1 Notes General Banking Law

Course Outline (A.Y.
2021-2022)
LLb 328 - Special Commercial Laws (v1)
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GENERAL BANKING ACT

(R.A. No. 8791, as amended)
A. Definition (Sec. 3.1)

"Banks" shall refer to entities engaged in the lending of funds obtained in the form of deposits
B. Elements
- Republic of the Philippines v. Security Credit and Acceptance Corp., G.R. No. L-
20583, 23 Jan 1967
- Central Bank of the Philippines v. Morfe, G.R. No. L-20119, 30 Jun 1967
- Bañas v. Asia Pacific Finance Corp., G.R. No. 128703, 18 Oct 2000
a. Engaged in lending of funds
b. Obtained in the form of deposits
c. From the public, which shall mean 20 or more persons (Sec. 8.2)
C. Classification of banks (Sec. 3; Sec. X101, Manual of Regulations for Bank)

Banks are classified into the following subject to the power of the Monetary Board to create other classes or kinds of
banks: (1) Universal banks (UBs); (2) Commercial banks (KBs); (3) Thrift banks (TBs), as defined in Republic Act
(R.A.) No. 7906, which shall be composed of: (a) savings and mortgage banks, (b) stock savings and loan
associations, and (c) private development banks; (4) Rural banks (RBs), as defined in R. A. No. 7353; (5) Cooperative
banks (Coop Banks), as defined in R. A. No. 6938; and (6) Islamic banks (IBs), as defined in R.A. No. 6848.
D. Distinction of banks from quasi-banks and other entities (Sec. 4[last para]; Sec. X234,
Manual of Regulations for Banks)
Sec. 4, GBL. For the purposes of this Act, "quasi-banks" shall refer to entities engaged in the borrowing of
funds through the issuance, endorsement or assignment with recourse or acceptance of deposit
substitutes as defined in Section 95 of Republic Act No. 7653 (hereafter the "New Central Bank Act")
for purposes of re-lending or purchasing of receivables and other obligations.
MORB. § X234.1 Elements of quasibanking. The essential elements of quasibanking are: a. Borrowing
funds for the borrower’s own account; b. Twenty (20) or more lenders at any one time; c. Methods of
borrowing are issuance, endorsement, or acceptance of debt instruments of any kind, other than
deposits, such as acceptances, promissory notes, participations, certificates of assignments or similar
instruments with recourse, trust certificates, repurchase agreements, and such other instruments as the
Monetary Board may determine; and d. The purpose of which is (1) relending, or (2) purchasing
receivables or other obligations.
E. Ownership/capitalization of banks
School of Law | UNIVERSITY OF SAN JOSE-RECOLETOS | Magallanes Street, 6000 Cebu City | www.usjr.edu.ph
Course Outline (A.Y. 2021-2022)
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a. Organization (Sec. 8)
i. Stock corporation (Sec. 8.1)

8.1 That the entity is a stock corporation
ii. Funds obtained from the public (Sec. 8.2)

8.2 That its funds are obtained from the public, which shall mean twenty (20) or more
persons
iii. Minimum capital requirements (Sec. 8.3;

- BSP Circular No. 257, s.2000
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iv. Capability and other requirements (Sec. 8[para. 2])

Sec. 8. No new commercial bank shall be established within three (3) years from the
effectivity of this Act. In the exercise of the authority granted herein, the Monetary Board
shall take into consideration their capability in terms of their financial resources and technical
expertise and integrity. The bank licensing process shall incorporate an assessment of the
bank's ownership structure, directors and senior management, its operating plan and internal
controls as well as its projected financial condition and capital base.
b. Stockholdings
i. Foreign stockholdings
1. Individuals and non-banks (Sec. 11)
Section 11. Foreign Stockholdings. - Foreign individuals and non-bank
corporations may own or control up to forty percent (40%) of the voting stock of a
domestic bank. This rule shall apply to Filipinos and domestic non-bank
corporations. (12a; 12-Aa) The percentage of foreign-owned voting stocks in a
bank shall be determined by the citizenship of the individual stockholders in that
bank. The citizenship of the corporation which is a stockholder in a bank shall
follow the citizenship of the controlling stockholders of the corporation,
irrespective of the place of incorporation.
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2. Foreign banks (Secs. 11 & 73)
Section 11. Foreign Stockholdings. - Foreign individuals and non-bank
corporations may own or control up to forty percent (40%) of the voting stock of a
domestic bank. This rule shall apply to Filipinos and domestic non-bank
corporations. (12a; 12-Aa) The percentage of foreign-owned voting stocks in a
bank shall be determined by the citizenship of the individual stockholders in that
bank. The citizenship of the corporation which is a stockholder in a bank shall
follow the citizenship of the controlling stockholders of the corporation,
irrespective of the place of incorporation.
Section 73. Acquisition of Voting Stock in a Domestic Bank. - Within seven (7)
years from the effectivity of this act and subject to guidelines issued pursuant to
the Foreign Banks Liberalization Act, the Monetary Board may authorize a foreign
bank to acquire up to one hundred percent (100%) of the voting stock of only one
(1) bank organized under the laws of the Republic of the Philippines. Within the
same period, the Monetary Board may authorize any foreign bank, which prior to
the effectivity of this Act availed itself of the privilege to acquire up to sixty
percent (60%) of the voting stock of a bank under the Foreign Banks Liberalization
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Act and the Thrift Banks Act, to further acquire voting shares such bank to the
extent necessary for it to own one hundred percent (100%) of the voting stock
thereof. In the exercise of the authority, the Monetary Board shall adopt measures
as may be necessary to ensure that at all times the control of seventy percent
(70%) of the resources or assets of the entire banking system is held by banks
which are at least majority-owned by Filipinos. Any right, privilege or incentive
granted to a foreign bank under this Section shall be equally enjoyed by and
extended under the same conditions to banks organized under the laws of the
Republic of the Philippines. (Secs. 2 and 3, RA 7721)
- See: R.A. No. 7721, as amended
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ii. Filipino stockholdings (Sec. 11)

Section 11. Foreign Stockholdings. - Foreign individuals and non-bank corporations may
own or control up to forty percent (40%) of the voting stock of a domestic bank. This rule
shall apply to Filipinos and domestic non-bank corporations. (12a; 12-Aa) The percentage of
foreign-owned voting stocks in a bank shall be determined by the citizenship of the
individual stockholders in that bank. The citizenship of the corporation which is a
stockholder in a bank shall follow the citizenship of the controlling stockholders of the
corporation, irrespective of the place of incorporation.
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1. Stockholdings of family groups or related interests (Secs. 12 & 13)

Section 12. Stockholdings of Family Groups of Related Interests. - Stockholdings
of individuals related to each other within the fourth degree of consanguinity or
affinity, legitimate or common-law, shall be considered family groups or related
interests and must be fully disclosed in all transactions by such corporations or
related groups of persons with the bank.
Section 13. Corporate Stockholdings. - Two or more corporations owned or
controlled by the same family group or same group of persons shall be considered
related interests and must be fully disclosed in all transactions by such
corporations or related group of persons with the bank.
2. Required public offering (Sec. X102.1, Manual of Regulations for
Banks)
§ X102.1 Suspension of the grant of new banking licenses on the establishment of
new banks
- SEC MC No. 13, s.2017
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c. Directors and Officers
i. Composition of Board (Secs. 15 & 17; Sec. 7, R.A. No. 7721, as amended;
Secs. 22 & 24, R.A. No. 11232)
Section 15. Board of Directors. - The provisions of the Corporation Code to the
contrary notwithstanding, there shall be at least five (5), and a maximum of
fifteen (15) members of the board or directors of a bank, two (2) of whom shall
be independent directors. An "independent director" shall mean a person other
than an officer or employee of the bank, its subsidiaries or affiliates or related
interests. (n) Non-Filipino citizens may become members of the board of
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directors of a bank to the extent of the foreign participation in the equity of
said bank. (Sec. 7, RA 7721) The meetings of the board of directors may be
conducted through modern technologies such as, but not limited to,
teleconferencing and video-conferencing.
Section 17. Directors of Merged or Consolidated Banks. - In the case of a bank
merger or consolidation, the number of directors shall not exceed twenty-one
(21).
Sec. 7., RA 7721. Board of Directors. — Non-Filipino citizens may become members of the
Board of Directors of a bank to the extent of the foreign participation in the equity of said
bank.
ii. Qualifications
1. Own at least one share (Sec. 22, R.A. No. 11232)
2. “Fit and Proper” rule (Sec. 16)
- Busuego v. Court of Appeals, G.R. No. 95326, 11 Mar 1999
3. Other minimum qualifications (Guidelines for the Establishment of

Banks)
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iii. Disqualifications (Guidelines for the Establishment of Banks)

1. Criminal conviction (Sec. 26, R.A. No. 11232)
Section 26. Disqualification of Directors, Trustees or Officers. - A person shall be
disqualified from being a director, trustee or officer of any corporation if, within
five (5) years prior to the election or appointment as such, the person was:
(a) Convicted by final judgment:
(1) Of an offense punishable by imprisonment for a period exceeding six (6) years
(2) For violating this Code; and
(3) For violating Republic Act No. 8799, otherwise known as "The Securities
Regulation Code"
(b) Found administratively liable for any offense involving fraudulent acts;
(c) By a foreign court or equivalent foreign regulatory authority for acts, violations
or misconduct similar to those enumerated in paragraphs (a) and (b) above
2. Public officials (Sec. 19)
Section 19. Prohibition on Public Officials. - Except as otherwise provided in the
Rural Banks Act, no appointive or elective public official whether full-time or
part-time shall at the same time serve as officer of any private bank, save in cases
where such service is incident to financial assistance provided by the government
or a government owned or controlled corporation to the bank or unless otherwise
provided under existing laws.
3. MB member/BSP personnel (Secs. 9 & 27, R.A. No. 7653, as
amended)
Section 9. Disqualifications. - In addition to the disqualifications
imposed by Republic Act No. 6713, a member of the Monetary
Board is disqualified from being a director, officer, employee,
consultant, lawyer, agent or stockholder of any bank, quasi-bank
or any other institution which is subject to supervision or
examination by the Bangko Sentral, in which case such member
shall resign from, and divest himself of any and all interests in
such institution before assumption of office as member of the
Monetary Board.
Section 9. Disqualifications. - In addition to the disqualifications
imposed by Republic Act No. 6713, a member of the Monetary
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Board is disqualified from being a director, officer, employee,
consultant, lawyer, agent or stockholder of any bank, quasi-bank
or any other institution which is subject to supervision or
examination by the Bangko Sentral, in which case such member
shall resign from, and divest himself of any and all interests in
such institution before assumption of office as member of the
Monetary Board.
No person shall be a member of the Monetary Board if he has been
connected directly with any multilateral banking or financial
institution or has a substantial interest in any private bank in the
Philippines, within one (1) year prior to his appointment; likewise,
no member of the Monetary Board shall be employed in any such
institution within two (2) years after the expiration of his term
except when he serves as an official representative of the
Philippine Government to such institution.
Section 27. Prohibitions. - In addition to the prohibitions found in
Republic Act Nos. 3019 and 6713, personnel of the Bangko
Sentral are hereby prohibited from:
(a) being an officer, director, lawyer or agent, employee, consultant or
stockholder, directly or indirectly, of any institution subject to
supervision or examination by the Bangko Sentral, except non-
stock savings and loan associations and provident funds
organized exclusively for employees of the Bangko Sentral, and
except as otherwise provided in this Act;
(b) directly or indirectly requesting or receiving any gift, present or
pecuniary or material benefit for himself or another, from any
institution subject to supervision or examination by the Bangko
Sentral;
(c) revealing in any manner, except under orders of the court, the
Congress or any government office or agency authorized by law,
or under such conditions as may be prescribed by the Monetary
Board, information relating to the condition or business of any
institution. This prohibition shall not be held to apply to the giving
of information to the Monetary Board or the Governor of the
Bangko Sentral, or to any person authorized by either of them, in
writing, to receive such information; and
(d) borrowing from any institution subject to supervision or
examination by the Bangko Sentral shall be prohibited unless said
borrowings are adequately secured, fully disclosed to the
Monetary Board, and shall be subject to such further rules and
regulations as the Monetary Board may prescribe: Provided,
however, That personnel of the supervising and examining
departments are prohibited from borrowing from a bank under
their supervision or examination.
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iv. Compensation and other benefits (Sec. 18; Sec. 29, R.A. No. 11232)
Section 18. Compensation and Other Benefits of Directors and Officers. To protect the finds
of depositors and creditors the Monetary Board may regulate the payment by the bank to its
directors and officers of compensation, allowance, fees, bonuses, stock options, profit sharing
and fringe benefits only in exceptional cases and when the circumstances warrant, such as but
not limited to the following:
18.1. When a bank is under comptrollership or conservatorship; or
18.2. When a bank is found by the Monetary Board to be conducting business in an uunsafe
or unsound manner; or
18.3. When a bank is found by the Monetary Board to be in an unsatisfactory financial
condition
v. Meetings (Sec. 15)

The meetings of the board of directors may be conducted through modern technologies such
as, but not limited to, teleconferencing and video-conferencing
vi. Powers of directors

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vii. “Apparent Authority” doctrine

- Philippine Commercial International Bank v. Court of Appeals,
G.R. Nos. 121413, 121479 & 128604, 29 Jan 2001
It is a well-settled rule that the relationship between the payee or holder
of commercial paper and the bank to which it is sent for collection is,
in the absence of an agreement to the contrary, that of principal and
agent.22 A bank which receives such paper for collection is the agent
of the payee or holder.
Even considering arguendo, that the diversion of the amount of a check
payable to the collecting bank in behalf of the designated payee may
be allowed, still such diversion must be properly authorized by the
payor. Otherwise stated, the diversion can be justified only by proof
of authority from the drawer, or that the drawer has clothed his agent
with apparent authority to receive the proceeds of such check.
viii. Prohibited acts (Sec. 55.1)

Section 55. Prohibited Transactions
55.1. No director, officer, employee, or agent of any bank shall –
(a) Make false entries in any bank report or statement or participate in any fraudulent
transaction, thereby affecting the financial interest of, or causing damage to, the bank or any
person;
(b) Without order of a court of competent jurisdiction, disclose to any unauthorized person any
information relative to the funds or properties in the custody of the bank belonging to private
individuals, corporations, or any other entity: Provided, That with respect to bank deposits, the
provisions of existing laws shall prevail
(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
(e) Outsource inherent banking functions
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F. Incorporation (Sec. 14; Secs. 16, 45, & 116, R.A. No. 11232)
Section 14. Certificate of Authority to Register. - 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 seal. Such certificate shall not be issued
unless the Monetary Board is satisfied from the evidence submitted to it:
14.1 That all requirements of existing laws and regulations to engage in the business for which the
applicant is proposed to be incorporated have been complied with;
14.2 That the public interest and economic conditions, both general and local, justify the
authorization; and
14.3 That the amount of capital, the financing, organization, direction and administration, as well as
the integrity and responsibility of the organizers and administrators reasonably assure the safety of
deposits and the public interest.
The Securities and Exchange Commission shall not register the by-laws of any bank, or any amendment
thereto, unless accompanied by a certificate of authority from the Bangko Sentral.
G. Operation (Sec. 6)
Section 6. Authority to Engage in Banking and Quasi-Banking Functions. - No person or entity shall
engage in banking operations or quasi-banking functions without authority from the Bangko
Sentral: .Provided, however, That an entity authorized by the Bangko Sentral to perform universal or
commercial banking functions shall likewise have the authority to engage in quasi-banking functions.
The determination of whether a person or entity is performing banking or quasi-banking functions without
Bangko Sentral authority shall be decided by the Monetary Board. To resolve such issue, the Monetary
Board may; through the appropriate supervising and examining department of the Bangko Sentral,
examine, inspect or investigate the books and records of such person or entity. Upon issuance of this
authority, such person or entity may commence to engage in banking operations or quasi-banking function
and shall continue to do so unless such authority is sooner surrendered, revoked, suspended or annulled by
the Bangko Sentral in accordance with this Act or other special laws.
The department head and the examiners of the appropriate supervising and examining department are
hereby authorized to administer oaths to any such person, employee, officer, or director of any such entity
and to compel the presentation or production of such books, documents, papers or records that are
reasonably necessary to ascertain the facts relative to the true functions and operations of such person or
entity. Failure or refusal to comply with the required presentation or production of such books, documents,
papers or records within a reasonable time shall subject the persons responsible therefore to the penal
sanctions provided under the New Central Bank Act.
Persons or entities found to be performing banking or quasi-banking functions without authority from the
Bangko Sentral shall be subject to appropriate sanctions under the New Central Bank Act and other
applicable laws.
a. Authority required
b. Monetary board determination
c. Unauthorized advertisement (Sec. 64)

Section 64. Unauthorized Advertisement or Business Representation. - No person, association, or
corporation unless duly authorized to engage in the business of a bank, quasi-bank, trust entity, or
savings and loan association as defined in this Act, or other banking laws, shall advertise or hold
itself out as being engaged in the business of such bank, quasi-bank, trust entity, or association, or
use in connection with its business title, the word or words "bank", "banking", "banker", "quasi-
bank", "quasi-banking", "quasi-banker", "savings and loan association", "trust corporation", "trust
company" or words of similar import or transact in any manner the business of any such bank,
corporation or association.
d. Change in name
- P.C. Javier & Sons Inc. v. Court of Appeals, G.R. No. 129552, 29 Jun
2005
A change in the corporate name does not make a new corporation, whether
effected by a special act or under a general law. It has no effect on the identity of
the corporation, or on its property, rights, or liabilities.21 The corporation, upon
such change in its name, is in no sense a new corporation, nor the successor of
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the original corporation. It is the same corporation with a different name, and its
character is in no respect changed.
e. Sanctions for operating without authority (Sec. 6 in rel. to Sec. 66)

Section 6. Authority to Engage in Banking and Quasi-Banking Functions. - No person or entity
shall engage in banking operations or quasi-banking functions without authority from the Bangko
Sentral: .Provided, however, That an entity authorized by the Bangko Sentral to perform universal
or commercial banking functions shall likewise have the authority to engage in quasi-banking
functions.
The determination of whether a person or entity is performing banking or quasi-banking functions
without Bangko Sentral authority shall be decided by the Monetary Board. To resolve such issue,
the Monetary Board may; through the appropriate supervising and examining department of the
Bangko Sentral, examine, inspect or investigate the books and records of such person or entity.
Upon issuance of this authority, such person or entity may commence to engage in banking
operations or quasi-banking function and shall continue to do so unless such authority is sooner
surrendered, revoked, suspended or annulled by the Bangko Sentral in accordance with this Act or
other special laws.
The department head and the examiners of the appropriate supervising and examining department
are hereby authorized to administer oaths to any such person, employee, officer, or director of any
such entity and to compel the presentation or production of such books, documents, papers or
records that are reasonably necessary to ascertain the facts relative to the true functions and
operations of such person or entity. Failure or refusal to comply with the required presentation or
production of such books, documents, papers or records within a reasonable time shall subject the
persons responsible therefore to the penal sanctions provided under the New Central Bank Act.
Section 66. Penalty for Violation of this Act. - Unless otherwise herein provided, the violation of
any of the provisions of this Act shall be subject to Sections 34, 35, 36 and 37 of the New Central
Bank Act. If the offender is a director or officer of a bank, quasi-bank or trust entity, the Monetary
Board may also suspend or remove such director or officer. If the violation is committed by a
corporation, such corporation may be dissolved by quo warranto proceedings instituted by the
Solicitor General.
H. Nature of banking business (Sec. 2)

Section 2. 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
a. Vital role in economy
i. Subject to reasonable regulation by the State

- Central Bank of the Phils. v. Court of Appeals, G.R. Nos. 88353 &
92943, 08 May 1992
It must be stressed in this connection that the banking business is properly
subject to reasonable regulation under the police power of the state because of
its nature and relation to the fiscal affairs of the people and the revenues of the
state. 55 Banks are affected with public interest because they receive funds
from the general public in the form of deposits. Due to the nature of their
transactions and functions, a fiduciary relationship is created between the
banking institutions and their depositors. Therefore, banks are under the
obligation to treat with meticulous care and utmost fidelity the accounts of
those who have reposed their trust and confidence in them.
ii. Strikes and lockouts (Sec. 22; Article 278[g], Labor Code, as amended)
Section 22. Strikes and Lockouts. - The banking industry is hereby declared as indispensable
to the national interest and, notwithstanding the provisions of any law to the contrary, any
strike or lockout involving banks, if unsettled after seven (7) calendar days shall be reported
by the Bangko Sentral to the secretary of Labor who may assume jurisdiction over the
dispute or decide it or certify the sane to the National Labor Relations Commission for
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compulsory arbitration. However, the President of the Philippines may at any time intervene
and assume jurisdiction over such labor dispute in order to settle or terminate the same.
b. Fiduciary nature of banking business
i. Degree of diligence required

- Simex International, Inc. v. Court of Appeals, G.R. No. 88013, 19
Mar 1990
In every case, the depositor expects the bank to treat his account with the
utmost fidelity, whether such account consists only of a few hundred pesos or
of millions. The bank must record every single transaction accurately, down to
the last centavo, and as promptly as possible. This has to be done if the account
is to reflect at any given time the amount of money the depositor can dispose of
as he sees fit, confident that the bank will deliver it as and to whomever he
directs. A blunder on the part of the bank, such as the dishonor of a check
without good reason, can cause the depositor not a little embarrassment if not
also financial loss and perhaps even civil and criminal litigation.
- Bank of the Philippine Islands v. Intermediate Appellate Court,
G.R. No. 69162, 21 Feb 1992
The point is that as a business affected with public interest and because of the
nature of its functions, the bank is under obligation to treat the accounts of its
depositors with meticulous care, always having in mind the fiduciary nature of
their relationship
1. When utmost diligence required

a. In dealing with accounts of depositors
- Philippine Banking Corp. v. Court of Appeals, G.R.
No. 127469, 15 Jan 2004
As the BANK’s depositor, Marcos had the right to expect that
the BANK was accurately recording his transactions with it.
Upon the maturity of his time deposits, Marcos also had the
right to withdraw the amount due him after the BANK had
correctly debited his outstanding obligations from his time
deposits.
b. In selection and supervision of employees
- Philippine Commercial International Bank v. Court
of Appeals, G.R. Nos. 121413, 121479 & 128604,
29 Jan 2001
Banks handle daily transactions involving millions of pesos.36 By
the very nature of their work the degree of responsibility, care and
trustworthiness expected of their employees and officials is far
greater than those of ordinary clerks and employees.37 Banks are
expected to exercise the highest degree of diligence in the
selection and supervision of their employees.
c. To be mortgagees in good faith
- Cruz v. Bancom Finance Corp., G.R. No. 147788,
19 Mar 2002
"Banks, indeed, should exercise more care and prudence in
dealing even with registered lands, than private individuals, for
their business is one affected with public interest, keeping in trust
money belonging to their depositors, which they should guard
against loss by not committing any act of negligence which
amounts to lack of good faith by which they would be denied the
protective mantle of the land registration statute, Act [No.] 496,
extended only to purchasers for value and in good faith, as well as
to mortgagees of the same character and description."
d. In the custody of documents; integrity of records
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- Heirs of Manlapat v. Court of Appeals, G.R. No. 41
125585, 08 Jun 2005
Banks, indeed, should exercise more care and prudence in
dealing even with registered lands, than private individuals, as
their business is one affected with public interest. Banks keep
in trust money belonging to their depositors, which they should
guard against loss by not committing any act of negligence that
amounts to lack of good faith. Absent good faith, banks would
be denied the protective mantle of the land registration statute,
Act 496, which extends only to purchasers for value and good
faith, as well as to mortgagees of the same character and
description.53 Thus, this Court clarified that the rule that
persons dealing with registered lands can rely solely on the
certificate of title does not apply to banks.
The bank should not have allowed complete strangers to take
possession of the owner’s duplicate certificate even if the
purpose is merely for photocopying for a danger of losing the
same is more than imminent. They should be aware of the
conclusive presumption in Section 53. Such act constitutes
manifest negligence on the part of the bank which would
necessarily hold it liable for damages under Article 1170 and
other relevant provisions of the Civil Code.
2. Exception
- Spouses Reyes v. Court of Appeals, G.R. No. 118492, 15
Aug 2001
Considering the foregoing, the respondent bank was not required to
exert more than the diligence of a good father of a family in regard to
the sale and issuance of the subject foreign exchange demand draft.
The case at bar does not involve the handling of petitioners' deposit, if
any, with the respondent bank. Instead, the relationship involved was
that of a buyer and seller, that is, between the respondent bank as the
seller of the subject foreign exchange demand draft, and PRCI as the
buyer of the same, with the 20th Asian Racing conference Secretariat in
Sydney, Australia as the payee thereof.
3. Applicability to government financial institutions
- Government Service Insurance System v. Santiago, G.R.
No. 155206, 28 Oct 2003
Due diligence required of banks extend even to persons, or institutions
like the petitioner, regularly engaged in the business of lending money
secured by real estate mortgages.
ii. Liability for negligence

1. Rules on determination of negligence
- Consolidated Bank and Trust Corp. v. Court of Appeals,
G.R. No. 138569, 11 Sep 2003
The contract between the bank and its depositor is governed by
the provisions of the Civil Code on simple loan. 17 Article
1980 of the Civil Code expressly provides that." . . savings . .
. deposits of money in banks and similar institutions shall be
governed by the provisions concerning simple loan." There is
a debtor-creditor relationship between the bank and its
depositor. The bank is the debtor and the depositor is the
creditor. The depositor lends the bank money and the bank
agrees to pay the depositor on demand. The savings deposit
agreement between the bank and the depositor is the contract
that determines the rights and obligations of the parties.
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2. Award of actual, moral, compensatory or temperate damages 41
- Prudential Bank v. Court of Appeals, G.R. No. 125536, 16
Mar 2000
There is no hard-and-fast rule in the determination of what would
be a fair amount of moral damages since each case must be
governed by its own peculiar facts. The yardstick should be that it
is not palpably and scandalously excessive.
The law allows the grant of exemplary damages by way of
example for the public good. The public relies on the banks'
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sworn profession of diligence and meticulousness in giving

irreproachable service. The level of meticulousness must be
maintained at all times by the banking sector.
he award of attorney's fees is also proper when exemplary
damages are awarded and since private respondent was compelled
to engage the services of a lawyer and incurred expenses to
protect her interest.
3. Right to recover against erring employee
- Pacific Banking Corp. v. Court of Appeals, G.R. No. L-
45656, 05 May 1989
It must be noted, however, that the law merely gives the employer
a right to reimbursement from the employee for what is paid to
the private respondent. Article 2181 does not make recovery from
the employee a mandatory requirement. A right to relief shall be
recognized only when the party concerned asserts it through a
proper pleading filed in court.
I. Basic function of banks
a. Loan function
i. Basic concepts
1. Grant, purpose, and requirement of loans (Secs. 39 & 40)
Section 39. Grant and Purpose of Loans and Other Credit Accommodations. - A
bank shall grant loans and other credit accommodations only in amounts and for
the periods of time essential for the effective completion of the operations to be
financed. Such grant of loans and other credit accommodations shall be consistent
with safe and sound banking practices. (75a) The purpose of all loans and other
credit accommodations shall be stated in the application and in the contract
between the bank and the borrower. If the bank finds that the proceeds of the loan
or other credit accommodation have been employed, without its approval, for
purposes other than those agreed upon with the bank, it shall have the right to
terminate the loan or other credit accommodation and demand immediate
repayment of the obligation.
Section 40. Requirement for Grant Of Loans or 0ther Credit Accommodations. -
Before granting a loan or other credit accommodation, a bank must ascertain that
the debtor is capable of fulfilling his commitments to the bank. Toward this end, a
bank may demand from its credit applicants a statement of their assets and
liabilities and of their income and expenditures and such information as may be
prescribed by law or by rules and regulations of the Monetary Board to enable the
bank to properly evaluate the credit application which includes the corresponding
financial statements submitted for taxation purposes to the Bureau of Internal
Revenue. Should such statements prove to be false or incorrect in any material
detail, the bank may terminate any loan or other credit accommodation granted on
the basis of said statements and shall have the right to demand immediate
repayment or liquidation of the obligation. In formulating rules and regulations
under this Section, the Monetary Board shall recognize the peculiar characteristics
of micro financing, such as cash flow-based lending to the basic sectors that are
not covered by traditional collateral.
Page 12 of
2. Prohibited transactions (Sec 36 DOSRI) (Secs. 55.1[c], 55.1[d], and 41
55.2)
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;
55.2. No borrower of a bank shall –
(a) Fraudulently overvalue property offered as security for a loan or other credit
accommodation from the bank;
(b) Furnish false or make misrepresentation or suppression of material facts for
the purpose of obtaining, renewing, or increasing a loan or other credit
accommodation or extending the period thereof;
(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 such persons
into approving a loan or other credit accommodation application.
ii. Ratio of net worth to total risk assets
iii. Single borrower’s limit (Sec. 35)

Section 35. Limit on Loans, Credit Accommodations and Guarantees
35.1 Except as the Monetary Board may otherwise prescribe for reasons of national interest,
the total amount of loans, credit accommodations and guarantees as may be defined by the
Monetary Board that may be extended by a bank to any person, partnership, association,
corporation or other entity shall at no time exceed twenty percent (20%) of the net worth of
such bank. The basis for determining compliance with single borrower limit is the total credit
commitment of the bank to the borrower.
35.2. Unless the Monetary Board prescribes otherwise, the total amount of loans, credit
accommodations and guarantees prescribed in the preceding paragraph may be increased by
an additional ten percent (10%) of the net worth of such bank provided the additional
liabilities of any borrower are adequately secured by trust receipts, shipping documents,
warehouse receipts or other similar documents transferring or securing title covering readily
marketable, non-perishable goods which must be fully covered by insurance.
35.3 The above prescribed ceilings shall include:
(a) the direct liability of the maker or acceptor of paper discounted with or sold to such bank
and the liability of a general endorser, drawer or guarantor who obtains a loan or other credit
accommodation from or discounts paper with or sells papers to such bank;
(b) in the case of an individual who owns or controls a majority interest in a corporation,
partnership, association or any other entity, the liabilities of said entities to such bank;
(c) in the case of a corporation, all liabilities to such bank of all subsidiaries in which such
corporation owns or controls a majority interest; and
(d) in the case of a partnership, association or other entity, the liabilities of the members
thereof to such bank.
35.4. Even if a parent corporation, partnership, association, entity or an individual who owns
or controls a majority interest in such entities has no liability to the bank, the Monetary Board
may prescribe the combination of the liabilities of subsidiary corporations or members of
the partnership, association, entity or such individual under certain circumstances, including
but not limited to any of the following situations:
(a) the parent corporation, partnership, association, entity or individual guarantees the
repayment of the liabilities;
(b) the liabilities were incurred for the accommodation of the parent corporation or another
subsidiary or of the partnership or association or entity or such individual; or
(c) the subsidiaries though separate entities operate merely as departments or divisions of a
single entity.
iv. DORSI Accounts (Sec. 36; Sec. 26, R.A. No. 7653, as amended)
Section 36. Restriction on Bank Exposure to Directors, Officers, Stockholders and Their
Related Interests. - 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
Page 13 of
guarantor, endorser or surety for loans from such bank to others, or in any manner be an 41
obligor or incur any contractual liability to the bank except with the written approval of the
majority of all the directors of the bank, excluding the director concerned: Provided, That
such written approval shall not be required for loans, other credit accommodations and
advances granted to officers under a fringe benefit plan approved by the Bangko Sentral.
The required approval shall be entered upon the records of the bank and a copy of such entry
shall be transmitted forthwith to the appropriate supervising and examining department of the
Bangko Sentral. Dealings of a bank with any of its directors, officers or stockholders and their
related interests shall be upon terms not less favorable to the bank than those offered to
others. After due notice to the board of directors of the bank, the office of any bank director
or officer who violates the provisions of this Section may be declared vacant and the director
or officer shall be subject to the penal provisions of the New Central Bank Act. The Monetary
Board may regulate the amount of loans, credit accommodations and guarantees that may be
extended, directly or indirectly, by a bank to its directors, officers, stockholders and their
related interests, as well as investments of such bank in enterprises owned or controlled by
said directors, officers, stockholders and their related interests. However, the outstanding
loans, credit accommodations and guarantees which a bank may extend to each of its
stockholders, directors, or officers and their related interests, shall be limited to an amount
equivalent to their respective unencumbered deposits and book value of their paid-in capital
contribution in the bank: Provided, however, That loans, credit accommodations and
guarantees secured by assets considered as non-risk by the Monetary Board shall be excluded
from such limit: Provided, further, That loans, credit accommodations and advances to
officers in the form of fringe benefits granted in accordance with rules as may be prescribed
by the Monetary Board shall not be subject to the individual limit. The Monetary Board shall
define the term "related interests." The limit on loans, credit accommodations and guarantees
prescribed herein shall not apply to loans, credit accommodations and guarantees extended by
a cooperative bank to its cooperative shareholders.
v. Interest (Art. 1956, Civil Code)

Article 1956. No interest shall be due unless it has been expressly stipulated in writing .
1. No ceiling (Sec. 1-a, 4-a, 45 of Usury Law)

- Spouses Bacolor v. Banco Filipino Savings and Mortgage
Bank, G.R. No. 148491, 08 Feb 2007
The rate of interest, including commissions, premiums, fees and other
charges, on a loan or forbearance of any money etc., regardless of
maturity x x x, shall not be subject to any ceiling under or pursuant to
the Usury Law, as amended (CB Circular no. 905). Hence, the 24%
interest per annum is allowed under P.D. No. 166.
For sometime now, usury has been legally non-existent. Interest
can now be as lender and borrower may agree upon (Verdejo v.
CA, Jan. 29, 1988. 157 SCRA 743).
Central Bank Circular No. 783, which took effect on July 1, 1981,
removed the ceiling on interest rates on a certain class of loans, thus:
SECTION 2. The interest rate on a loan forbearance of any money, goods,
or credits with a maturity of more than seven hundred thirty (730) days
shall not be subject to any ceiling.
2. In the absence of stipulation
3. Escalation clause; when allowable (Art. 1308, Civil Code)

- Philippine National Bank v. Court of Appeals, G.R. No.
88880, 30 Apr 1991
Article 1308. The contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of them.
(1256a)
"It is now clear that from March 17, 1980, escalation clauses to be
valid should specifically provide: (1) that there can be an increase in
interest if increased by law or by the Monetary Board; and (2) in order
for such stipulation to be valid, it must include a provision for
reduction of the stipulated interest ‘in the event that the applicable
Page 14 of
maximum rate of interest is reduced by law or by the Monetary 41
Board.’"
4. Floating rates of interest
- Consolidated Bank & Trust Corp. v. Court of Appeals, G.R.
No. 114286, 19 Apr 2001
While it may be acceptable, for practical reasons given the fluctuating
economic conditions, for banks to stipulate that interest rates on a loan
not be fixed and instead be made dependent upon prevailing market
conditions, there should always be a reference rate upon which to peg
such variable interest rates. An example of such a valid variable
interest rate was found in Polotan, Sr. v. Court of Appeals. 10 In that
case, the contractual provision stating that "if there occurs any change
in the prevailing market rates, the new interest rate shall be the
guiding rate in computing the interest due on the outstanding
obligation without need of serving notice to the Cardholder other than
the required posting on the monthly statement served to the
Cardholder"11 was considered valid. The aforequoted provision was
upheld notwithstanding that it may partake of the nature of an
escalation clause, because at the same time it provides for the decrease
in the interest rate in case the prevailing market rates dictate its
reduction. In other words, unlike the stipulation subject of the instant
case, the interest rate involved in the Polotan case is designed to be
based on the prevailing market rate. On the other hand, a stipulation
ostensibly signifying an agreement to "any increase or decrease in the
interest rate," without more, cannot be accepted by this Court as valid
for it leaves solely to the creditor the determination of what interest
rate to charge against an outstanding loan.
b. Deposit function
i. Nature of deposit
1. Deposits as simple loans (Arts. 1953 & 1980, Civil Code)
- Serrano v. Central Bank of the Philippines, G.R. No. L-
30511, 14 Feb 1980
Article 1953. 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.
Article 1980. Fixed, savings, and current deposits of money in banks
and similar institutions shall be governed by the provisions concerning
simple loan.
Bank deposits are in the nature of irregular deposits. They are really
loans because they earn interest. All kinds of bank deposits, whether
fixed, savings, or current are to be treated as loans and are to be
covered by the law on loans. 14 Current and savings deposit are loans to
a bank because it can use the same.
2. Bank as debtor
a. Deposit is voluntary agreement; “Know Your Customer”
standards
The know your customer or know your client guidelines in financial
services require that professionals make an effort to verify the identity,
suitability, and risks involved with maintaining a business relationship.
The procedures fit within the broader scope of a bank's anti-money
laundering policy.
b. Bank acquires ownership of money deposited
- BPI Family Bank v. Franco, G.R. No. 123498, 23
Nov 2007
As there is a debtor-creditor relationship between a bank and its
depositor, BPI-FB ultimately acquired ownership of Franco’s
Page 15 of
deposits, but such ownership is coupled with a corresponding 41
obligation to pay him an equal amount on demand.37 Although BPI-FB
owns the deposits in Franco’s accounts, it cannot prevent him from
demanding payment of BPI-FB’s obligation by drawing checks
against his current account, or asking for the release of the funds in his
savings account. Thus, when Franco issued checks drawn against his
current account, he had every right as creditor to expect that those
checks would be honored by BPI-FB as debtor.
c. Payment to proper party-depositor

- Bank of the Philippine Islands v. Court of Appeals,
G.R. No. 104612, 10 May 1994
As the real creditor of the bank, Eastern has the right to withdraw it or
to demand payment thereof. BPI cannot be relieved of its duty to pay
Eastern simply because it already allowed the heirs of Velasco to
withdraw the whole balance of the account.
d. Deposits are not preferred credits
- Central Bank of the Philippines v. Morfe, G.R. No.
L-38427, 12 Mar 1975
It should be noted that fixed, savings, and current deposits of money
in banks and similar institutions are not true deposits. They are
considered simple loans and, as such, are not preferred credits (Art.
1980, Civil Code)
e. Bank has right to compensation
- Bank of the Philippine Islands v. Court of Appeals,
G.R. No. 136202, 25 Jan 2007
Hence, the relationship between banks and depositors has been
held to be that of creditor and debtor. Thus, legal
compensation under Article 1278 of the Civil Code may take
place "when all the requisites mentioned in Article 1279 are
present," as follows:
(1) That each one of the obligors be bound principally, and that he
be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due
are consumable, they be of the same kind, and also of the
same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time
to the debtor.
3. Bank’s duty of utmost care (Sec. 2)
ii. Kinds of deposit

1. Demand deposits (Secs. 58-60, R.A. No. 7653, as amended; Part 2
[a], Manual of Regulations for Bank)
Section 58. Definition. - For purposes of this Act, the term "demand
deposits" means all those liabilities of the Bangko Sentral and of other
banks which are denominated in Philippine currency and are subject to
payment in legal tender upon demand by the presentation of checks.
Section 59. Issue of Demand Deposits. - Only banks duly authorized to do
so may accept funds or create liabilities payable in pesos upon demand
by the presentation of checks, and such operations shall be subject to the
Page 16 of
control of the Monetary Board in accordance with the powers granted it41
with respect thereto under this Act.
Section 60. Legal Character. - Checks representing demand deposits do not
have legal tender power and their acceptance in the payment of debts,
both public and private, is at the option of the creditor: Provided,
however, That a check which has been cleared and credited to the
account of the creditor shall be equivalent to a delivery to the creditor of
cash in an amount equal to the amount credited to his account.
2. Savings Deposits (Part 2 [b], Manual of Regulations for Bank)
3. Negotiable Order of Withdrawal (NOW) Accounts (Part 2 [c],

Manual of Regulations for Bank)
Are interest-bearing deposit accounts that combine the payable on
demand feature of checks and investment feature of savings
accounts
UB and KB may offer NOW accounts without prior authority from
the MB
A TB/RB/Coop Bank may offer NOW accounts with prior
authority from MB
4. Time deposits (Part 2 [c], Manual of Regulations for Bank)

No time deposit shall be accepted for a term less than 30 days.
5. Foreign currency deposits (Secs. 2 & 3, R.A. No. 6426)
Section 2. Authority to deposit foreign currencies. – Any person, natural or
juridical, may, in accordance with the provisions of this Act, deposit with such
Philippine banks in good standing, as may, upon application, be designated by the
Central Bank for the purpose, foreign currencies which are acceptable as part of
the international reserve, except those which are required by the Central Bank to
be surrendered in accordance with the provisions of Republic Act Numbered two
hundred sixty-five (Now Rep. Act No. 7653).
Section 3. Authority of banks to accept foreign currency deposits. – The banks
designated by the Central Bank under Section two hereof shall have the authority:
(1) To accept deposits and to accept foreign currencies in trust Provided, That
numbered accounts for recording and servicing of said deposits shall be allowed;
(2) To issue certificates to evidence such deposits;
(3) To discount said certificates;
(4) To accept said deposits as collateral for loans subject to such rules and
regulations as may be promulgated by the Central Bank from time to time; and
(5) To pay interest in foreign currency on such deposits.
iii. Capacity of depositors

1. Minors (Sec. 1, P.D. No. 734; Sec. 22, R.A. No. 7906)
Section 1. Minors who are at least seven years of age, are able to read and write,
have sufficient discretion, and are not otherwise disqualified by any other
incapacity, are hereby vested with special capacity and power, in their own right
and in their own names, to make savings or time deposits with and withdraw the
same as well as receive interests thereon from banking institutions, without the
assistance of their parents or guardians, the provisions of existing laws and
regulations to the contrary notwithstanding. Parents may nevertheless deposit for
their minor children and guardians for their wards.
Sec. 22. 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
interest: Provided, however, That, if any 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.
Page 17 of
2. Married women (Sec. 5, R.A. No. 7192) 41
Sec. 5. Equality in Capacity to Act. — Women of legal age, regardless of civil
status, shall have the capacity to act and enter into contracts which shall in every
respect be equal to that of men under similar circumstances.
In all contractual situations where married men have the capacity to act, married
women shall have equal rights.
3. Corporations (Sec. 23, R.A. No. 11232)
4. Bank officers and employees (Sec. X204, Manual of Regulations
for Bank)
iv. Opening of deposit accounts

1. “Know Your Customer” standards
2. Prohibitions
a. Anonymous accounts/fictitious names (Sec. 9[a], R.A. No.
9160, as amended)
b. Pseudonyms (Art. 178, Revised Penal Code)
c. Exception (Sec. 9[a], R.A. No. 9160 , as amended; Sec.
3[1], R.A. No. 6426)
3. Joint accounts (Arts. 485, 1207 and 1208, Civil Code)
4. Interest on deposits
c. Other services, functions, and operations
i. Custodian of funds, documents, valuable objects (Sec. 53.1)
ii. Financial agent (Sec. 53.2)
iii. Collection/payment agent (Sec. 53.3)
iv. Financial adviser (Sec. 53.4)
v. Renting out safety deposit boxes (Sec. 53.5)

- CA Agro-Industrial Development Corp. v. Court of Appeals, G.R.
No. 90027, 03 Mar 1993
vi. Issue guarantees (Sec. 74)
vii. Credit card operations (Sec. X320, Manual of Regulations for Bank)
J. Prohibited acts
a. Insurance business (Sec. 54; Sec. 2, P.D. No. 612, as amended)
b. Outsourcing of bank functions (Sec. 55.1[e])
K. Penalty for Violations (Sec. 66; Sec. 34-37, R.A. No. 7653, as amended)
- Perez v. Monetary Board, G.R. No. L-23307, 30 Jun 1967
a. Fine or imprisonment
Page 18 of
b. Suspension or removal of director/officer 41
c. Dissolution of bank
- - - - - - - - - - end of this law - - - - - - - - -

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Course Outline (A.Y.

GENERAL BANKING ACT

A. Definition (Sec. 3.1)

a. Engaged in lending of funds

b. Obtained in the form of deposits

C. Classification of banks (Sec. 3; Sec. X101, Manual of Regulations for Bank)

i. Stock corporation (Sec. 8.1)

ii. Funds obtained from the public (Sec. 8.2)

iii. Minimum capital requirements (Sec. 8.3;

iv. Capability and other requirements (Sec. 8[para. 2])

ii. Filipino stockholdings (Sec. 11)

1. Stockholdings of family groups or related interests (Secs. 12 & 13)

c. Directors and Officers

3. Other minimum qualifications (Guidelines for the Establishment of

iii. Disqualifications (Guidelines for the Establishment of Banks)

v. Meetings (Sec. 15)

vi. Powers of directors

vii. “Apparent Authority” doctrine

viii. Prohibited acts (Sec. 55.1)

b. Monetary board determination

c. Unauthorized advertisement (Sec. 64)

e. Sanctions for operating without authority (Sec. 6 in rel. to Sec. 66)

H. Nature of banking business (Sec. 2)

a. Vital role in economy

i. Subject to reasonable regulation by the State

b. Fiduciary nature of banking business

i. Degree of diligence required

1. When utmost diligence required

ii. Liability for negligence

sworn profession of diligence and meticulousness in giving

I. Basic function of banks

ii. Ratio of net worth to total risk assets

iii. Single borrower’s limit (Sec. 35)

v. Interest (Art. 1956, Civil Code)

1. No ceiling (Sec. 1-a, 4-a, 45 of Usury Law)

3. Escalation clause; when allowable (Art. 1308, Civil Code)

c. Payment to proper party-depositor

ii. Kinds of deposit

3. Negotiable Order of Withdrawal (NOW) Accounts (Part 2 [c],

4. Time deposits (Part 2 [c], Manual of Regulations for Bank)

iii. Capacity of depositors

iv. Opening of deposit accounts

c. Other services, functions, and operations

i. Custodian of funds, documents, valuable objects (Sec. 53.1)

ii. Financial agent (Sec. 53.2)

iii. Collection/payment agent (Sec. 53.3)

iv. Financial adviser (Sec. 53.4)

v. Renting out safety deposit boxes (Sec. 53.5)

vi. Issue guarantees (Sec. 74)

a. Insurance business (Sec. 54; Sec. 2, P.D. No. 612, as amended)

b. Outsourcing of bank functions (Sec. 55.1[e])

- - - - - - - - - - end of this law - - - - - - - - -

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