTENTS
A. The New Central Bank ActRepublic Act No. 7653
B. The General Banking ActRepublic Act No. 337
In GeneralEstablishment of Domestic BanksLicensing of Foreign BanksCommercial Banking Corporations and Universal BanksThrift Banks Act of 1996
Republic Act No. 7906Building and Loans AssociationsRural Banks Act of 1992
Republic Act No. 7353
C. An Act Liberalizing the Entry of Foreign Banks Republic Act No. 7721
D. Offshore Banking System LawPres. Decree No. 1034
E. Foreign Currency Deposits ActRepublic Act No. 6426, as amended
F. An Act Creating the PDICRepublic Act No. 3531
G. The Truth in Lending ActRepublic Act No. 3765
H. Law on Secrecy of Bank DepositsRepublic Act No. 1405
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Note: We have included several banking laws which are not in the barcoverage. Likewise, we have incorporated several laws on non-bank financial intermediaries. Since they are not covered by thebar exam, the reviewee has the option of not reading them.
BANKING AND FINANCE IN GENERAL
Two types of financing
1. equity
2. debt-financing
A cross-breed of the two may also occur.
Intermediaries
1. Banks
2. Non-bank financial intermediaries
3. Exchanges
4. Others i.e. secondary markets
Function of intermediaries
1. “Brokering” or matching investors with those in need of financing
2. Help in diminishing risks to investors
3. Provide liquidity
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NEW CENTRAL BANK ACT
Republic Act No. 7653Approved 14 June 1993
IN GENERAL
Mandate
The Bangko Sentral ng Pilipinas is the State’s centralmonetary authority, mandated in the 1987 Constitution, whichshall function and operate as an independent and accountablebody corporate in the discharge of its mandated responsibilitiesconcerning money, banking and credit. [Section 1, RA 7653]
The Bangko Sentral shall enjoy fiscal and administrativeautonomy. [Section 1, RA 7653]
Objectives
1. The primary objective of the Bangko Sentral is to maintain pricestability conducive to a balanced and sustainable growth of theeconomy.
2. It shall also promote and maintain monetary stability and theconvertibility of the peso.
3. It shall also provide policy directions in the areas of money,banking and credit.
4. It has supervision over banks and has regulatory powers over theoperations of finance companies and non-bank financialintermediaries performing quasi-banking functions. [Section 3,RA 7653]
Typical functions of the Bangko Sentral
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1. Supervision over banks and regulation of non-bank financialintermediaries engaged in quasi-banking functions
2. Bank of issue: as such, it has the sole power and authority toissue currency
3. Custodian of the nation’s reserves of foreign currency
As such, it ensures convertibility of the peso and backs upPhilippine currency.
4. It has control of credit
a. regulating money supply i.e. reserve requirements forbanks
b. open market operations i.e. Tbills
c. controlling interest rate
5. Lender of last resort
It has a "rediscounting window,” allowing banks to sell theirpromissory notes to it.
6. Custodian of cash reserves of banks
7. Government banker, agent and advisor
8. Central clearance and settlement agency
Fiscal policy v. monetary policy
Fiscal policy is concerned with revenue generation andexpenditure while monetary policy involves regulating moneysupply and price stability.
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The Bangko Sentral will now concentrate on monetary policy andshed off fiscal responsibilities which in the past haddistracted 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 bythe Monetary Board.
The Board is composed of seven (7) members appointed by thePresident for a term of six (6) years. No member may bereappointed 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. Must be natural born citizens of the Philippines
2. At least thirty five (35) years of age, with the exception ofthe Governor who should at least be forty (40) years old
3. Good moral character
4. Of unquestionable integrity
5. Of known probity and patriotism
6. With recognized competence in social and economic disciplines
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Disqualifications
In addition to the disqualifications imposed by Republic Act No.6713, a member of the Monetary Board is disqualified from beinga director, officer, employee, consultant, lawyer, agent orstockholder of any bank, quasi-bank or any other institutionwhich is subject to supervision or examination by the BangkoSentral, in which case such member shall resign from, and divesthimself of any and all interests in such institution beforeassumption of office as member of the Monetary Board.
The member of the Monetary Board coming from the private sectorshall not hold any other public office or public employmentduring their tenure.
No person shall be a member of the Monetary Board if he has beenconnected with any multilateral banking or financial institutionor has a substantial interest in any private bank in thePhilippines, within one (1) year prior to his appointment;likewise, no member of the Monetary Board shall be employed inany such institution within two (2) years after the expirationof his term except when he serves as an official representativeof 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 designatedalternate shall be among the four.
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Withdrawal of persons having a personal interest
In addition to the requirements of Republic Act No. 6713, anymember of the Monetary Board with personal or pecuniary interestin any matter in the agenda of the Monetary Board shall disclosehis interest to the Board and shall retire from the meeting whenthe matter is taken up. The decision taken on the matter shallbe made public. The minutes shall reflect the disclosure madeand 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, andemployees of the Bangko Sentral who willfully violate RA 7653 orwho are guilty of negligence, abuses or acts of malfeasance ormisfeasance or fail to exercise extraordinary diligence in theperformance of his duties shall be held liable for any loss orinjury suffered by the Bangko Sentral or other bankinginstitutions as a result of such violation, negligence, abuse,malfeasance, misfeasance or failure to exercise extraordinarydiligence.
Similar responsibility shall apply to members, officers andemployees of the Bangko Sentral for;
1. The disclosure of any information of a confidentialnature, or any information on the discussions orresolutions of the Monetary Board, or about theconfidential operations of the Bangko Sentral, unless thedisclosure is in connection with the performance ofofficial functions with the Bangko Sentral, or is withprior authorizaytion of the Monetary Board or theGovernor; or
2. The use of such information for personal gain or to thedetriment of the Government, the Bangko Sentral or thirdparties.
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However, any data or information required to be submitted to thePresident and/or Congress, or to be published under theprovisions 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 torender opinions, decisions, or rulings which shall be final andexecutory, until reversed or modified by the Monetary Board, onmatters regarding application or enforcement of laws pertainingto institutions supervised by the Bangko Sentral and lawspertaining to quasi-banks, as well as regulations, policies orinstructions issued by the Monetary Board, and theimplementation thereof. [Section 17(e), RA 7653]
Authority of the Governor in emergencies
In case of emergencies where time is insufficient to call ameeting of the Monetary Board, the governor with the concurrenceof two other members of the Board may decide any matter or takean action within the authority of the Board.
He shall thereafter submit a report to the President and Congresswithin 72 hours after the action has been taken.
At the soonest possible time, the Governor shall call a meeting ofthe Monetary board to submit his action for ratification.[Section 19, RA 7653]
Outside interests of the Governor and the full-time members of the Board
The Governor of the Bangko Sentral and the full-time members ofthe Board shall limit their professional activities to thosepertaining directly to their positions with the Bangko Sentral.
They may not accept any other employment, whether public orprivate, remunerated or ad honorem.
Exceptions:
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1. Positions in eleemosynary, civic, cultural or religiousorganizations
2. Whenever, by designation of the President, the Governor orthe full-time member is tasked to represent the interestof the Government or other government agencies in mattersconnected with or affecting the economy or the financialsystem of the country
CERTAIN OPERATIONS OF THE BANGKO SENTRAL
Supervision and examination
The Bangko Sentral shall have supervision over, and conductperiodic or special examination of, banking institutions andquasi-banks, including their subsidiaries and affiliates engagedin allied activities.
This power however is subject to the provision of existing lawsprotecting or safeguarding the secrecy or confidentiality ofbank deposits as well as investments of persons, natural orjuridical, 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-bankand an affiliate means a corporation the voting stock of which,to the extent of fifty percent (50%) or less, is owned by a bankor quasi-bank or which is related or linked to such institutionor intermediary through common stockholders or such otherfactors 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 courtenjoining the Bangko Sentral from examining any institution
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subject to supervision or examination by the Bangko Sentral,unless there is convincing proof that the action of the BangkoSentral is plainly arbitrary and made in bad faith and thepetitioner or plaintiff files with the clerk or judge of thecourt in which the action is pending a bond executed in favor ofthe 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 anyinstitution subject to supervision or examination by theBangko Sentral, except non-stock savings and loanassociations and provident funds organized exclusively foremployees of the Bangko Sentral, and except as otherwiseprovided in RA 7653;
2. Directly or indirectly requesting or receiving any gift,present or pecuniary or material benefit for himself oranother, from any institution subject to supervision orexamination by the Bangko Sentral;
3. Revealing in any manner, except upon orders of the court,the Congress or any government office or agency authorizedby law, or under such conditions as may be prescribed bythe Monetary Board, information relating to the conditionor business of any such institution. This prohibitionshall not apply to the giving of information to theMonetary Boar or the Governor of the Bangko Sentral, or toany person authorized by either of them, in writing, toreceive such information; and
4. Borrowing from any institution subject to supervision orexamination by the Bangko Sentral unless said borrowingsare adequately secured, fully disclosed to the Monetary
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Boar, and shall be subject to such further rules andregulations as the Monetary Board may prescribe.
CONSERVATORSHIP V. RECEIVERSHIP
CONSERVATOR
Grounds for appointment of conservator
The Monetary Board may appoint a conservator whenever it findsthat a bank or a quasi-bank is in a state of continuinginability or unwillingness to maintain a condition of liquiditydeemed adequate to protect the interest of depositors andcreditors. [Section 29, RA 7653]
The conservator should be competent and knowledgeable in bankoperations and management. The conservatorship shall not exceedone (1) year.
Powers of conservator
1. Take charge of the assets, liabilities and management of thebank or quasi-bank
2. Reorganize the management
3. Collect all monies and debts due said institution
4. 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 actionsof the previous management and board of directors of the bank orquasi-bank.
However, the power cannot extend to the post-facto repudiation ofperfected transactions, otherwise they would infringe againstthe non-impairment clause of the Constitution.
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Section 28-A of RA No. 265 merely gives the conservator thepower to revoke contracts that are deemed to be defective underexisting law (i.e., void, voidable, unenforceable, orrescissible); hence, the conservator merely takes the place of abank’s board of directors. What the board of directors cannotdo, such as repudiating a contract validly entered into underthe doctrine of implied authority, the conservator cannot doeither. [First Philippine International Bank v. CA, 252 SCRA 255 (1986)]
Termination of conservatorship
The Monetary Board shall terminate the conservatorship when it issatisfied that the institution can continue to operate on itsown and the conservatorship is no longer necessary.
The conservatorship shall likewise be terminated should theMonetary Board determine that the continuance in business of theinstitution would involve probable loss to its depositors orcreditors, in which case proceedings for receivership andliquidation 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 receivershipwhenever it finds that a bank or quasi-bank:
1. Is unable to pay its liabilities as they become due in theordinary course of business; provided that this shall notinclude inability to pay caused by extraordinary demandsinduced by financial panic in the banking community;
2. Has insufficient realizable assets to meet itsliabilities;
3. Cannot continue in business without involving probableloss to its depositors or creditors; or
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4. Has willfully violated a cease and desist order that hasbecome final, involving acts or transactions which amountto fraud or a dissipation of the assets of theinstitution.
No need of prior notice and hearing
In such cases, the Monetary Board may summarily and without needfor prior hearing, forbid the institution from doing business inthe Philippines and designate the Philippine Deposit InsuranceCorporation as receiver of the banking institution. [Section 30,RA 7653]
Who acts as receiver
For a bank, the Philippine Deposit Insurance Corporation shallserve as receiver; for a quasi-bank, any person of recognizedcompetence in banking or finance may be designated as receiver.
Tasks of the receiver
The receiver shall immediately (1) gather and take charge of allassets and liabilities of the institution, (2) administer thesame for the benefit of its creditors, and (3) exercise thegeneral powers of a receiver. (4) The receiver shall determineas soon as possible, but not later than ninety (90) days fromtakeover, whether the institution may be rehabilitated orotherwise placed in such a condition so that it may be permittedto resume business with safety to its depositors and creditorsand the general public.
Resumption
Any determination for the resumption of business of theinstitution shall be subject to prior approval of the MonetaryBoard.
Liguidation
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If the receiver determines that the institution cannot berehabilitated or permitted to resume business, the MonetaryBoard shall notify in writing the board of directors of itsfindings and direct the receiver to proceed with the liquidationof the institution.
Procedure for liquidation
The receiver shall then:
1. File ex parte with the proper regional trial court, andwithout the requirement of prior notice or any otheraction, a petition for assistance in the liquidation ofthe institution pursuant to a liquidation plan adopted bythe Philippine Deposit Insurance Corporation in the caseof a bank or by the Monetary Board in the case of a quasi-bank;
2. Upon acquiring jurisdiction, the court shall, upon motionby the institution, assist the enforcement of individualliabilities of the stockholders, directors and officers,and decide on other issues as may be material to implementthe liquidation plan adopted; and
3. Convert the assets of the institution to money, dispose ofthe same to creditors and other parties, for the purposeof paying the debts of such institution in accordance withthe rules on concurrence and preference of credit underthe Civil Code of the Philippines and he may, in the nameof the institution, institute such actions as may benecessary 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 liquidationshall be deemed in custodia legis in the hands of the receiver andshall, from the moment the institution was placed under such
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receivership or liquidation, be exempt from any order ofgarnishment, levy, attachment, or execution. [Section 30, RA7653]
Actions of Monetary Board final and may be questioned only through certiorari
The actions of the Monetary Board taken regarding thedesignation of a conservator and appointment of a receiver shallbe final and executory and may not be restrained or set aside bythe court except on petition for certiorari on the ground thatthe action taken was in excess of jurisdiction or with suchgrave abuse of discretion as to amount to lack or excess ofjurisdiction.
The petition for certiorari may only be filed by thestockholders of record representing the majority of the capitalstock within ten (10) days from receipt by the board ofdirectors of the institution of the order directingreceivership, liquidation or conservatorship.
Designation of conservator not precondition to designation of receiver
The designation of a conservator or the appointment of areceiver shall be vested exclusively with the Monetary Board.
The designation of a conservator is not a precondition to thedesignation 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 Philippinenotes and coins issued or circulating in accordance with theprovisions of RA 7653.
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Bank of issue
The Bangko Sentral has the sole power and authority to issuecurrency within the territory of the Philippines [Section 50, RA7653]
Notes and coins issued by the BSP shall be liabilities of the BSPand may be issued only against and in amounts not exceeding, theassets of the BSP. Said notes and coins shall be a first andparamount lien on all assets of the BSP [Section 51, RA 7653]
All notes and coins issued by the BSP are fully guaranteed bythe RP and shall be legal tender in the Philippines for alldebts, both public and private. [Section 52, RA 7653]
Demand deposits
"Demand deposits" means all those liabilities of the Bangko Sentraland of other banks which are denominated in Philippine currencyand are subject to payment in legal tender upon demand by thepresentation of checks.
Issue of demand deposits
Only banks duly authorized to do so may accept funds or createliabilities payable in pesos upon demand by the presentation ofchecks, and such operations shall be subject to the control ofthe Monetary Board in accordance with the powers granted it withrespect thereto under RA 7653.
Legal character of checks
Checks representing demand deposits do not have legal tenderpower and their acceptance in the payment of debts, both publicand private, is at the option of the creditor. [Section 60, RA7653]
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However, a check which has been cleared and credited to theaccount of the creditor shall be equivalent to a delivery to thecreditor of cash in an amount equal to the amount credited tohis account. [Section 60, RA 7653]
DOMESTIC MONETARY STABILIZATION
Guiding principle
The Monetary Board shall endeavor to control any expansion orcontraction in monetary aggregates which is prejudicial to theattainment or maintenance of price stability.
Action when abnormal movements occur in the monetary aggregates, credit, or pricelevel
Whenever abnormal movements in the monetary aggregates, incredit, or in prices endanger the stability of the Philippineeconomy or important sectors thereof, the Monetary Board shall:
1. Take such remedial measures as are appropriate and withinthe powers granted to the Monetary Board and the BangkoSentral;
2. Submit to the President of the Philippines and theCongress, and make public, a detailed report which shallincludes, as a minimum, a description and analysis of:
a. The causes of the rise or fall of the monetaryaggregates, of credit or of prices;
b. The extent to which the changes in the monetaryaggregates, in credit, or in prices have beenreflected in changes in the level of domestic output,employment, wages, and economic activity in generaland the nature and significance of any such changes;and
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c. The measures which the Monetary Board has taken andthe other monetary, fiscal or administrative measureswhich it recommends to be adopted.
INTERNATIONAL MONETARY STABILIZATION
International monetary stabilization
The Bangko Sentral shall exercise its powers to preserve theinternational value of the pesos and to maintain itsconvertibility into other freely convertible currenciesprimarily for, although not necessarily limited to, currentpayments for foreign trade and invisibles. [Section 64, RA 7653]
International reserves
In order to maintain the international stability andconvertibility of the Philippine peso, the Bangko Sentral shallmaintain international reserves adequate to meet any foreseeablenet demands on the Bangko Sentral for foreign currencies.[Section 65, RA 7653]
Composition of the international reserves
1. Gold
2. Assets in foreign currencies
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Action when international stability of the pesos is threatened
Whenever the international reserve of the Bangko Sentral fallsto a level which the Monetary Board considers inadequate to meetthe prospective net demands on the Bangko for foreigncurrencies, or whenever the international reserve appears to bein imminent danger of falling to such a level, or whenever theinternational reserve is falling as a result of payments orremittances abroad which, in the opinion of the Monetary Board,are contrary to the national welfare, the Monetary Board shall:
1. Take such remedial measures as are appropriate and withinthe powers granted to the Monetary Board and the BangkoSentral;
2. Submit to the President of the Philippines and theCongress, and make public, a detailed report which shallincludes, as a minimum, a description and analysis of:
a. The nature and causes of the existing or imminentdecline;
b. The remedial measures already taken or to be taken bythe Monetary Board;
c. The monetary, fiscal or administrative measuresfurther proposed; and
d. The character and extent of the cooperation requiredfrom other government agencies for the successfulexecution 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
20BANKING LAWS
powers granted to it under RA 7653 for the management ofmonetary aggregates.
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, anddocuments and instruments of types customarily employed for theinternational 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 thefollowing entities or persons only:
1. Banking institutions operating in the Philippines;
2. The Government, its political subdivisions andinstrumentalities;
3. Foreign or international financial institutions;
4. Foreign governments and their instrumentalities; and
5. Other entities or persons which the Monetary Board ishereby 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 netpositive foreign asset position so that its gross foreignexchange assets will always exceed its gross foreignliabilities.
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Emergency restrictions on foreign exchange operations
Emergency restrictions on foreign exchange operations include:
1. Temporarily suspending or restricting sales of foreignexchange by the Bangko Sentral;
2. Subjecting all transactions in gold and foreign exchangeto license by the Bangko Sentral; and
3. Requiring that any foreign exchange thereafter obtained byany person residing or entity operating in the Philippinesbe delivered to the Bangko Sentral or to any bank or agentdesignated by the Bangko Sentral for the purpose, at theeffective exchange rate or rates. [Section 72, RA 7653]
Emergency restrictions may be imposed for the followingpurposes:
1. In order to achieve the primary objective of the BangkoSentral;
2. To protect the international reserves of the BangkoSentral in the imminence of, or during an exchange crisis,or in time of national emergency; and
3. To give the Monetary Board and the Government time inwhich to take constructive measures to forestall, combat,or overcome such a crisis or emergency. [Section 72, RA7653]
Such measures may be adopted with the concurrence of at leastfive (5) members of the Monetary Board and with the approval ofthe President of the Philippines. [Section 72, RA 7653]
Exchange rates
The Bangko Sentral shall determine the exchange rate policy ofthe country.
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Foreign exchange holdings of the banks
In order that the Bangko Sentral may at all times have foreignexchange resources sufficient to enable it to maintain theinternational stability and convertibility of the peso, or inorder to promote the domestic investment of bank resources, theMonetary Board may require the banks to sell to the BangkoSentral or to other banks all or part of their surplus holdingsof foreign exchange. [Section 76, RA 7653]
LOANS TO BANKING AND OTHER FINANCIAL INSTITUTIONS
Guiding principles
The rediscounts, discounts, loans and advances, which the BangkoSentral is authorized to extend to banking institutions, shallbe used to influence the volume of credit consistent with theobjective of price stability.
Types of credit operations
1. Normal credit operations
2. Special credit operations
3. Emergency credit operations
Normal credit operations
1. Commercial credits
2. Production credits
3. Other credits
Commercial credits
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The Bangko Sentral may rediscount, discount, buy and sell bills,acceptances, promissory notes and other credit instruments withmaturities of not more than one hundred eighty (180) days fromthe date of their rediscount, discount or acquisition by theBangko Sentral and resulting from transactions related to:
1. The importation, exportation, purchase or sale of readilysaleable goods and products, or their transportationwithin the Philippines; or
2. The storing of non-perishable goods and products which areduly insured and deposited, under conditions assuringtheir preservation in authorized bonded warehouses or inother places approved by the Monetary Board.
Production credits
The Bangko Sentral may rediscount, discount, buy and sell bills,acceptances, promissory notes and other credit instrumentshaving maturities of not more than three hundred sixty (360)days from the date of their rediscount, discount or acquisitionby the Bangko Sentral and resulting from transactions related tothe production or processing of agricultural, animal, mineral,or industrial products.
Other credits
Special credit instruments not otherwise rediscountable undercommercial and production credits may be eligible forrediscounting in accordance with the rules and regulations whichthe Bangko Sentral shall prescribe.
Special credit operation
1. Loans for liquidity purposes
Loans for liquidity purposes
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The Bangko Sentral may extend loans and advances to bankinginstitutions for a period of not more than seven (7) dayswithout any collateral for the purpose of providing liquidity tothe banking system in times of need. [Section 83, RA 7653]
Emergency loans and advances
In periods of national and/or local emergency or of imminentfinancial panic which directly threaten monetary and bankingstability, the Monetary Board may, by a vote of at least five(5) of its members, authorize the Bangko Sentral to grantextraordinary loans or advances to banking institutions securedby assets. [Section 84, RA 7653]
The Monetary Board may, at its discretion, likewise authorizethe Bangko Sentral to grant emergency loans or advances tobanking institutions, even during normal periods, for thepurpose of assisting a bank in a precarious financial conditionor under serious financial pressures brought by unforeseenevents, or events which, though foreseeable, could not beprevented by the bank concerned. This requires that the MonetaryBoard has ascertained that the bank is not insolvent and has theassets to secure the advances and that the concurrent vote of atleast 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 BangkoSentral shall be made exclusively in accordance with its primaryobjective of achieving price stability.
In pursuit of this principle, the Bangko Sentral may engage inthe purchase and sale of government securities as well as issueand negotiate obligations of the Bangko Sentral.
BANK RESERVES
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Reserve requirements
In order to control the volume of money created by the creditoperations of the banking system, all banks operating in thePhilippines shall be required to maintain reserves against theirdeposit liabilities.
The required reserves of each bank shall be proportional to thevolume of its deposit liabilities and shall ordinarily take theform of a deposit in the Bangko Sentral. [Section 94, RA 7653]
No interest on bank reserves
Since the requirement to maintain bank reserves is imposedprimarily to control the volume of money, the Bangko Sentralshall not pay interest on the reserves maintained with it unlessthe Monetary Board decides otherwise as warranted bycircumstances. [Section 94, RA 7653]
Deposit substitutes
The term "deposit substitutes" is defined as an alternative form ofobtaining funds from the public, other than deposits, throughthe issuance, endorsement, or acceptance of debt instruments forthe borrower's own account, for the purpose of re-lending orpurchasing of receivables and other obligations.
Required reserves against foreign currency
The Monetary Board is similarly authorized to prescribe andmodify the minimum reserve ratios authorized applicable todeposits denominated in foreign currencies.
Increase in reserve requirements
Whenever in the opinion of the Monetary Board it becomesnecessary to increase reserve requirements against existingliabilities, the increase shall be made in a gradual manner and
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shall not exceed four percentage points in any thirty-dayperiod.
Banks and other affected financial institutions shall benotified reasonably in advance of the date on which suchincrease is to become effective.
Exemption from attachment and other purposes of reserves
Deposits maintained by banks with the Bangko Sentral as part oftheir 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 tosatisfy the claim of a party other than the Government, or itspolitical subdivision or instrumentalities.
SELECTIVE REGULATION OF BANK OPERATIONS
Guiding principle
The Monetary Board shall use the powers granted to it under RA7653 to ensure that the supply, availability and cost of moneyare in accord with the needs of the Philippine economy and thatbank credit is not granted for speculative purposes prejudicialto the national interests.
Regulations on bank operations shall be applied to all banks ofthe same category uniformly and without discrimination.
Margin requirements against letters of credit
The Monetary Board may at any time prescribe minimum cashmargins for the opening of letters of credit, and may relatedthe size of the required margin to the nature of the transactionto be financed.
FUNCTIONS AS BANKER AND FINANCIAL ADVISOR OF THE GOVERNMENT
Designation of Bangko Sentral as banker of the government
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The Bangko Sentral shall act as a banker of the Government, itspolitical subdivisions and instrumentalities.
The Bangko Sentral shall represent the government with theInternational Monetary Fund and other financial institutions.
Official deposits
The Bangko Sentral shall be the official depository of theGovernment, its political subdivisions and instrumentalities aswell 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 theGovernment, its political subdivisions or instrumentalities maybe made through the Bangko Sentral, which may act as agent of,and for the account of, the Government or its respectivesubdivisions or instrumentality, as the case may be.
The Bangko Sentral shall not be a member of any stock exchangeor syndicate, but may intervene therein for the sole purpose ofregulating their operations in the placing of governmentsecurities. [Section 118, RA 7653]
Servicing and redemption of public debt
The servicing and redemption of the public debt shall also beeffected through the Bangko Sentral.
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Financial advice on official credit operations
Before undertaking any credit operation abroad, the Government,through the Secretary of Finance, shall request the opinion, inwriting, of the Monetary Board on the monetary implications ofthe contemplated action. Such opinion must similarly berequested by all political subdivisions and instrumentalities ofthe Government before any credit operation abroad is undertakenby them.
Whenever the Government, or any of its political subdivisions orinstrumentalities, contemplates borrowing within thePhilippines, the prior opinion of the Monetary Board shalllikewise be requested in order that the Board may render anopinion on the probable effects of the proposed operation onmonetary aggregates, the price level, and the balance ofpayments.
In order to assure effective coordination between the economic,financial and fiscal policies of the government and themonetary, credit and exchange policies of the Bangko Sentral,the Deputy Governor designated by the Governor of the BangkoSentral shall be an ex officio member of the National Economic andDevelopment Authority Board.
PROHIBITIONS
Prohibitions
The Bangko Sentral shall not acquire shares of any kind oraccept them as coolateral, and shall not participate in theownership or management of any enterprise, either directly orindirectly.
The Bangko Sentral shall not engage in development banking orfinancing.
TRANSITORY PROVISIONS
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Phaseout of fiscal agency functions
Unless circumstances warrant otherwise and approved by theCongress Oversight Committee, the Bangko Sentral shall within aperiod of three (3) years but in no case longer than five (5)years from the approval of RA 7653, phase out all fiscal agencyfunctions, and transfer the same to the Department of Finance.[Section 129, RA 7653]
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Phaseout of regulatory powers over the operations of finance corporations and otherinstitutions performing similar functions
The Bangko Sentral shall within a period of five (5) years fromthe effectivity of RA 7653 phase out its regulatory powers overfinance companies without quasi-banking functions and otherinstitutions performing similar functions, the same to beassumed by the Securities and Exchange Commission. [Section 130,RA 7653]
GENERAL BANKING ACT
Republic Act No. 337, as amendedAn act regulating banks and banking institutions and for other purposesApproved 23 February 1995
IN GENERAL
Rule on bank operations
Only entities duly authorized by the Monetary Board of the Bangko Sentral may engage in the lending of funds obtained from the public through the receipt of deposits of any kind and all entities regularly conducting such operations shall be considered as banking institutions.
Banks or banking institutions
Entities engaged in the lending of funds obtained from the public through the receipt of deposits of any kind, and all entities regularly conducting such operation.
Banks or banking institutions must be duly authorized by the Monetary Board of the Central Bank.
Public shall mean twenty or more lenders.
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Quasi-banking functions
“Quasi-banking functions” shall mean borrowing funds, for the borrower’s 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 thelimited 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, eitherfor 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, endorsementor 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
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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 loan associations.
These entities will be subject to regulation by the Monetary Board which may include, but need not be limited to:
1. the imposition of net worth to risk assets ratios;
2. reserve requirements;
3. interest rate ceilings;
4. methods of computation thereof;
5. prescribing charges which may be collected;
6. minimum capitalization; and
7. 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 notbe limited to, the imposition of constraints covering the:
1. minimum size of funds received;
2. methods of marketing and distribution;
3. terms and maturities of funds received; and
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4. 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 orstandards are to be applied. In some instances, these entities may be subject to special examination.
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Supervision
“Supervision” shall include not only the issuance of rules but alsothe 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 thebailment 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 ofdays. During this period, the money deposited cannot be withdrawn. The bank uses this money to lend to others. That iswhy 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
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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.
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Money market transactions
Money market is a market dealing in standardized short-term creditinstruments (involving large amounts) where lenders and borrowers do not deal directly with each other but through a mediator or dealer in the open market.
It involves “commercial papers” which are instruments “evidencing indebtedness of any person or entity… which are issued, endorsed, sold or transferred or in any manner conveyed to another person or entity, with or without recourse.”
The fundamental function of the money market devise in its operation is to match and bring together in a most impersonal manner both the “fund users” and the “fund suppliers.”
The money market is an “impersonal market” free from personal considerations. The market mechanism is intended to provide quick mobility of money and securities.
The General Banking Act discriminates against banks in two aspects
1. Period- Under the Civil Code, a period is presumed to be for the benefit of both parties. Insofar as banks are concerned, the period is always for the benefit of the debtor if the bank is the creditor. The debtor can compel the creditor bank to accept payment of a debt before it is due, and recover interest deducted in advance.
2. Foreclosure of mortgage-
The general rule is that there is no right of redemption in judicial foreclosure of mortgage. There is only 90 dayequity redemption period.
The exception is with the banks aside from the 90-day equity redemption period, banks are required to give a one-year redemption period.
Alien bank mortgage
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An alien bank can bid in a public auction of mortgaged property ifsuch property was mortgage to it in the course of an ordinary banking transaction. If the mortgage was not within the normal banking transaction, it must be prohibited from bidding.
Mortgage loans
Loans against real estate security shall not exceed 70% of the appraised value of the real estate security, plus 70 %of the appraised value of the improvements with title to the property being with the mortgagor.
Loans on the security of chattels shall not exceed 50% of the appraised value of the security.
Classification of banks
1. Commercial banks
2. Thrift banks
a. Savings and mortgage banks
b. Stock savings and loan associations
c. Private development banks
3. 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 lawto 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.
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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 regulationsto engage in the business for which the applicant isproposed to be incorporated have been complied with;
2. that the public interest and economic conditions, both general and local, justify the authorization; and
3. that the amount of capital, the financing organization, direction and administration, as well as the integrity andresponsibility of the organizers and administrators reasonably assure the safety of the interests which the public may entrust to them.
Receipt and disposition of deposits
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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 thePhilippines.
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, exceptwhere 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 bedetermined 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 thebasis 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
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not exceed thirty percent (30%) of the voting stock of that bank.
In the case of a corporation which is wholly owned, or the majority of the voting stock of which is owned, by any one person or by persons related to each other within the third degree of consanguinity or affinity, that corporation may own not more than twenty percent (20%) of the voting stock of any bank.
LICENSING OF FOREIGN BANKS
License to conduct business
No foreign bank or banking corporation formed, organized or existing under any law other than those of the Philippines shallbe 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 ofthe Philippines shall be permitted to transact business in the Philippines.
Requisites for issuance of license
1. Public and economic conditions, both general and local, justify the issuance of such order.
2. The foreign bank or banking corporation is solvent and in sound financial condition.
3. A duly appointed agent in the Philippines has been authorized toaccept summons and legal processes.
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Investment rights
1. Foreign banking institutions without branches in the Philippines, including their wholly or majority owned subsidiaries and their holding companies having majority holdingin 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.
Revocation of license
1. The foreign bank is in imminent danger of insolvency.
2. 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. by receiving deposits;
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3. by buying and selling foreign exchange and gold or silver bullion; and
4. by lending money against personal security or against securities consisting of personal property of mortgages onimproved real estate and the insured improvements thereon.
A commercial bank may also accept or create demand deposits subject to withdrawal by check.
A commercial bank may offer NOW accounts (special types of savings deposit which can be withdrawn by means of a Negotiable Order of Withdrawal and is offered only to natural persons).
A commercial bank may likewise acquire readily marketable bonds and other debt securities subject to such rules as the Monetary Board may promulgate.
A commercial bank, finally, may invest to the extent allowed under applicable law and regulations in equities of allied undertaking, whether financial or non-financial.
Investment in allied undertakings
Commercial banks, including Government banks and foreign banks with existing local branches, may invest in equities of allied undertakings.
Equity investments shall not be permitted in non-related activities.
Limitations on investments in allied undertakings:
1. 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;
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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 bank’s net worth for purposes of computing the prescribed ratio of net worth to risk assets.
Financial allied undertakings
1. Leasing companies
2. Banks
3. Investment houses
4. Financing companies
5. Credit card operations
6. Financial institutions catering to small and medium scale enterprises
Non-financial allied undertakings
1. Warehousing companies
2. Storage companies
3. Safe deposit box companies
4. Companies engaged in the management of mutual funds but not in the mutual funds themselves
5. Management corporations engaged or to be engaged in activity similar to the engagement of mutual funds
6. Companies engaged in the provision of computer services
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7. Insurance agencies
8. Companies engaged in home building and home development
9. Companies providing drying and/or milling facilities for agricultural crops
Universal bank or expanded commercial banking authority
The Monetary Board may authorize -- to further national development objectives or support national priority projects -- a commercial bank, a bank authorized to provide commercial banking services, as well as a government owned and controlled bank, to operate under an expanded commercial banking authority.
By virtue of such expanded power, the universal bank may, in addition to powers authorized for commercial banks:
1. 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.
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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 bank’s 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
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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 extendcovered 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
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Any commercial bank may purchase, hold, and convey real estate for the following purposes:
1. Such as shall be necessary for its immediate accommodationin the transaction of its business;
2. Such as shall be mortgaged to it in good faith by way of security for debts;
3. Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings; and
4. 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 possessionof any real estate purchased to secure any debt due to it, for alonger period than five years.
Establishment of branches
Any commercial bank organized under Philippine laws may, with the prior approval of the Monetary Board, establish branches in the Philippines or branches and agencies outside the Philippines, and the bank shall be responsible for all business conducted in such branches to the same extent and in the same manner as though such business had all been conducted in the head office.
A bank and its branches shall be treated as a unit.
THRIFT BANKS
Thrift banks
“Thrift banks” shall include savings and mortgage banks, privatedevelopment banks, and stock savings and loan associations
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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 inreal 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; incommercial papers, and accounts receivables, drafts, billsof exchange, acceptances or notes arising out of commercial transactions; and in such other investments andloans which the Monetary Board will determine as necessaryin 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;
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6. Extend credit against the security of jewelry, precious stones and similar articles;
7. Accept foreign currency deposits;
8. Invest in equity of allied undertakings;
9. Rediscount papers with the PNB, LBP, DBP, and other GOCCs;
10. Issue domestic letters of credit;
11. Invest in marketable bonds and other debt securities;
12. Grant loans, secured or not secured; and
13. With prior approval of the Monetary Board:
a. Open current or checking accounts;
b. Act as collection agent for government entities;
c. Act as official depository of national agencies and municipal, city or provincial funds where the bank islocated;
d. Issue mortgage and chattel certificates;
e. Engage in quasi-banking and money market operations; and
f. 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
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Capitalization may vary according to the location of the head office:
Within Metro Manila - P250 millionOutside Metro Manila - P 40 million
Incentives and exemptions
1. Reserve requirement differential
2. Liberalized branching rules
3. Notices of statement of condition
4. Tax exemptions
5. Exemption from publication requirement
6. Exemption from notarial charges
7. Exemption from registration fees
Equity ownership
At least 40% of the voting stock of a thrift bank shall be ownedby Filipino citizens.
Exception: In case of merger or consolidation of existing Thrift Banks with foreign holdings, the resulting holding shall not be increased but may be reduced and, once reduced, shall not be increased thereafter beyond 60% of the voting stock of the Thrift Bank.
Minors as depositors
Minors in their own rights and in their own names may make deposits and withdraw the same, and may receive dividends and interests.
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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. to accumulate the savings of its stockholders;
2. to repay to said stockholders their accumulated savings and profits upon surrender of their shares;
3. to encourage industry, frugality, and home building among its stockholders; and
4. 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
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With the approval of the Monetary Board, a building and loan association may also invest such of its funds as may otherwise remain idle in bonds and obligations of the Republic of the Philippines or any of its subdivisions, or GOCCs.
Capital stock
The capital stock of such associations shall be paid in by the stockholders in regular, equal, periodical payments known as dues, at such times and in such amounts as shall be provided in their by laws.
The dues on each share of stock subscribed for by a stockholder shall continue to be paid by the stockholder to the association until the share has been duly withdrawn, cancelled, or forfeitedor 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
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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 duesupon giving sixty (60) days’ notice in writing to the board of directors and the withdrawal value shall be the total sum of thedues paid thereon plus not less than ninety percent (90%) of alldividends earned by such shares up to the end of the last preceding fiscal period plus such interest for the time elapsed since the end of the period as shall be allowed by the board of directors.
Stockholders who have not paid twelve (12) monthly installments of dues may, after giving sixty (60) days’ notice to the board, surrender their shares and withdraw from the association, and the withdrawal value shall be the total sum of the due paid thereon plus such dividend or interest as may be allowed by the board of directors.
RURAL BANKS
Scope of authority
A rural bank may perform any or all of the following services:
1. Extend loans and advances primarily for the purpose ofmeeting the normal and credit needs of farmers, fishermen,or farm families as well as cooperatives, merchants,private and public employees;
2. Accept savings and time deposits;
3. Ac as correspondent bank of other financial institutions;
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4. Rediscount paper with the LBP, DBP, or any other bank, including its branches and agencies.
5. Act as a collection agent;
6. Offer other banking services as provided in Section 772 ofRA 337, as amended;
7. Extend financial assistance to private and public employees in accordance with RA 3779, as amended; and
8. 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 promotecomprehensive rural development with the end in view of thefollowing:
1. A more equitable distribution of opportunities, income andwealth;
2. A sustained increase of goods and services produced by thenation for the benefit of the people; and
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3. An expanding productivity as a key to raising the qualityof life for all.
This can be achieved by making credit available and readilyaccessible in the rural areas.
Capital stock
With the exception of shareholdings of corporations organizedprimarily to hold equities in rural banks, and of Filipino-controlled domestic banks, the capital stock of any rural bankshall be fully-owned and held by Philippine citizens or entitiesqualified under Phil. law to own and hold such capital stock.
Board
All members of the BOD shall be Filipino citizens.
However, there is no prohibition against any appointive orelective public official from serving as director, officer,consultant or in any capacity in the bank.
Incentives
Foreclosure of mortgages exempt from newspaper publicationrequirements if the loan, excluding interest due and unpaid,does not exceed P100,000.
Exempt from payment of all taxes, fees and charges of whatevernautre and description, except corporate income taxes and localtaxes, fees and charges for aperiod of five years from the dateof commencement of operations.
Free from notarization fees
Free from registration fees and DST in RD.
ACT LIBERALIZING ENTRY OF FOREIGN BANKS
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Republic Act No. 7721An act liberalizing the entry and scope of operations of foreignbanks in the Philippines and for other purposes
Declaration of policy
The State shall:
1. Develop a self-reliant and independent national economyeffectively controlled by Filipinos; and
2. Encourage, promote and maintain a stable, competitive,efficient and dynamic banking and financial system.
Pursuant to this policy, the Philippine banking and financialsystem is hereby liberalized to create a more competitiveenvironment and encourage greater foreign participation throughincrease in ownership in domestic banks by foreign banks and theentry of new foreign bank branches.
In allowing increased foreign participation in the financialsystem, it shall be the policy of the State that the financialsystem shall remain effectively controlled by Filipinos.
Three (3) modes of entry for foreign banks
The Monetary Board may authorize foreign banks to operate in thePhilippine banking system through any of the following modes ofentry:
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 votingstock of a new banking subsidiary incorporated underPhilippine laws; or
3. by establishing branches with full banking authority.
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A foreign bank or a Philippine corporation, however, may own upto sixty percent (60%) of the voting stock of only one domesticbank or new banking subsidiary.
Guidelines for entry
In approving entry applications of foreign banks, the MonetaryBoard shall:
1. ensure geographic representation and complementation;
2. consider strategic trade and investment relationshipsbetween the Philippines and the country of incorporationof the foreign bank;
3. study the demonstrated capacity, global reputation forfinancial innovations and stability in a competitiveenvironment of the applicant;
4. see to it that reciprocity rights are enjoyed byPhilippine banks in the applicant’s country; and
5. consider willingness to fully share their technology.
Only those among the top one hundred fifty (150) foreign banksin the world or the top five (5) banks in their country oforigin 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 asmay be necessary:
1. to ensure that, at all times, the control of seventy (70%)of the resources or assets of the entire banking system isheld by domestic banks which are at least majority-ownedby Filipinos;
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2. prevent a dominant market position by one bank or theconcentration of economic power in one or more financialinstitutions, or in corporations, partnerships, groups orindividuals with related interests; and
3. secure the listing in the Philippine Stock Exchange of theshares of stocks of banking corporations established under(a) and (b) modes of entry.
To qualify to establish a branch or subsidiary, the foreign bankapplicant must be widely-owned and publicly-listed in itscountry of origin, unless the foreign bank applicant is owned bythe government of its country of origin.
Capital requirements
Locally incorporated subsidiaries shall have the same minimumcapital requirements as domestic banks of the same category.
For foreign bank branches, they shall permanently assign capitalof not less than the U.S. dollar equivalent of P210,000,000.00at the exchange rate on the date of effectivity of this law.
The permanently assigned capital shall be inwardly remitted andconverted into Philippine currency.
Branches
A foreign bank shall be entitled to three (3) branches uponremittance of minimum capital requirement.
A foreign bank may open three (3) additional branches inlocations designated by the Monetary Board by inwardly remittingand converting into Philippine currency as permanently assignedcapital the U.S. dollar equivalent of P35,000,000.00 peradditional branch at the exchange rate on the date ofeffectivity of this law.
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Total number of branches for each new foreign bank entrant shallnot exceed six (6).
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Head office guarantee
The head office of foreign bank branches shall guarantee promptpayment of all liabilities of its Philippine branches.
Equal treatment
Foreign banks authorized to operate under the law shall performthe same functions, enjoy the same privileges, and be subject tothe same limitations imposed upon a Philippine bank of the samecategory.
These limits include, among others, the single borrower’s limitand capital to risk asset ratio as well as the capitalizationrequired for expanded commercial banking activities under theGeneral Banking Act and other related laws of the Philippines.
OFFSHORE BANKING SYSTEM LAW
Presidential Decree No. 1034Authorizing the establishment of an offshore banking system in thePhilippinesApproved 30 September 1976
Offshore banking
Offshore banking shall refer to the conduct of bankingtransactions in foreign currencies involving the receipt offunds from external sources and the utilization of such funds intransactions with non-residents or other offshore banking units.
Offshore banking unit
Offshore banking unit shall mean a branch, subsidiary oraffiliate of a foreign banking corporation which is dulyauthorized by the Central Bank to transact offshore bankingbusiness in the Philippines.
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Deposits
Deposits shall mean funds in foreign currencies which areaccepted and held by an offshore banking unit in the regularcourse of business, with the obligation to return an equivalentamount to the owner thereof, with or without interest.
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Who are qualified to operate an offshore banking unit?
Only banks which are organized under any law other than those ofthe Republic of the Philippines, their branches, subsidiaries oraffiliates, shall be qualified to operate offshore banking unitsin the Philippines.
Local branches of foreign banks already authorized to acceptforeign currency deposits under RA 6426 may opt to apply forauthority to operate an offshore banking unit under PD 1034.However, upon their receipt of a corresponding certificate ofauthority to operate as an offshore banking unit, the license totransact business under RA 6426 shall be deemed automaticallywithdrawn.
Certificate of authority to operate
The Monetary Board is authorized to issue certificates ofauthority to operate offshore banking units.
In issuing such certificate, the Monetary Board shall take intoconsideration the applicant’s:
1. liquidity and solvency position;
2. net worth and resources;
3. management;
4. international banking expertise;
5. contribution to the Philippine economy; and
6. other relevant factors such as participation in equity oflocal commercial banks and appropriate geographicrepresentation.
The Central Bank is authorized to collect a fee of not less thanUS $20,000 upon issuing any certificate of authority to operate
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and annually thereafter on the anniversary date of suchcertificate.
Corporate undertaking
No application to operate as an offshore banking unit shall beconsidered unless the applicant shall have first submitted tothe Central Bank a sworn undertaking of its head office orparent or holding company, duly supported by an appropriateresolution of its board of directors, that, among other things:
1. it will, on demand, provide the necessary specifiedcurrencies to cover liquidity needs that may arise orother shortfall that its offshore banking unit may incur;
2. the operations of its offshore banking unit shall bemanaged soundly and with prudence;
3. it will train and continually educate a specific number ofFilipinos in international banking and foreign exchangetrading with a view to reducing the number of expatriates;
4. it will provide and maintain in its offshore banking unitnet office funds in the minimum amount of US $ 1,000,000;and
5. it will start operations of its offshore banking unitwithin 180 days from receipt of its certificate ofauthority to operate such unit.
Transactions of offshore banking units
Transactions of offshore banking units with non-residents orwith other offshore banking units shall be freely allowed, butsafeguards will be established to prevent circumvention offoreign exchange regulations.
Transactions of offshore banking units with residents of thePhilippines, including those with local commercial banks and
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local branches of foreign banks authorized to receive foreigncurrency deposits under RA 6426, shall be subject to applicablelaw and regulations.
Tax and other incentives
The provisions of any law to the contrary notwithstanding, thetransactions of offshore banking units with non-residents andother offshore banking units shall be subject to a five percent(5%) tax on the net income from such transactions which shall bein lieu of all taxes on the said transactions.
The transactions of offshore banking units with local commercialbanks, including branches of foreign banks that may beauthorized by the Central Bank to transact business withoffshore banking units, shall likewise be subject to the sametax, except net income from such transactions as may bespecified by the Secretary of Finance, upon recommendation ofthe Monetary Board, to be subject to the usual income taxpayable by banks.
Any income of non-residents from transactions with said offshorebanking units shall be exempt from any tax.
In the case of transaction with residents (other than otheroffshore banking units or local commercial banks including localbranches of foreign banks that may be authorized by the CentralBank to transact business with offshore banking units), interestincome from loans granted to such residents shall be subjectonly to a ten percent (10%) withholding tax as final tax.
Effect of certain laws
The Usury Law, Uniform Currency Law, and PDIC law shall notapply to transactions and/or deposits in offshore banking unitsin the Philippines.
The provisions of RA 1405 or the Law on Secrecy of Bank Depositsshall apply to deposits in offshore banking units.
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FOREIGN CURRENCY DEPOSIT ACT
Republic Act No. 6426, as amendedAn act instituting a foreign currency deposit system in thePhilippines and for other purposesApproved 04 April 1974
Authority to deposit foreign currencies
Any person, natural or juridical, may deposit with suchPhilippine banks in good standing, as may upon application bedesignated by the Central Bank for the purpose, foreigncurrencies which are acceptable as part of the internationalreserve.
Exception
Foreign currencies which are required by the Central Bank to besurrendered in accordance with the provisions of RA 7653 may notbe deposited.
Authority of the banks to accept foreign currency deposits
The banks designated by the Central Bank shall have theauthority:
1. To accept deposits and to accept foreign currencies intrust;
2. To issue certificates to evidence such deposits;
3. To discount said certificates;
4. To accept said deposits as collaterals for loans subjectto such rules and regulations as may be promulgated by theCentral Bank; and
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5. To pay interest in foreign currency on such deposits.
Foreign currency cover requirements
Depositary banks shall maintain at all times a one hundredpercent (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 theform of foreign currency deposit with the Central Bank and thebalance in the form of foreign currency loans or securities,which loans or securities shall be of short term maturities andreadily marketable.
Foreign currency cover shall be in the same currency as that ofthe corresponding foreign currency deposit liability, unless theMonetary Board may otherwise prescribe or allow.
The Central Bank may pay interest on the foreign currencydeposit, and if requested, shall exchange the foreign currencynotes and coins into foreign currency instruments drawn on itsdepositary banks.
Central Bank may exempt from the 15% foreign currency cover inthe form of foreign currency deposit with the Central Bank incases of depository banks which, on account of their net worth,resources, past performance, or other pertinent criteria, havebeen qualified by the Monetary Board to function under anexpanded foreign currency deposit system.
Said banks may also be exempt from the limitations on thematurity periods for loans and securities subject to priorapproval by the Central Bank.
Withdrawability and transferability of deposits
There shall be no restriction on the withdrawal by the depositorof his deposit or on the transferability of the same abroad
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except those arising from the contract between the depositor andthe bank.
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Tax exemption
All foreign currency deposits made under RA 6426, as amended, aswell as foreign currency deposits authorized under PD 1304,including interest and all other income or earnings of suchdeposits, are hereby exempted from any and all taxes whatsoeverirrespective of whether or not these deposits are made byresidents or non-residents so long as the deposits are eligibleor allowed under the said laws and, in the case of non-residents, irrespective of whether or not they are engaged intrade or business in the Philippines.
Secrecy of foreign currency deposits
All foreign currency deposits authorized under RA 6426, asamended by PD 1305, as well as foreign currency depositsauthorized under PD 1034, are hereby declared as and consideredof an absolutely confidential nature and, except upon thewritten permission of the depositor, in no instance shallforeign currency deposits be examined, inquired or looked intoby any person, government official, bureau or entity whetherpublic or private.
Unlike the Law on Secrecy of Banks Deposits Act, there is onlyone exception for foreign currency deposits and that is whenthere 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 other order or process of any court,legislative body, government agency, or any administrative bodywhatsoever.
Salvacion v. Central Bank of the Philippines278 SCRA 27
FACTS:
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Greg Bartelli, an American tourist, was arrested for committing fourcounts of rape and serious illegal detention against Karen Salvacion. Policerecovered from him several dollar checks and a dollar account in the ChinaBanking Corp. He was, however, able to escape from prison. In a civil casefiled against him, the trial court awarded Salvacion moral, exemplary andattorney’s fees amounting to almost P1,000,000.00.
Salvacion tried to execute the judgment on the dollar deposit ofBartelli with the China Banking Corp. but the latter refused arguing thatSection 11 of Central Bank Circular No. 960 exempts foreign currency depositsfrom 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 theSupreme Court.
ISSUE: Should Section 113 of Central Bank Circular No. 960 and Section 8 ofRepublic Act No. 6426, as amended by PD 1246, otherwise known as the ForeignCurrency 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 heldto be INAPPLICABLE to this case because of its peculiar circumstances.Respondents are hereby required to comply with the writ of execution issued inthe civil case and to release to petitioners the dollar deposit of Bartelli insuch amount as would satisfy the judgment.
RATIO:
Supreme Court ruled that the questioned law makes futile the favorablejudgment and award of damages that Salvacion and her parents fully deserve. Itthen 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 lawstill denies those entitled to due process of law for being unreasonable andoppressive. The intention of the law may be good when enacted. The law failedto anticipate the iniquitous effects producing outright injustice andinequality such as the case before us.
The SC adopted the comment of the Solicitor General who argued that theOffshore Banking System and the Foreign Currency Deposit System were designedto draw deposits from foreign lenders and investors and, subsequently, to givethe latter protection. However, the foreign currency deposit made by a
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transient or a tourist is not the kind of deposit encouraged by PD Nos. 1034and 1035 and given incentives and protection by said laws because suchdepositor stays only for a few days in the country and, therefore, willmaintain his deposit in the bank only for a short time. Considering thatBartelli is just a tourist or a transient, he is not entitled to theprotection of Section 113 of Central Bank Circular No. 960 and PD No. 1246against attachment, garnishment or other court processes.
Further, the SC said: “In fine, the application of the law depends onthe extent of its justice. Eventually, if we rule that the questioned Section113 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 aforeign transient, injustice would result especially to a citizen aggrieved bya foreign guest like accused Greg Bartelli. This would negate Article 10 ofthe New Civil Code which provides that “in case of doubt in the interpretationor application of laws, it is presumed that the lawmaking body intended rightand justice to prevail.””
Deposit insurance coverage
The deposits under RA 6426 shall be insured under the provisionsof RA 3591, as amended, or the Charter of the Philippine DepositInsurance Corporation.
Insurance payment shall be in the same currency in which theinsured deposits are denominated.
ACT CREATING THE PHILIPPINE DEPOSIT INSURANCE CORPORATION
Republic Act No. 3591An act establishing the Philippine Deposit Insurance Corporation, defining its powers and duties and for other purposes22 June 1963
Creation of PDIC
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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 lawsof the Philippines which maintains a branch outside the Philippines may elect to include for insurance its deposit obligations payable only at such branch.
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Insured deposit
The term “insured deposit” means the net amount due to any depositorfor 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.
All these types of deposits are covered: demand, savings and time deposits; if a depositor 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 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 interbankrate obtaining on the date the bank was closed or on insolvency, and the insurance coverage shall extend to
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such computed amount, but in no case to exceed P40,000 foreach depositor; and
2. The liability of PDIC to each depositor shall be payable in Philippine pesos in the amount of insurance coverage ascomputed 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 beinsured 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.
Should any bank fail or refuse to pay any assessment required tobe 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.
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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 togenerally 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) violationsof 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 writtencondition 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 practicesor 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
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another insured bank in an amount equal to the insured deposit of such depositor.
Proof of claims may be required by PDIC before payment. If it isnot 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 theinsured deposit shall be barred, and all rights of the depositoragainst the closed bank and its shareholders or the receivershipestate 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 periodheretofore mentioned.
Subrogation
The PDIC, upon payment, shall be subrogated to all rights of thedepositor against the closed bank to the extent of such payment.
Payments made by PDIC shall be considered as a preferred credit similar to taxes.
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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. Provide financial assistance to an insured bank in danger of closing.
2. Borrow from the Central Bank and from any bank designated as depository or fiscal agent of the Philippine Government.
3. Issue bonds, debentures and other obligations with the approval of the President of the Philippines.
4. Act as receiver of any banking corporation.
Receiver
Receiver includes a receiver, commission, person, or other agency charged by law with the duty to take charge of the assetsand 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 windup the affairs of such bank.
THE TRUTH IN LENDING ACT
Republic Act No. 3765An act to require the disclosure of finance charges in connection with extensions of credit
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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 creditto the user by assuring a full disclosure of such cost with a view of preventing the uninformed use of credit to the detrimentof 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 priceis 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 anycredit upon the security of, any obligation or claim arising outof 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.
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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;
2. the amounts, if any, to be credited as downpayment and/or trade in;
3. the difference between the amounts set forth under clauses(1) and (2);
4. 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;
5. the total amount to be financed;
6. the finance charge expressed in terms of pesos and centavos; and
7. the percentage that the finance charge bears to the total amount to be financed expressed as a simple annual rate onthe 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.
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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 attorney’sfees 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 AppealsG.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, ConsolidatedBank was not allowed to collect from the private respondents handling charges because it failed to conform to the Truth in Lending Act.
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. MedinaG.R. No. 33623, 22 March 1990
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Mariano Medina, Jr. purchase on installment 24 truck engines from International Harvester Macleod, Inc. (IHMI). The latter imposed and collectedthe 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 NotesAnalysis, IHMI used the works “Finance Income Unearned,” “Finance Rate,” “Rateper year,” “Total Amount Finance,” and “Date Finance Begun,” to denote certainentries 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. 5980or 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 andsales 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 incompliance 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 froma financing transaction under Republic Act No. 5980 in that there were only
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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 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 IHMI’s 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 IHMI’s 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 IHMI’s 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.
LAW ON SECRECY OF BANK DEPOSITS
Republic Act No. 1405, as amendedAn act prohibiting disclosure of or inquiry into, deposits with anybanking institution and providing penalty therefor
Policy of the law
It is hereby declared to be the policy of the Government to giveencouragement to the people to deposit their money in bankinginstitutions and to discourage private hoarding so that the samemay be properly utilized by banks in authorized loans to assistin the economic development of the country. [Section 1, RA 1405]
General rule
All deposits of whatever nature with banks or bankinginstitutions in the Philippines including investments in bondsissued by the Government of the Philippines, its political
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subdivisions and its instrumentalities, are hereby considered asof 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 todisclose to any person, other than those mentioned in Section 2hereof, any information concerning said deposits. [Section 3, RA1405]
Exceptions
1. Upon written permission of the depositor, including:
a. in determining estate of a decedent; and
b. tax compromise cases;
2. In cases of impeachment;
3. Upon order of a competent court in cases of bribery ordereliction of duty of public officials;
4. In cases where the money deposited or invested is the subjectmatter of the litigation; and
5. Cases of unexplained wealth under Republic Act No. 3019 or theAnti-Graft and Corrupt Practices Act.
Penalty for violation of law
Any violation of this law will subject offender upon convictionto an imprisonment of not more than five (5) years or a fine ofnot more than twenty thousand pesos (P20,000) or both, in thediscretion of the court. [Section 5, RA 1405]
Tatalon Barrio Council v. Chief Accountant, et. al.GR No. 18360, 31 January 1963
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In this case, the Supreme Court ruled that savings and current accountsare privileged documents which fall within the protection of Republic Act No.1405, and their disclosure can only be justified under any of the casesenumerated in Section 2 of the Act, which do not include the prosecution ofcriminal actions for violation of the provisions of the Anti-Graft and CorruptPractices Act and of Article 216 of the Revised Penal Code. This has sincebeen overturned by the case of PNB v. Gancayco.
Philippine National Bank v. GancaycoGR No. 18343, 30 September 1965
FACTS:
Emilio Gancayco and Florentino Flor, as special prosecutors of theDepartment of Justice, required the Philippine National Bank to produce at ahearing the records of the bank deposits of Ernesto Jimenez, formeradministrator of the Agricultural Credit and Cooperative Administration, whowas then under investigation for unexplained wealth.
PNB refused to disclose his bank deposits, invoking Section 2 ofRepublic Act No. 1405. On the other hand, the prosecutors cited the Anti-Graftand Corrupt Practices Act, particularly Section 8 therewith, to wit:
“Section 8. Dismissal due to unexplained wealth. - If inaccordance with the provisions of RA 1379, a public official hasbeen found to have acquired during his incumbency, whether in hisname or in the name of other persons, an amount of property and/ormoney manifestly out of proportion to his salary and to his otherlawful income, that fact shall be a ground for dismissal orremoval. Properties in the name of the spouse and unmarriedchildren of such public official, may be taken into consideration,when their acquisition through legitimate means cannot besatisfactorily shown. Bank deposits shall be taken into consideration in theenforcement of this section, notwithstanding any provision of law to the contrary.”
PNB then filed an action for declaratory judgment in the CFI of Manilawhich ruled that Section 8 of the Anti-Graft and Corrupt Practices Act clearlyintended 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 ofaccounts of a depositor who is under investigation for unexplained wealth?
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HELD: Yes. Republic Act No. 3019 provided another exception to Section 2 ofRepublic Act No. 1405.
RATIO:
No reconciliation is possible between Republic Act No. 1405 and RepublicAct No. 3019 as the two laws are so repugnant to each other. Thus, whileSection 2 of Republic Act No. 1405 provides that bank deposits are “absolutelyconfidential … 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 takeninto consideration in the enforcement of this section, notwithstanding anyprovision of law to the contrary.” The only conclusion possible is thatSection 8 of the Anti-Graft Law is intended to amend Section 2 of Republic ActNo. 1405 by providing an additional exception to the rule against thedisclosure of bank deposits.
With regard to the claim that disclosure would be contrary to the policymaking bank deposits confidential, it is enough to point out that whileSection 2 of Republic Act No. 1405 declares bank deposits to be “absolutelyconfidential,” it nevertheless allows such disclosure in the followinginstances: (1) Upon written permission of the depositor; (2) In cases ofimpeachment; (3) Upon order of a competent court in cases of bribery ordereliction of duty of public officials; (4) In cases where the moneydeposited is the subject of the litigation.
Cases of unexplained wealth are similar to cases of bribery ordereliction of duty and no reason is seen why these two classes of casescannot be excepted from the rule making bank deposits confidential. The policyas to one cannot be different from the policy as to the other. This policyexpresses the notion that a public office is a public trust and any person whoenters upon its discharge does so with the full knowledge that his life, sofar as relevant to his duty, is open to public scrutiny.
Banco Filipino Savings and Mortgage Bank v. PurisimaGR No. 56429, 28 May 1988
The Bureau of Internal Revenue accused Customs special agent ManuelCaturla before the Tanodbayan of having illegal acquired property manifestlyout of proportion to his salary and other lawful income. During thepreliminary investigation, the Tanodbayan issued a subpoena duces tecum to the
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Banco Filipino Savings and Mortgage Bank, commanding its representative toappear at a specified time at the Office of the Tanodbayan and furnish thelatter with duly certified copies of the records in all its branches andextension offices of the loans, savings and time deposits and other bankingtransactions, 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 RA1405 which was denied by the Tanodbayan. In fact, the Tanodbayan issuedanother subpoena which expanded its scope including the production of bankrecords not only of the persons enumerated above but of additional persons andentities as well.
The Banco Filipino filed an action for declaratory relief with the CFIof Manila which was denied by the lower court. Thus this special civil actionof certiorari in the SC.
The issue here is whether or not the Law on Secrecy of Bank Depositsprecludes production by subpoena duces tecum of bank records of transactions byor in the names of the wife, children and friends of a special agent of theBureau of Customs accused before the Tanodbayan of having allegedly acquiredproperty manifestly out of proportion to his salary and other lawful income inviolation 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 providesthat bank deposits are “absolutely confidential … and, therefore, may not be examined, inquired orlooked into,” except in those cases enumerated therein, Section 8 of Republic Act No. 3019 (Anti-graftlaw) directs in mandatory terms that bank deposits “shall be taken into consideration in the enforcementof this section, notwithstanding any provision of law to the contrary.” The only conclusion possible is thatSection 8 of the Anti-Graft Law is intended to amend Section 2 of Republic Act No. 1405 by providing anadditional exception to the rule against the disclosure of bank deposits.”
The inquiry into illegally acquired property - or property notlegitimately acquired - extends to cases where such property is concealed bybeing held by or recorded in the name of other persons. This proposition ismade clear by RA 3019 which quite categorically states that the term“legitimately acquired property of a public officer or employee shall notinclude … property unlawfully acquired by the respondent, but its ownership isconcealed by its being recorded in the name of, of held by, respondent’sspouse, ascendants, descendants, relatives or any other persons.
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To sustain the petitioner’s theory, and restrict the inquiry only toproperty held by or in the name of the government official or employee, or hisspouse and unmarried children is unwarranted in the light of the provisions ofthe statutes in question, and would make available to persons in governmentwho illegally acquire property an easy and fool-proof means of evadinginvestigation and prosecution; all they have to do would be to simply placethe property in the possession or name of persons other than their spouse andunmarried children. This is an absurdity that we will not ascribe to thelawmakers.
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 MarinduqueMining and Industrial Corporation for the payment of backwages amounting toP205,853 before the National Labor Relations Commission. A writ of executionwas issued and the Deputy Sheriff served the writ, but it was unsatisfied. Thesheriff prepared on his own a Notice of Garnishment addressed to six banks inBacolod City, including petitioner PCIB, directing the bank concerned to issuea check in satisfaction of the judgment.
While the in house lawyer of the Corporation warned the PCIB to withholdany release of its deposit with the bank, the bank issued a manager’s check inthe amount of P37,466 which was the exact balance of the private respondent’saccount as of that day. The said check was also encashed by the sheriff thenext day.
Marinduque Mining thus filed a complaint before the RTC of Manilaagainst PCIB and the deputy sheriff, alleging that its current deposit withthe petitioner bank was levied upon, garnished, and with undue hasteunlawfully allowed to be withdrawn, and notwithstanding the allegedunauthorized disclosure of the said current deposit and unlawful releasethereof, the latter have failed and refused to restore the amount of P37,466to the former’s account despite repeated demands.
Trial court rendered judgment in favor of Marinduque Mining Corporation.On appeal, the Court of Appeals initially reversed the trial court’s order butlater affirmed it. Thus, this petition to the SC.
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The issue is whether or not the petitioners violated RA 1405, otherwiseknown as the Secrecy of Bank Deposits Act, when they allowed the sheriff togarnish the deposit of Marinduque Mining Corporation? SC held no.
The SC first ruled that the release of the deposit by the bank was notdone in undue and indecent haste. We find the immediate release of the fundsby the petitioner bank on the strength of the notice of garnishment and writof execution, whose issuance, absent any patent defect, enjoys the presumptionof regularity.
The SC likewise did not find any violation whatsoever by the petitionersof RA 1405, otherwise known as the Secrecy of Bank Deposits Act. The Court, inChina Banking Corporation v. Ortega, had the occasion to dispose of this issue whenit stated, to wit:
“It is clear from the discussion of the conference committee report on Senate Bill No. 351and House Bill No. 3977, which later became Republic Act No. 1405, that the prohibitionagainst examination of or inquiry into a bank deposit under Republic Act No. 1405 doesnot preclude its being garnished to insure satisfaction of a judgment. Indeed, there is noreal inquiry in such a case, and if existence of the deposit is disclosed, the disclosure ispurely incidental to the execution process. It is hard to conceive that it was ever withinthe intention of Congress to enable debtors to evade payment of their just debts, even ifordered by the Court, through the expedient of converting their assets into cash anddepositing the same in a bank.”
Since there is no evidence that the petitioners themselves divulged theinformation that the private respondent had an account with the petitionerbank and it is undisputed that the said account was properly the object of thenotice of garnishment and writ of execution carried out by the deputy sheriff,a duly authorized officer of the court, we cannot therefore hold thepetitioners 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 VictoriaJavier 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 inManila through the Prudential Bank. Accordingly, the First National Bankrequested the petitioner, Mellon Bank, to effect the transfer. Unfortunately,the wire sent by Mellon Bank to Manufacturers Hanover Bank, a correspondent ofPrudential Bank, indicated the amount transferred as “US $1,000,000.00”
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instead of US $1,000.00. Hence, Manufacturers Hanover Bank transferred onemillion dollars less bank charges of $6.30 to the Prudential Bank for theaccount of Victoria Javier.
Javier opened a new dollar account in Prudential Bank and deposited$999,943. Immediately, thereafter, Javier and her husband made withdrawalsfrom the account, deposited them in several banks only to withdraw them laterin an apparent plan to conceal, launder and dissipate the erroneously sentamount. One of the things they bought was real property in California, USAwhich was the subject of an action for recovery by Mellon Bank. Later, itfiled 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 ornot, by virtue of the principle of election of remedies, an action filed inCalifornia, USA, to recover real property located therein and to constitute aconstructive trust on said property precludes the filing in our jurisdictionof an action to recover the purchase price of said real property. SC ruledthat the filing of a recovery suit in the US does not preclude the filing ofan action in the Philippines for the recovery of the purchase price.
With regard to our subject matter, Erlinda Baylosis of the PhilippineVeteran’s Bank and Pilologo Red, Jr. of Hongkong and Shanghai BankingCorporation were required to give testimonies with regard to the deposits andchecks issued by the private respondents Javier, et. al.. These testimonieswere questioned for being immaterial and irrelevant as well as covered by RA1405 on confidentiality.
SC said: Private respondents’ protestations that to allow the questionedtestimonies to remain on record would be in violation of the provisions of RA1405 on the secrecy of bank deposits is unfounded. Section 2 of said lawallows the disclosure of bank deposits in cases where the money deposited isthe subject matter of the litigation. Inasmuch as the civil case is aimed atrecovering the amount converted by the Javiers for their own benefit,necessarily, an inquiry into the whereabouts of the illegally acquired amountextends to whatever is concealed by being held or recorded in the name ofpersons other than the one responsible for the illegal acquisition.
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NON-BANK FINANCIAL INTERMEDIARIES
NON-BANK FINANCIAL INTERMEDIARIES
1. The Investment House LawPres. Decree 129
2. Investment Company ActRepublic Act No. 2629
3. Financing Company Act Republic Act No. 5580, as amended
4. Pawnshops Pres. Decree No. 114
5. Trust Corporations Chapter VII, General Banking Act
THE INVESTMENT HOUSES LAW
Presidential Decree No. 129Governing the establishment, operation and regulation of InvestmentHouses15 February 1973
Investment houses
An investment house is any enterprise which engages in theunderwriting of securities of other corporations.
Under its Rules and Regulations, an investment house is definedan “any enterprise which engages or purports to engage, whetherregularly or on an isolated basis, in the underwriting ofsecurities of another person or enterprise, including securitiesof the Government and its instrumentalities.
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Underwriting
Underwriting is the act or process of guaranteeing thedistribution and sale within the Philippines of securities ofany kind issued by another corporation. The distribution andsale may be on public or private placement basis.
Private placement
Refers to the underwritten sale of securities to less than 20persons or enterprises.
Public placement
Refers to the underwritten sale of securities to at least 20persons or enterprises.
Organization and citizenship requirements
Investment Houses shall be organized in the form of stockcorporations.
At least forty percent (40%) of the voting stock of anyInvestment House shall be owned by citizens of the Philippines.
In determining the percentage of foreign-owned voting stocks inInvestment Houses, the basis for the computation shall be thecitizenship of each stockholder, and, if the stockholder is acorporation, the citizenship of the individual stockholdersholding voting rights in that corporation.
In approving foreign equity applications in Investment Houses,the SEC shall approve such applications only if the same orsimilar rights are enjoyed by Philippine nationals in theapplicant’s country.
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Foreign nationals may become members of the board of directorsto the extent of the foreign participation in the equity of saidenterprise.
Capital requirements
In the case of newly-organized Investment Houses, the minimumpaid-in capital shall be three hundred million pesos(P300,000,000).
The Monetary Board may prescribe a higher minimum capitalizationin order to promote and ensure the stability of the Philippinecapital market and the competitiveness of the investment houseindustry in line with the national economic goals.
Requirements for registration
The Securities and Exchange Commission shall not register thearticles of incorporation of any Investment House, or anyamendment thereto, unless it is satisfied from the evidencesubmitted to it:
a. That all the requirements of the PD 129 and of existinglaws or regulations to engage in the business have beencomplied with;
b. That the proposed enterprise will not be in conflict withpublic 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 theproposed managerial staff, provide reasonable assurancethat the enterprise will be conducted with financialprudence.
Prohibition
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No Investment House shall engage in banking operations asdefined in Section 2 of Republic Act No. 337, as amended.
Powers of investment houses
In addition to the powers granted to corporations in general, anInvestment House is authorized to do the following:
1. Arrange to distribute on a guaranteed basis securities ofother corporations and of the Government or itsinstrumentalities.
2. Participate in a syndicate undertaking to purchase andsell, distribute or arrange to distribute on a guaranteedbasis securities of other corporations and of theGovernment or its instrumentalities.
3. Arrange to distribute or participate in a syndicateundertaking to purchase and sell on a best-efforts basissecurities of other corporations and of the Government orits instrumentalities.
4. Participate as soliciting dealer or selling group memberin tender offers, block sales, or exchange offering ofsecurities; deal in options, right or warrants relating tosecurities and such other powers which a dealer mayexercise under the Securities Act.
5. Promote, sponsor, or otherwise assist and implementventures, projects and programs that contribute to theeconomy’s development.
6. Act as financial consultant, investment adviser, orbroker.
7. Act as portfolio manager and/or financial agent.
8. Subject to prior approval by the Monetary Board, theprovisions of Chapter IV of the Central Bank Charter, and
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such rules and regulations as may be issued by theMonetary Board, engage in foreign exchange operations.
9. Act as trustee of a trust fund or trust property, subjectto the provisions of the General Banking Act.
Conversion into a commercial bank
An Investment House may be converted into a commercial bankauthorized to operate under an expanded commercial bankingauthority, subject to applicable laws and regulations and withprior approval of the Monetary Board.
Central Bank regulatory powers
Investment Houses shall be subject to such regulations of theCentral Bank on non-bank financial intermediaries as may bepromulgated.
The regulations which may include, but need not be limited to a)minimum size of fund acceptance or receipt, b) methods ofmarketing and distribution, c) terms of placement andmaturities, and d) uses of funds may be modified by the MonetaryBoard insofar as they apply to Investment Houses.
Quasi-banking powers
The Monetary Board may, at its discretion, determine whetherInvestment Houses may be permitted to perform quasi-bankingfunctions.
If the Monetary Board decides to permit Investment Houses toengage in quasi-banking functions, the Board may require as acondition precedent the obtaining of a certificate of authorityfor the purpose from the Monetary Board.
Whenever the Monetary Board authorizes an Investment House toengage in quasi-banking functions, it may subject saidInvestment House to further regulations, which may include but
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need not necessarily be limited to a) liquidity reserverequirements; b) capital-to-risk assets ratios; c) interest rateceilings; and d) such other constraints as the Board may deemnecessary.
Dealer or broker
An Investment House may engage in the business of a dealer or abroker under the Securities Act without obtaining a separatelicense for the purpose.
Use of the term “Investment House”
No person, association, partnership or corporation other thanthose duly licensed as an Investment House shall advertise orhold itself out as being engaged in the business of anInvestment House.
INVESTMENT COMPANY ACT
Republic Act No. 2629Approved 18 June 1960
Investment company
Any issuer which is or holds itself out as being engagedprimarily in the business of investing, reinvesting, or tradingin securities.
Nature and purpose
Investment companies are financial institutions that raise fundsby selling their own issues of securities to individualinvestors. The funds obtained will be used to invest insecurities of other enterprises.
The objective of an investment company is to provide individualinvestors with safe and profitable use of their savings and to
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relieve them of the burden of direct responsibility of managingtheir own savings.
Types of investment companies
1. Open-end company - also called mutual funds
2. Closed-end company
Powers and functions
1. Offer for sale, sell, or deliver after sale, within thePhilippines, any security or any interest in any security,whether the issuer of such security is the investment company oranother person.
2. Purchase, redeem, retire, or otherwise acquire or attempt toacquire, within the Philippines, any security, or any interestin any security, whether the issuer of such security is suchinvestment company or another person.
Security
Any note, stock, treasury stock, bond, debenture, evidence ofindebtedness, certificate of interest or participation in anyprofit-sharing agreement, collateral trust certificate, pre-organization certificate or subscription, investment contract,voting trust certificate, certificate of deposit for a security,fractional undivided interest in oil, gas, or other mineralrights, or, in general, any interest or instrument commonlyknown as a “security” or any certificate of interest orparticipation in, temporary or interim certificate for, receiptfor, guarantee of, or warrant or right to subscribe to orpurchase, any of the foregoing. (Section 3(bb), RA 2629).
Note that there is an expanded definition under the RevisedSecurities Act.
Form
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All shares of its capital stock shall be common and votingshares.
Capitalization
No public offering may be made unless the investment company hasa paid up capital of at least P500,000 (Section 13(1), RA 2629).However, Rule 2.1 provides that the minimum subscribed and paidin capital should be at least 50 million.
FINANCING COMPANY ACT
Republic Act No. 5980, as amendedAn Act Regulating the Organization and Operation of FinancingCompanies
Declaration of policy
It is hereby declared to be the policy of the State to regulatethe activities of financing and leasing companies:
1. to place their operations on a sound, competitive, stableand efficient basis as other financial institutions;
2. to recognize and strengthen their critical role inproviding medium and long-term credit for investments incapital goods and equipment especially by small and mediumenterprises particularly in the countryside; and
3. to curtail and prevent acts or practices prejudicial tothe public interest.
As such, they may be in a better position to extend efficientservice in a fair manner to the general public and to industry,commerce and agriculture and thereby more fully contribute tothe sound development of the national economy.
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Financing companies
Financing companies are corporations, except banks, investmenthouses, savings and loans associations, insurance companies,cooperatives, and other financial institutions organized oroperating under special laws, which are primarily organized forthe purpose of extending credit facilities to consumers and toindustrial, commercial, or agricultural enterprises.
It may extend such credit:
1. by direct lending; or
2. by discounting or factoring commercial papers or accountsreceivable; or
3. by buying and selling contracts, leases, chattelmortgages, or other evidences of indebtedness; or
4. by financial leasing of movable as well as immovableproperty.
Financial leasing
Financial leasing is a mode of extending credit through a non-cancelable lease contract under which the lessor purchases oracquires, at the instance of the lessee, machinery, equipment,motor vehicles, appliances, business and office machines, andother movable or immovable property in consideration of theperiodic payment by the lessee of a fixed amount of moneysufficient to amortize at least seventy percent (70%) of thepurchase price or acquisition cost, including any incidentalexpenses and a margin of profit over an obligatory period of notless than two (2) years.
During the two-year period, the lessee has the right to hold anduse the leased property with the right to expense the leaserentals paid to the lessor. Lessee also bears the cost of
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repairs, maintenance, insurance and preservation of the leasedproperty.
However, lessee has no obligation or option to purchase theleased property from the owner-lessor at the end of the leasecontract.
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Liability of lessors
Financing companies shall not be liable for loss, damage orinjury caused by a motor vehicle, aircraft, vessel, equipment,machinery or other property leased to a third person or entityexcept where the motor vehicle, aircraft, vessel, equipment,machinery or other property is operated by the financingcompany, its employees or agents at the time of the loss, damageor injury.
Rights and powers of financing companies
Financing companies shall have the following powers, in additionto those granted by this Act and by other laws:
1. Engage in quasi-banking and money market operations withthe prior approval of the Bangko Sentral.
2. Engage in trust operations subject to the provisions ofthe General Banking Act upon prior approval of the BangkoSentral.
3. Issue bonds and other capital instruments subject topertinent rules and regulations of the Bangko Sentral.
4. Rediscount their paper with governmental financialinstitutions subject to relevant laws, rules andregulations.
5. Participate in special loan or credit programs sponsoredby or made available through governmental financialinstitutions.
6. Provide foreign currency loans and leases to enterpriseswho earn foreign currency by exports or other means,subject to existing laws and rules and regulations of theBangko Sentral.
Form of organization and capital requirements
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Financing companies shall be organized in the form of stockcorporations at least forty percent (40%) of the voting stock ofwhich is owned by citizens of the Philippines.
They shall have paid-up capital of not less than ten millionpesos (P10,000,000) in case the financing company is located inMetro Manila and first class cities, five million pesos(P5,000,000) in other classes of cities, and two million fivehundred thousand pesos (P2,500,000) in municipalities.
No foreign national may be allowed to own stock in any financingcompany unless the country of which he is a national accords thesame reciprocal rights to Filipinos in the ownership offinancing companies or their counterpart entities in suchcountry.
Requirements for registration
Aside from requiring compliance with the provisions of theCorporation Code, the SEC shall not register the articles ofincorporation of any financing company unless its office issatisfied on the evidence submitted to it, that:
1. All the requirements of existing laws to engage in thebusiness for which the applicant is proposed to beincorporated or organized have been complied with;
2. The organization, direction and administration, as well asthe integrity and responsibility of the organizers andadministrators reasonably assure the protection of theinterest of the general public; and
3. All the requirements of RA 5980 have been complied with.
Revocation and suspension of registration
1. Financing company is insolvent
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2. It violated any provision of the law
Supervision and regulation
The SEC is empowered to enforce the provisions of RA 5980, asamended, and issue implementing regulations except insofar asthe Bangko Sentral may have supervisory authority for financingcompanies licensed to perform quasi-banking functions, andinsofar as the Monetary Board has authority to prescribefinancing company rates and charges.
Prohibited acts
The Act imposes a fine of not less than P10,000 but not morethan P100,000, or imprisonment of not more than six(6)months orboth, at the discretion of the court, on "persons, associations,partnerships or corporations, including managing officersthereof," upon the following unlawful acts:
1. Engaging in the business of finance companies withoutauthority from the SEC through advertisement in whateverfrom, or through other representations without authority.
2. Using trade or firm name containing the words "financingcompany" or "leasing company" or "finance and leasingcompany" or "finance and investment company" or anyother designation that would give the public theimpression that it is engaged in the business of afinancing company or leasing company without authority.
3. Holding themselves out to be financing companies withoutauthority from the SEC.
4. Any officer, employee, or agent of a financing company whoshall knowingly and willingly make any statement in anyapplication, report or document required to be filed underthe Act, which is false or misleading with respect to anymaterial fact, or overvalue or aid in overvaluing any
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securities for the purpose of influencing in any way theaction of the company on any loan, or discounting.
5. Any officer, employee or examiner of the SEC directlycharged with the implementation of the Act who shallcommit, connive, aid or assist in the commission of actsenumerated above.
PAWNSHOPS
Presidential Decree 114in relation to CB Circular No. 374
Pawnshop
A pawnshop is a person (single proprietorship) or entity(corporation/partnership) engaged in the business of lendingmoney on personal property delivered as security for loans.
Purpose of the law
To regulate the establishement of pawnshops and to place theiroperation on any sound and stable basis:
1. To derive maximum benefit as source of credit
2. To prevent and mitigate practices prejudicial to thepublic; and
3. To prescribe minimum requirements
Requirements for establishing a pawnshop
1. Registration
a. With DTI if single proprietorship
b. With SEC if corporation or partnership
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c. In all cases, with the BSP
d. With the Board of Investments if there is foreign equityparticipation
2. Secure a license to operate from the LGU concerned
3. Minimum paid in capital of P100,000
4. Citizenship
a. If single proprietor, must be a Filipino
b. If partnership, 70% of capital owned by Filipinos
c. If corporation, 70% of voting capital should be owned byFilipinos
d. If no voting stock, 70% of members entitled to vote shouldbe Filipinos
General requirements as to operation
Owner who has other businesses not directly related orincidental to his pawnshop business must keep the latterseparate from his other businesses.
Maintain adequate security i.e. fire and burglar proof safewhere pawns/records are kept.
Insure place of business and pawns against fire and burglars.
Accountable officers/employees shall be bonded.
Accounting records
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Loans cannot be less than 30% of the appraised value of thepersonal property unless the borrower stipulated in writing thathe is borrowing a lesser amount.
In addition to interest charges, pawnshops may impose a maximumservice charge of P5.00 but in no case to exceed 1% of theprincipal loan.
No other charges, fees, and commissions shall be collected bypawnshop in connection with the loan transaction or paymentthereof. Borrower shall not pay insurance premiums.
Conduct of business
1. Borrower offers to pledge personal property as security forloan.
2. Property is appraised.
3. Loan agreement is entered into.
4. Pawnshop issues receipt (pawn ticket).
5. Pawnshop lends money to pawner.
6. Pawner pays charges not to exceed P5.00.
7. Pawned property is placed in vault/safe.
8. If upon maturity, borrower fails to pay, pawnshop will wait for90 days after maturity before it can sell the thing pledged at apublic auction.
9. Pawnshop has to comply with notice requirements, to wit:
a. Before the 90-day period expires, notice to the borrowerthat the pawn will be sold if not redeemed within 90 daysfrom maturity specifying time, date, and place of auctionsale.
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b. If there is no redemption, pawnshop will sell the pawnafter publishing a notice of sale in at least twonewspapers in the city/municipality of operation six (6)days before the date of sale. In remote areas where thereis no newspaper, by posting at City Hall or MunicipalBuilding and two other conspicuous public places wherepawnshop operates.
c. Sale of pawn by auctioneer/notary public to higher bidder.
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Supervisory powers of the Bangko Sentral
BSP official in charge of non-bank financial intermediaries orauthorized agent may inspect, examine, and investigate therecords of pawnshop to ensure compliance with PD 114.
Said official or agent makes recommendations to the MonetaryBoard.
Impose penalties for violation of PD 114.
TRUST CORPORATIONS
Chapter VIIGeneral Banking Act
Trust corporation
A trust corporation is any corporation formed or organized forthe purpose of acting as trustee, administering any trust orholding property in trust or on deposit for the use, benefit orbehoof of others.
A corporation or a bank may engage in the business of a trustcorporation.
Standard of care
A trust company or any bank authorized to engaged in thebusiness of a trust company shall administer the funds orproperty under its custody with the skill, care, prudence anddiligence necessary under the circumstances then prevailing thata prudent man, acting under like capacity and familiar with suchmatters, would exercise in the conduct of an enterprise of alike character and with similar aims.
No trust company or bank engaged in the business of a trustcompany shall, for the account of the trustor or the beneficiary
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of the trust, purchase or acquire property from, or sell,transfer, assign or lend money or property to, or purchase debtinstruments of any of the departments, directors, officers,stockholders, or employees of the trust company or bank, orrelatives within the first degree of consanguinity or affinity,or the related interests, of such director, officers, andstockholders, unless the transaction is specifically authorizedby the trustor and the relationship of the trustee and the otherparty involved in the transaction is fully disclosed to thetrustor or beneficiary of the trust prior to the transaction.
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Powers (in addition to general powers incident to corporations)
1. To act as trustee on any mortgage or bond issued by anymunicipality, corporation, or any body politic and to accept andexecute any other municipal or corporate trust not inconsistentwith law.
2. To act under the order or appointment of any court of record asguardian, receiver, trustee or depository of the estate of anyminor, insane person, idiot, habitual drunkard, or otherincompetent or irresponsible person, and as receiver anddepository of any moneys paid into court by parties to any legalproceedings and of property of any kind which may be broughtunder the jurisdiction of the court by property legalproceedings.
3. To act as the executor of any last will or testament when it isnamed in the last will and testament as the executor thereof.
4. To act under appointment of a court of competent jurisdiction asadministrator of the estate of any deceased person, with thewill annexed, or as administrator of the estate of any deceasedperson when there is no will, and when in either case there isno person qualified, competent, willing, able and entitled toaccept such administration.
5. To accept and execute any legal trust confided to it by anycourt 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 suchrules and regulations as may be prescribed by the MonetaryBoard.
Commercial banking activity
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A trust company may, with the approval of the Monetary Board, doa commercial banking business, but such business must be keptseparate and distinct from its trust business.
Any banking corporation may, with the approval of the MonetaryBoard, be authorized to engage in the business of a trustcompany, but it shall be subject to the provisions on trustoperations.
Bond/security requirements and paid in capital
Except as may otherwise be provided in this Act, no bond orother security shall be required from any trust company for thefaithful 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, requireany corporation which shall seek to be or shall have been soappointed to give adequate security for the protection of thefunds or property confided to the corporation and, upon failureof such corporation to give the security required, itsappointment as trustee, executor, administrator, guardian,receiver or depositary shall be revoked.
Section 65, however, provides: “As security for the faithfulperformance of its trust duties, every trust company, beforetransacting trust business, shall carry on deposit with theCentral Bank, cash or securities approved by the Monetary Boardin an amount equal to not less than two hundred and fiftythousands pesos (P250,000). This may be increased by the CentralBank.
Paid in capital and surplus of the company must be at leastequal to the amount required to be deposited with the centralBank.
Separation of trust funds and property
110BANKING LAWS
All moneys, properties, or securities received by any trustcompany shall be kept separate and distinct from all otherfunds, properties and assets of its general business.
The accounts of all such moneys, properties or securities shalllikewise be kept separate and distinct from the accounts of itsgeneral business.
Capital stock may be invested
The capital stock and funds of a trust company may be loaned orotherwise invested as its by laws prescribe; if it does acommercial banking business in addition to its trust business,the investment of its funds other than trust funds shall begoverned by the relevant provisions of the General Banking Act.
Surplus and dividend
Every trust company, before the distribution of a dividend,shall carry to surplus 10% of its net profits accruing since thelast preceding dividend until the surplus shall amount to 20% ofits authorized capital stock and no part of the surplus shall atany time be paid out in dividends, but losses accruing in thecourse of its business may be charged against the surplus.
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