Basic Function of Banks

• LOAN FUNCTION

– Mobilization of savings and allocating resources.

• Grant, Purpose, and Requirement of Loans, Secs. 39 and 40, GBL

– Only in amounts and for the periods of time essential for the effective completion of the operations to be financed.

– Purpose: Stated. If not used for the said purpose, terminate the loan and demand for immediate repayment.

Grant, Purpose, and Requirement of Loans, Secs. 39 and 40, GBL

• Capacity of Debtor to fulfill his commitment.

• Statement of assets and liabilities and the like

• Financial Statements submitted to the BIR for taxation purposes.

• If false or incorrect, bank may terminate the loan and demand repayment or liquidation of the obligation.

Prohibited Transactions – Secs. 55.1(c), 55.1(d), and 55.2, GBL

• 55.1. No director, officer, employee, or agent of any bank shall —

• (c) Accept gifts, fees or commissions or any other form of remuneration in connection with the approval of a loan or other credit accommodation from said bank;

• (d) Overvalue or aid in overvaluing any security for the purpose of influencing in any way the actions of the bank or any bank; or

Prohibited Transactions – Secs. 55.1(c), 55.1(d), and 55.2, GBL

• 55.2. No borrower of a bank shall —

• (a) Fraudulently overvalue property

• (b) Furnish false or make misrepresentation or suppression of material facts

• (c) Attempt to defraud the said bank in the event of a court action to recover a loan or other credit accommodation; or

• (d) Offer any director, officer, employee or agent of a bank any gift, fee, commission, or any other form of compensation in order to influence

• SINGLE BORROWER’S LIMIT

• Total amount of loans, credit accommodations and guarantees that may be extended to any person, partnership, association, corporation or other entity shall at no time exceed 25% of the net worth of a bank. (Sec. 35, GBL)

• + 10%, adequately secured, unless MB prescribes otherwise

• Exceptions:

– MB otherwise prescribe for reasons of national interest.

– Deposits of rural banks with government-owned of controlled financial institutions.

• RESTRICTIONS ON BANK EXPOSURE TO DOSRI

• No director or officer of any bank shall directly or indirectly, for himself or as the representative or agent of others, borrow from such bank nor shall he become a guarantor, indorser or surety for loans form such bank or others or in any manner be an obligor or incur any contractual liability to the bank except with the written approval of the majority of all directors of the bank, excluding the director concerned. (Sec. 36, GBL)

• ARMS LENGTH RULE

• Account should be upon terms not less favorable to the bank than those offered to others.

• EXTENT OF LOAN TO DOSRI

• In excess of five percent (5%) of the capital and surplus of the bank, or in the maximum amount permitted by law, whichever is lower.

• Waiver of the secrecy of his deposits. (Sec. 26, NCBA)

Interest – Art. 1956, Civil Code

• No ceiling – Sec. 1-a, 4-a, 45 of Usury Law; Bacolor v. Bango Filipino Savings and Mortgage Bank, Dagupan City Branch, 515 SCRA 79 (2007)

– “For sometime now, usury has been legally non-inexistent and that interest can now be charged as lender and borrower may agree upon.”

• In the absence of stipulation

• Escalation clause; when allowable – Art. 1308, Civil Code; Philippine National Bank v. Court of Appeals, 196 SCRA 536 (1991)

1. There can be an increase in interest if increased by law or by the Monetary Board; and

2. In order for such a stipulation to be valid, it must include a provision for reduction of the stipulated interest in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board.

• Floating rates of interest –Consolidated Bank and Trust Corporation (Solid Bank) v. Court of Appeals, 356 SCRA 671 (2001)

• “A stipulation for a floating rate of interest in a letter of credit in which

there is no reference rate set either by it or by the central bank, leaving the determination thereof to the sole will and control of the lender bank is invalid.”

Basic Function of Banks

• DEPOSIT FUNCTION

• entities that only extend loans but do not accept deposits from the public is not considered performing banking business.

• Nature of Deposit

• Deposits as Simple Loans

• A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality.

• RELATIONSHIP OF BANK AND DEPOSITOR

• Debtor and Creditor : Contract of Loan Art. 1980, NCC “fixed, savings and current deposits of money in banks and similar

institutions shall be governed by the provisions concerning simple loans.” However, unlike ordinary contracts of simple loan, bank deposits are

subject to special rules provided for by special laws as well as BSP regulations.

• Serrano v. Central Bank

• “ Bank deposits are in the nature of irregular deposits. They are really loans because they earn interest…”

• “…Failure of the respondent bank to honor the time deposit is failure to pay its obligations as a debtor and not a breach of trust arising from a depositary’s failure to return the subject matter of the deposit.”

Bank as Debtor

• Deposit is voluntary agreement; “Know Your Customer” standards

• Bank acquires ownership of money deposited; obligation to pay amount, but no obligation to return the same money– BPI Family Bank v. CA, Franco, 538 SCRA 184 (2007)

• Specific or determinate thing v. generic and fungible.

• Obligation is to pay in equal amount upon demand, but not the exact same thing deposited.

Bank as Debtor

• Deposit is voluntary agreement; “Know Your Customer” standards

• Circular No. 251 (07/07/00), as amended by Circular No, 333 (05/30/02)

• “Know your client policy”

• Report to AMLC any suspicious transactions, not to allow anonymous accounts or accounts under fictitious names.

“KYC” Policy

• Circular No. 258 (09/06/00)

– Establish and record the true identity of clients under a numbered account system as authorized under existing banking rules and regulations.

• Circular No. 279 (04/02/01)

– Phase out within 1 year all anonymous or fictitious accounts and submit annually a certification that there is monitoring of

compliance with existing AMLA regulations. Bank as Debtor

• Payment to proper party-depositor –Bank of the Philippine Islands v. Court of Appeals, 232 SCRA 302 (1994)

• “ Payment made by the debtor to the wrong party does not extinguish the obligation as to the creditor who is without fault or negligence, even if the debtor acted in utmost good faith and by mistake as to the person of the creditor, or through error induced by fraud of a third person.”

Bank as Debtor

• Deposits are not preferred credits – Central Bank v. Morfe, 63 SCRA 114 (1975)

• “A contrary rule or practice would be productive of injustice, mischief and confusion. To recognize such judgments as entitled to priority would mean that depositors in insolvent banks, after learning that the bank is insolvent as shown by the fact that it can no longer pay withdrawals or that it has closed its doors or has been enjoined by the Monetary Board from doing business, would rush to the courts to secure judgments for the payment of their deposits.”

Bank as Debtor

• Bank has right to compensation –Bank of the Philippine Islands v. Court of Appeals, 512 SCRA 620 (2007)

• The relationship between banks and depositors has been held to be that of creditor and debtor. Thus, legal compensation may take place.

Bank’s Duty of Utmost Care– Sec. 2, GBL

• Declaration Of Policy. - The State recognizes the vital role of banks providing an environment conducive to the sustained development of the national economy and the fiduciary nature of banking that requires high standards of integrity and performance. In furtherance thereof, the State shall promote and maintain a stable and efficient banking and financial system that is globally competitive, dynamic and responsive to the demands of a developing economy.

Kinds of Deposit

• Demand Deposits – Secs. 58-60, NCBA

• Savings Deposits

• Negotiable Order of Withdrawal (NOW) Accounts

• Time Deposits

• Foreign Currency Deposits – Secs. 2 and 3, Foreign Currency Denominated Accounts

Capacity of Depositors

• Minors – Sec. 1, Presidential Decree No. 734; Sec. 22, Thrift Banks Act

• Married Women – Sec. 5, Republic Act No. 7192

• Corporations: Through signatories designated by Board of Directors – Sec. 23, Corporation Code

• Bank Officers and Employees: GR: Prohibited from maintaining demand deposits or current accounts in banking office where they are assigned –Sec. X204, MRB

Opening of Deposit Accounts

• Know Your Customer Standards: At least 3 specimen signatures updated every 5 years, ID optional

• Prohibitions:

– Anonymous Accounts/Fictitious Names – Sec. 9(a), AMLA

– Pseudonyms – Art. 178, Revised Penal Code

– Exception: Numbered accounts – Sec. 9(a), AMLA; Sec. 3(1), FCDA

– Joint Accounts – Arts. 485, 1207 and 1208, Civil Code

Other Services/Functions/Operations – Sec. 53, pars. 1-3, GBL

• Custodian of Funds, Documents, Valuable Objects – Sec. 53.1, GBL

• Financial Agent – Sec. 53.2, GBL

• Collection/Payment Agent – Sec. 53.3, GBL

• Financial Adviser – Sec. 53.4, GBL

• Renting Out Safety Deposit Boxes – Sec. 53.5, GBL; CA Agro-Industrial Development Corporation v. Court of Appeals, 219 SCRA (1993)

• Issue Guarantees – See Sec. 74, General Banking Act

• Credit Card Operations

• Prohibited Acts

– Insurance business – Sec. 54, GBL; Sec. 2, Insurance Code

– Outsourcing of bank functions – Sec. 55(1)(e), GBL

• Penalty for Violations – Sec. 66, GBL; Sec. 34-37, NCBA

– Perez v. Monetary Board, 20 SCRA 592 (1967)

– Fine, imprisonment

– Suspension or removal of director or officer

– Dissolution of bank