dizon - banking laws.pdf

7/27/2019 DIZON - Banking Laws.pdf

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Chapter 1

Banks and the Business of Banking

I. Declared Policy Of The State

Section 2 of Republic Act 8791 (General Banking Law of 2000

or GBL) provides:

The State recognizes the vital role of banks

in providing an environment conducive to the sus-

tained development of the national economy and the

fiduciary nature of banking that requires high stan-

dards of integrity and performance. In furtherance

thereof, the State shall promote and maintain a sta-

ble and efficient banking and financial system that

is globally competitive, dynamic and responsive tothe demands of a developing economy.

II. Definition Of Banks

Banks are defined under the GBL as entities engaged in thelending of funds obtained in the form of deposits.1Note however thatbanks may engage in other activities allowed by law which will bediscussed in the succeeding chapters of this book.

Other Definitions:

A bank is

(i) A moneyed institute2founded to facilitate the borrowing,lending and safe-keeping of money3and to deal, in notes,bills of exchange, and credits.4

1Section 3.2, Republic Act No. 8791.2Talmage vs. Pell 7 N.Y. (3 Seld.) 328, 347, 348.3Smith vs. Kansas City Title & Trust Co., 41 S. Ct. 243, 255 U.S. 180, 210, 65

L. Ed. 577.4State vs. Cornings Sav. Bank, 115 N.W. 937, 139 Iowa 338; Banks & Banking,

by Zellmann, Vol. 1, p. 46.


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BANKING LAWS & JURISPRUDENCE2

(ii) An investment company which loans out the money of its

customers, collects the interest and charges a commissionto both lender and borrower, is a bank.5

(iii) Any person engaged in the business carried on bybanks of deposit, of discount, or of circulation is doing abanking business, although but one of these functions isexercised.6

(iv) A financial institution with power to issue its promissorynotes intended to circulate as money (known as bank

notes); or to receive the money ofotherson general deposit,to form a joint fund that shall be used by the institution forits own benefit, for one or more of the purposes of makingtemporary loans and discounts, of dealing in notes, foreignand domestic bills of exchange, coin bullion, credits, andthe remission of money; or with both these powers, andwith the privileges, in addition to these basic powers, ofreceiving special deposits, and making collection for theholders of negotiable paper, if the institution sees fit to

engage in such business.7

In funding these businesses,the bank invests the money that it holds in trust of itsdepositors.

III. Nature Of Banking Business

A. Debtor-Creditor Relationship

The relation existing between a depositor and a bank is that

of creditor and debtor

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and not that of a depositor and a depositaryunder the Civil Code.

Article 1980 of the Civil Code of the Philippines provides:

Art. 1980. Fixed, savings, and current depositsof money in banks and similar institutions shall begoverned by the provisions concerning loan.

5

Western Investment Banking Co. vs. Murray, 56 P. 728, 730, 731; 6 Ariz 215.6MacLaren vs. State, 124 N.W. 667, 141 Wis. 577, 135 Am. S.R. 55, 18 Ann.Cas. 826; 9 C.J.S. 30.

7United Coconut Planters Bank vs. Ramos, G.R. No. 147800, November 11,2003.

8Gullas vs. The Philippine National Bank, G.R. No. L-43191, November 13,1935; Fulton Iron Works Co. vs. China Banking Corporation, 59 Phil. 59 (1933).


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In Consolidated Bank and Trust Corporation vs. Court of

Appeals, the Supreme Court held:The contract between the bank and its

depositor is governed by the provisions of the

Civil Code on simple loan, x x x. 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 thebank agrees to pay the depositor on demand. The savingsdeposit agreement between the bank and the depositor isthe contract that determines the rights and obligations ofthe parties.

Similarly, in Serrano vs. Central Bank of the Philippines,the Supreme Court held that bank deposits are in the nature ofirregular deposits. They are really loans because they earn interest.x x x. The petitioner here in making time deposits that earn interestswith respondent Overseas Bank of Manila was in reality a creditorof the respondent Bank and not a depositor. The respondent Bank

was in turn a debtor of petitioner. Failure of the respondent Bank tohonor the time deposit is failure to pay its obligation as a debtor andnot a breach of trust arising from a depositarys failure to return thesubject matter of the deposit.

B. Fiduciary Duty

i. Section 2 of the GBL expressly imposes fiduciary dutyon banks when it declares that the State recognizes thefiduciary nature of banking that requires high standardsof integrity and performance. This statutory declarationmerely echoes the earlier pronouncement of the SupremeCourt9 requiring banks to treat the accounts of itsdepositors with meticulous care, always having in mindthe fiduciary nature of their relationship.10

ii. Jurisprudence had already imposed on banks the samehigh standard of diligence long before the enactmentof the GBL. This fiduciary relationship means that the

banks obligation to observe high standards of integrity

9Simex International (Manila) Inc. vs. Court of Appeals, G.R. No. 88013, March19, 1990, 183 SCRA 360.

10Ibid.

CHAPTER 1 BANKS AND THE BUSINESS OF BANKING


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and performance is deemed written into every deposit

agreement between a bank and its depositor.iii. The fiduciary nature of banking requires banks to assume

a degree of diligence higher than that of a good father ofa family. Thus, the banks fiduciary duty imposes uponit a higher level of accountability than that expected ofdepositor.11

C. Not a Trust Agreement

i. However, the fiduciary nature of a bank-depositor rela-tionship does not convert the contract between the bankand its depositors from a simple loan to a trust agree-ment, whether express or implied. Failure by the bank topay the depositor is failure to pay a simple loan, and nota breach of trust.12The law simply imposes on the bank ahigher standardof integrity and performance in comply-ing with its obligations under the contract of simple loan,beyond those required of non-bank debtors under a simi-lar contract of simple loan.

ii. The fiduciary nature of banking does not convert asimple loan into a trust agreement because banks do notaccept deposits to enrich depositors but to earn moneyfor themselves. The law allows banks to offer the lowestpossible interest rate to depositors while charging thehighest possible interest rate on their own borrowers. Theinterest spread or differential belongs to the bank and notto the depositors who are notcestui que trustof banks. If

depositors arecestui que trustof banks, then the interestspread or income belongs to the depositors, a situationthat Congress certainly did not intend in enacting Section2 of R.A. 8791.

D. Indispensable Institution

The Supreme Court never fails to stress the remarkablesignificance of a banking institution to commercial transactions, in

11Philippine Banking Corporation vs. Court of Appeals, G.R. No. 127469, Janu-ary 15, 2004.

12Serrano vs. Central Bank, G.R. No. L-30511, February 14, 1980, 96 SCRA96.


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particular, and to the countrys economy in general.13The banking

system is an indispensable institution in the modern world and playsa vital role in the economic life of every civilized nation. Whether asmere passive entities for the safekeeping and saving of money or asactive instruments of business and commerce, banks have becomean ubiquitous presence among the people, who have come to regardthem with respect and even gratitude, and most of all, confidence.

i. Thus, even the humble wage-earner has not hesitated toentrust his lifes savings to the bank of his choice, knowingthat they will be safe in its custody and will even earn

some interest for him.

ii. The ordinary person, with equal faith, usually maintainsa modest checking account for security and conveniencein the settling of his monthly bills and the payment ofordinary expenses.

iii. As for business entities, the bank is a trusted and activeassociate that can help in the running of their affairs,not only in the form of loans when needed but more often

in the conduct of their day-to-day transactions like theissuance or encashment of checks.14

E. Impressed with Public Interest

i. The business of banking is imbued with public interest.The stability of banks largely depends on the confidenceof the people in the honesty and efficiency of banks. Thedepositors reasonable expectations from a bank and thebanks corresponding duty to its depositor, were pointedout by the Supreme Court as follows:

In every case, the depositor expects the bank to treathis account with the utmost fidelity, whether such accountconsists only of a few hundred pesos or of millions. Thebank must record every single transaction accurately,down to the last centavo, and as promptly as possible. Thishas to be done if the account is to reflect at any given timethe amount of money the depositor can dispose of as he

13Metropolitan Bank and Trust Company vs. Cabilzo, G.R. No. 154469,December 6, 2006.

14Simex International (Manila) Inc. vs. Court of Appeals, 183 SCRA 360, March19, 1990.



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sees fit, confident that the bank will deliver it as and to

whomever he directs.15

ii. Since the banking business is impressed with publicinterest, of paramount importance thereto is the trustand confidence of the public in general. Consequently,the highest degree of diligence16is expected,17and highstandards of integrity and performance are even required,of it. By the nature of its functions, a bank is underobligation to treat the accounts of its depositors withmeticulous care,18always having in mind the fiduciary

nature of their relationship.19

F. Degree of Diligence

i. The law imposes on banks high standards in view ofthe fiduciary nature of banking.20As stated earlier, thenew provision in the general banking law is a statutoryaffirmation of Supreme Court decisions, starting withthe 1990 case of Simex International vs. Court ofAppeals,21holding that the bank is under obligation

to treat the accounts of its depositors with meticulouscare, always having in mind the fiduciary nature of theirrelationship.22

15Ibid.16The diligence required of banks is more than that of apater familiasor good

father of a family. Bank of the Philippine Islands vs. Court of Appeals, 383 Phil. 538,554, February 29, 2000. See Philippine Bank of Commerce vs. Court of Appeals, 336Phil. 667, 681, March 14, 1997.

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Philippine Commercial International Bank vs. Court of Appeals, 350 SCRA446, 472, January 29, 2001.18Westmont Bank vs. Ong, 375 SCRA 212, 221, January 30, 2002; Citing Cit-

ytrust Banking Corp. vs. IAC, 232 SCRA 559, 564, May 27, 1994.19Simex International (Manila) Inc. vs. Court of Appeals, 183 SCRA 360, 367,

March 19, 1990, Per Cruz, J.20In the United States, the prevailing rule, as enunciated by the U.S. Supreme

Court in Bank of Marin vs. England, 385 U.S. 99 (1966), is that the bank-depositorrelationship is governed by contract, and the bankruptcy of the depositor does notalter the relationship unless the bank receives notice of the bankruptcy. However, theSupreme Court of some states, like Arizona, have held that banks have more than a

contractual duty to depositors, and that a special relationship may create afi

duciaryobligation on banks outside of their contract with depositors. See Stewart vs. PhoenixNational Bank, 49 Ariz. 34, 64 P. 2d 101 (1937); Klein vs. First Edina National Bank,293 Minn. 418, 196 N.W. 2d 619 (1972).

21G.R. No. 88013, March 19, 1990, 183 SCRA 360.22The ruling in Simex International was followed in the following cases: Bank

of the Philippine Islands vs. Intermediate Appellate Court, G.R. No. 69162, February


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ii. The fiduciary nature of banking requires banks to assume

a degree of diligence higher than that of a good father ofa family. Article 1173 of the Civil Code states that thedegree of diligence required of an obligor is that prescribedby law or contract, and absent such stipulation then thediligence of a good father of a family.23Section 2 of the GBLprescribes the statutory diligence required from banks that banks must observe high standards of integrity andperformance24in servicing their depositors.

iii. In Philippine Bank of Commerce vs. Court of Appeals25

upholding a long standing doctrine, the Supreme Courtruled that the degree of diligence required of banks, ismore than that of a good father of a family where thefiduciary nature of their relationship with their depositorsis concerned. In other words banks are duty bound to treatthe deposit accounts of their depositors with the highestdegree of care. But the said ruling applies only to caseswhere banks act under their fiduciary capacity, that is,as depositary of the deposits of their depositors. But the

same higher degree of diligence is not expected tobe exerted by banks in commercial transactionsthat do not involve their fiduciary relationshipwith their depositors.

iv. Considering the foregoing, a bank is not required to exertmore than the diligence of a good father of a family inregard to the sale and issuance of foreign exchangedemand draft. It does not involve the handling of deposit,if any, with the bank. Instead, the relationship involved

was that of a buyer and seller, that is, between the bankas the seller of the foreign exchange demand draft, andthe buyer of the same.26

21, 1992, 206 SCRA 408; Citytrust Banking Corporation vs. Intermediate AppellateCourt, G.R. No. 84281, May 27, 1994, 232 SCRA 559; Tan vs. Court of Appeals, G.R.No. 108555, December 20, 1994, 239 SCRA 310; Metropolitan Bank & Trust Co. vs.Court of Appeals, G.R. No. 112576, October 26, 1994, 237 SCRA 761; Philippine Bankof Commerce vs. Court of Appeals, 336 Phil. 667 (1997); Firestone vs. Court of Ap-

peals, G.R. No. 113236, March 5, 2001, 353 SCRA 601.23The second paragraph of Article 1173 of the Civil Code provides: If the law orcontract does not state the diligence which is to be observed in the performance, thatwhich is expected of a good father of a family shall be required.

24Bank of Commerce vs. Spouses San Pablo, G.R. No. 167848, April 27, 2007.25Reyes vs. Court of Appeals, G.R. No. 118492, August 15, 2001.26Ibid.



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* Note: Diligence Extends to Financial Institutions:

1. A governmentfinancial institution (e.g., GSIS), like banks,is expected to exercise greater care and prudence in its

dealings, including those involving registered lands.27

2. Due diligence required of banks extend even to persons, or

institutions, regularly engaged in the business of lending

money secured by real estate mortgages.28

G. Treatment of Accounts with Meticulous Care

i. A bank is under obligation to treat the accounts of itsdepositors with meticulous care.29

ii. In every case, the depositor expects the bank to treat hisaccount with the utmost fidelity, whether such accountconsists only of a few hundred pesos or of millions. Ablunder on the part of the bank, such as the dishonor of acheck without good reason, can cause the depositor not alittle embarrassment if not also financial loss and perhapseven civil and criminal litigation.30

iii. But there is no law mandating banks to call up their clientswhenever their representatives withdraw significantamounts from their accounts.

H. Duty to Keep Records

A bank has a fiduciary duty to keep efficiently a record of itstransactions with its depositors.31Banks shall have a true andaccurate account, record or statement of their daily transactions,

particularly those referring to their deposit liabilities. The makingof any false entry or the willful omission of entries relevant toany transaction, is a ground for the imposition of administrativesanctions and the disqualification from office of any director or

27Government Service Insurance System vs. Santiago, G.R. No. 155206, Octo-ber 28, 2003; Cruz vs. Bancom Finance Corporation, 379 SCRA 490 (2002).

28Adriano vs. Pangilinan, 373 SCRA 544 (2002).29

Firestone Tire & Rubber Company of the Philippines vs. Court of Appeals,G.R. No. 113236, March 5, 2001, 353 SCRA 601, 609, citing Philippine Bank of Com-merce vs. Court of Appeals, 269 SCRA 695, 699 (1997).

30Simex International (Manila) Incorporated vs. Court of Appeals, G.R. No.88013, March 19, 1990.

31Philippine Banking Corporation vs. Court of Appeals, G.R. No. 127469, Janu-ary 15, 2004.


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officer responsible therefor. This is without prejudice to their

criminal liability under the New Central Bank Act (NCBA) and/orthe applicable provisions of the Revised Penal Code.

I. Banks are not Gratuitous Bailees

Banks are not gratuitous bailees of the funds depositedwith them by their customers. Banks are run for gain, and theysolicit deposits in order that they can use the money for that verypurpose.32

J. Banks not Expected to be Infallible

A bank is not expected to be infallible.33However, it must bearthe blame for not discovering mistakes if there are establishedprocedures and the same have not been followed.

Problem:

Spouses A and V opened a joint current account in C Bank withan initial deposit of P2,250. Prior thereto, A had an existing separate

personal checking account in the same branch. When the spousesopened their joint current account, the new accounts teller of thebank pulled out from the banks files the old and existing signaturecard of A for use as ID and reference. By mistake, she placed theold personal account number of A on the deposit slip for the newjoint checking account of the spouses so that the initial deposit ofP2,250 for the joint checking account was miscredited to As personalaccount. The spouses subsequently deposited other amounts in theirjoint account. However, when V issued a check for P1,639.89 and

another check for P1,160.00, one of the checks was dishonored by thebank for insufficient funds and a penalty of P20 was deducted fromthe account in both instances. In view of the overdrawings, the banktried to call up the spouses at the telephone number which they hadgiven in their application form, but the bank could not contact thembecause they actually reside in Porac, Pampanga. The city addressand telephone number which they gave to the bank belonged to Vsparents.Is the bank liable for damages?

32San Carlos Milling Co., Ltd. vs. Bank of the Philippines Islands, G.R. No.37467, December 11, 1933.

33Bank of the Philippine Islands vs. The Intermediate Appellate Court, G.R.No. 69162, February 21, 1992.



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Yes. The bank is not expected to be infallible but, in this

instance, it must bear the blame for not discovering the mistake ofits teller despite the established procedure requiring the papers andbank books to pass through a battery of bank personnel whose dutyit is to check and countercheck them for possible errors. Apparently,the officials and employees tasked to do that did not perform theirduties with due care.34While the banks negligence may not havebeen attended with malice and bad faith, nevertheless, it causedserious anxiety, embarrassment and humiliation to the depositorsfor which they are entitled to recover reasonable moral damages.35

The award of reasonable attorneys fees is proper for the depositorswere compelled to litigate to protect their interest.36However, theabsence of malice and bad faith renders an award of exemplarydamages improper.37

K. Dealing with Registered Lands

i. Banks should exercise more care and prudence in dealingeven with registered lands, than private individuals,for their business is one affected with public interest.38

Banks keep in trust money belonging to their depositors,which they should guard against loss by not committingany act of negligence that amounts to lack of good faith.Absent good faith, banks would be denied the protectivemantle of the land registration statute, Act 496 (LandRegistration Law), which extends only to purchasers forvalue and good faith, as well as to mortgagees of the samecharacter and description. The rule that persons dealingwith registered lands can rely solely on the certificate of

title does notapply to banks.39

ii. A mortgagee can rely on what appears on the certificateof title presented by the mortgagor and an innocent mort-gagee is not expected to conduct an exhaustive investi-gation on the history of the mortgagors title. This ruleis strictly applied to banking institutions. A mortgagee-bank must exercise due diligence before entering into said

34Ibid.35American Express International, Inc. vs. IAC, 167 SCRA 209.36Art. 2208, Civil Code.37Globe Mackay Cable and Radio Corp. vs. Court of Appeals, 176 SCRA 778.38Id. at 88.39Manlapat vs. Court of Appeals, G.R. No. 125585, June 8, 2005.


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contract. Judicial notice is taken of the standard practice

for banks, before approving a loan, to send representa-tives to the premises of the land offered as collateral andto investigate who the real owners thereof are.

iii. In Cavite Development Bank vs. Spouses Lim,40the Courtexplained the doctrine of mortgagee in good faith, thus:

There is, however, a situation where, despite thefact that the mortgagor is not the owner of the mortgagedproperty, his title being fraudulent, the mortgage contract

and any foreclosure sale arising therefrom are given effectby reason of public policy. This is the doctrine of themortgagee in good faith based on the rule that all personsdealing with property covered by the Torrens Certificatesof Title, as buyers or mortgagees, are not required to gobeyond what appears on the face of the title. The publicinterest in upholding the indefeasibility of a certificateof title, as evidence of lawful ownership of the land or ofany encumbrance thereon, protects a buyer or mortgagee

who, in good faith, relied upon what appears on the faceof the certificate of title.

iv. Indeed, a mortgagee has a right to rely in good faith onthe certificate of title of the mortgagor of the propertygiven as security, and in the absence of any sign thatmight arouse suspicion, the mortgagee has no obligationto undertake further investigation. This doctrine pre-supposes, however, that the mortgagor, who is not therightful owner of the property, has already succeeded

in obtaining Torrens title over the property in his nameand that, after obtaining the said title, he succeeds inmortgaging the property to another who relies on whatappears on the title. This does not apply in a situationwhere the mortgagor was not the registered owner andmerely represented himself to be the attorney-in-fact.41

v. In cases where the mortgagee does not directly deal withthe registered owner of real property, the law requires thata higher degree of prudence be exercised by the mortgagee.

40381 Phil. 355, 368 (2000) as cited in Erea vs. Querrer-Kauffman, G.R. No.165853, June 22, 2006, 492 SCRA 298, 319.

41Bank of Commerce vs. Sps. San Pablo, G.R. No. 167848, April 27, 2007.



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As enunciated in the case ofAbad vs. Guimba:42

x x x While one who buys from the registered ownerdoes not need to look behind the certificate of title, one whobuys from one who is not a registered owner is expected toexamine not only the certificate of title but all the factualcircumstances necessary for [one] to determine if thereare any flaws in the title of the transferor, or in [the]capacity to transfer the land. Although the instant casedoes not involve a sale but only a mortgage, the same ruleapplies inasmuch as the law itself includes a mortgagee

in the term purchaser.43

vi. This principle is applied more strenuously when themortgagee is a bank or a banking institution. In the caseof Cruz vs. Bancom Finance Corporation, the SupremeCourt ruled:

Respondent, however, is not an ordinary mortgagee;it is a mortgagee-bank. As such, unlike private individu-als, it is expected to exercise greater care and prudence in

its dealings, including those involving registered lands. Abanking institution is expected to exercise due diligencebefore entering into a mortgage contract. The ascertain-ment of the status or condition of a property offered to itas security for a loan must be a standard and indispens-able part of its operations.44

vii. That the person applying for the loan is other than theregistered owner of the real property being mortgagedshould already raise a red flag and which should induce a

bank to make inquiries into and confirm the authority tomortgage anothers property. A person who deliberatelyignores a significant fact that could create suspicion in anotherwise reasonable person is not an innocent purchaserfor value.45

* Note: Any investigation previously conducted on the property offeredas collateral does not preclude a bank from considering new

information on the same property as security for a subsequent

42G.R. No. 157002, July 29, 2005, 465 SCRA 356, 369.43Bank of Commerce vs. Sps. San Pablo, G.R. No. 167848, April 27, 2007.44Ibid., 429 Phil. 225, 239 (2002).45Ibid.


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loan. In Sps. Omengan vs. Philippine National Bank,G.R. No.

161319, January 23, 2007, it was held that:

[T]he business of a bank is one affected with public

interest, for which reason the bank should guard againstloss due to negligence or bad faith. In approving the loan

of an applicant, the bank concerns itself with proper

[information] regarding its debtors.46Any investigation

previously conducted on the property offered by petition-ers as collateral did not preclude PNB from considering

new information on the same property as security for a

subsequent loan. The credit and property investigation

for the original loan of P3 million did not oblige PNB togrant and release any additional loan. At the time the

original P3 million credit line was approved, the title

to the property appeared to pertain exclusively to peti-

tioners. By the time the application for an increase wasconsidered, however, PNB already had reason to suspect

petitioners claim of exclusive ownership.

viii. Banks have access to more facilities in confirming the

identity of their judgment debtors. It should act morecautiously, especially if some uncertainty had beenreported by the appraiser tasked to make verifications.The uncertainty should not be treated as a flimsy matter.In one case, a bank was held negligent when it placedmore importance on the information regarding themarketability and market value of the property, utterlydisregarding the identity of the registered owner thereof.

ix. Unlike private individuals, it behooves banks to exercise

greater care and prudence in their dealings, includingthose involving registered lands. A banking institutionis expected to exercise due diligence before entering intoa mortgage contract. The ascertainment of the status orcondition of a property offered to it as a security must bestandard and indispensable part of its operations. A bankthat failed to observe due diligence cannot be accordedthe status of a bona fidemortgagee.

46United Coconut Planters Bank vs. Ramos, G.R. No. 147800, November 11,2003, 415 SCRA 596, 609.



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Problems:

1. A owns an unregistered parcel of land. A sold a portion ofsaid land to B. Subsequently, an Original Certificate of Title (OCT)was issued by the Register of Deeds. A then surrendered to X Bankthe owners duplicate of the OCT as a consequence of a mortgage. Bdied without knowing that an OCT was already issued. Later, C, Bsheir, upon learning of his right over the land confronted A. Havingfailed to obtain possession of the OCT from A, C went to X Bank. Csought to borrow the owners duplicate certificate for the purpose ofphotocopying the same and thereafter showing a copy thereof to the

Register of Deeds. X Bank allowed C to bring the owners duplicatecertificate outside the bank premises when the latter showed theDeed of Sale between A and B. C returned the owners duplicatecertificate on the same day after having copied the same. C thenbrought the copy of the OCT to the Register of Deeds which uponbeing presented with the Deed of Sale cancelled the OCT and issueda Transfer Certificate of Title.Is X Bank liable for damages toA?

Yes.The act of X Bank of entrusting to C the owners duplicatecertificate entrusted to it by A without even notifying A and absentany prior investigation on the veracity of Cs claim and characteris a patent failure to foresee the risk created by the act. This actruns afoul of every banks mandate to observe the highest degree ofdiligence in dealing with its clients. Moreover, A has also the rightto be afforded due process before deprivation or diminution of hisproperty is effected as the OCT was still in the name of A. Noticeand hearing are indispensable elements of this right which the bank

miserably ignored.47

2. A bank accepted a property as mortgage despite existenceof structures and occupants other than the mortgagor.Is the banknegligent?

Yes.Banks, being in the business of extending loans securedby real estate mortgage, are familiar with rules on land registration.As such, they are expected to exercise more care and prudence thanprivate individuals in their dealing with registered lands. Thus, the

suspicion provoking presence of occupants other than the owneron a land to be mortgaged, it behooved banks to conduct a moreexhaustive investigation on the history of the mortgagors title. The

47Manlapat vs. Court of Appeals, G.R. No. 125585, June 8, 2005.


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banks acceptance in mortgage of the property notwithstanding the

existence of structures on the property and which were in actual,visible and public possession of a person other than the mortgagor,constitutes gross negligence amounting to bad faith.48

Mercado vs. Allied Banking Corporation

G.R. No. 171460, July 24, 2007

On 28 May 1992, Perla executed a Special Power of Attor-ney (SPA) in favor of her husband, Julian D. Mercado (Julian)over several pieces of real property registered under her name,

authorizing the latter to perform several acts.

On the strength of the aforesaid SPA, Julian, on 12 De-cember 1996, obtained a loan from Allied Banking Corporation(ABC) in the amount of P3,000,000.00, secured by real estatemortgage constituted on TCT No. RT-18206 (106338) whichcovers a parcel of land with an area of 805 square meters, reg-istered with the Registry of Deeds of Quezon City (SubjectProperty).

Still using the Subject Property as security, Julian obtainedan additional loan from ABC in the sum of P5,000,000.00,evidenced by a Promissory Note he executed on 5 February1997 as another real estate mortgage (REM).

It appears, however, that there was no property identifiedin the SPA as TCT No. RT-18206 (106338) and registered withthe Registry of Deeds of Quezon City. What was identified inthe SPA instead was the property covered by TCT No. RT-

106338 registered with the Registry of Deeds of Pasig. Subsequently, Julian defaulted on the payment of hisloan obligations. Thus, ABC initiated extra-judicial foreclosureproceedings over the Subject Property which was subsequentlysold at public auction wherein the it was declared as the highestbidder as shown in the Sheriffs Certificate of Sale dated 15January 1998.

ABC explained that the discrepancy in the designation

of the Registry of Deeds in the SPA was merely an error thatmust not prevail over the clear intention of Perla to include thesubject property in the said SPA. In sum, the property referred

48Garaygay vs. Court of Appeals, G.R. No. 128229, March 18, 2005.



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to in the SPA Perla executed in favor of Julian as covered by

TCT No. 106338 of the Registry of Deeds of Pasig (now Makati)and the subject property in the case at bar, covered by RT-18206 (106338) of the Registry of Deeds of Quezon City, are oneand the same.

Elaborating, ABC claims to have carefully verified Ju-lians authority over the subject property which was validlycontained in the SPA. It stresses that the SPA was annotatedat the back of the TCT of the subject property. Finally, afterconducting an investigation, it found that the property covered

by TCT No. 106338, registered with the Registry of Deeds ofPasig (now Makati) referred to in the SPA, and the subjectproperty, covered by TCT No. 18206 (106338) registered withthe Registry of Deeds of Quezon City, are one and the sameproperty. From the foregoing, ABC concluded that Julian wasindeed authorized to constitute a mortgage over the subjectproperty.Is ABC a mortgagee in good faith?

No. The property listed in the real estate mortgages

Julian executed in favor of ABC is the one covered by TCT#RT-18206(106338). On the other hand, the Special Power ofAttorney referred to TCT No. RT-106338-805 Square Metersof the Registry of Deeds of Pasig now Makati. The palpabledifference between the TCT numbers referred to in the realestate mortgages and Julians SPA, coupled with the fact thatthe said TCTs are registered in the Registries of Deeds ofdifferent cities, should have put ABC on guard. ABCs claimof prudence is debunked by the fact that it had conveniently or

otherwise overlooked the inconsistent details appearing on theface of the documents, which it was relying on for its rights asmortgagee, and which significantly affected the identificationof the property being mortgaged. In Arrofo vs. Quio,49it waselucidated that:

[Settled is the rule that] a person dealing withregistered lands [is not required] to inquire furtherthan what the Torrens title on its face indicates.This rule, however, is not absolute but admits ofexceptions. Thus, while its is true, x x x that aperson dealing with registered lands need

49G.R. No. 145794, January 26, 2005, 449 SCRA 284.


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not go beyond the certificate of title, it is

likewise a well-settled rule that a purchaser ormortgagee cannot close his eyes to facts which

should put a reasonable man on his guard, and

then claim that he acted in good faith under

the belief that there was no defect in the title

of the vendor or mortgagor. His mere refusal toface up the fact that such defect exists, or his willfulclosing of his eyes to the possibility of the existenceof a defect in the vendors or mortgagors title, will

not make him an innocent purchaser for value,if it afterwards develops that the title was in factdefective, and it appears that he had such notice ofthe defect as would have led to its discovery had heacted with the measure of precaution which may berequired of a prudent man in a like situation.

By putting blinders on its eyes, and by refusing to seethe patent defect in the scope of Julians authority, easily

discernable from the plain terms of the SPA, ABC cannot nowclaim to be an innocent mortgagee.

Further, in the case of Abad vs. Guimba,50the SupremeCourt laid down the principle that where the mortgagee doesnot directly deal with the registered owner of real property, thelaw requires that a higher degree of prudence be exercised bythe mortgagee, thus:

While [the] one who buys from the registered

owner does not need to look behind the certificateof title, one who buys from [the] one who is not [the]registered owner is expected to examine not onlythe certificate of title but all factual circumstancesnecessary for [one] to determine if there are anyflaws in the title of the transferor, or in [the] capacityto transfer the land. Although the instant case doesnot involve a sale but only a mortgage, the samerule applies inasmuch as the law itself includes a

mortgagee in the term purchaser.51

50G.R. No. 157002, July 29, 2005, 465 SCRA 356.51Id. at 368-369.



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This principle is applied more strenuously when the

mortgagee is a bank or a banking institution. Thus, in the caseof Cruz vs. Bancom FinanceCorporation,52the Supreme Courtruled:

Respondent, however, is not an ordinary mort-gagee; it is a mortgagee-bank. As such, unlike pri-vate individuals, it is expected to exercise greatercare and prudence in its dealings, including thoseinvolving registered lands. A banking institution isexpected to exercise due diligence before entering

into a mortgage contract. The ascertainment of thestatus or condition of a property offered to it as secu-rity for a loan must be a standard and indispensablepart of its operations.53

Hence, considering that the property being mortgagedby Julian was not his, and there are additional doubts orsuspicions as to the real identity of the same, ABC should haveproceeded with its transactions with Julian only with utmost

caution. As a bank, ABC must subject all its transactions to themost rigid scrutiny, since its business is impressed with publicinterest and its fiduciary character requires high standardsof integrity and performance.54 Where ABC acted in unduehaste in granting the mortgage loans in favor of Julian anddisregarding the apparent defects in the latters authority asagent, it failed to discharge the degree of diligence required ofit as a banking corporation.

Thus, even granting for the sake of argument that the

subject property and the one identified in the SPA are oneand the same, it would not elevate ABCs status to that of aninnocent mortgagee. As a banking institution, jurisprudencestringently requires that ABC should take more precautionsthan an ordinary prudent man should, to ascertain the statusand condition of the properties offered as collateral and toverify the scope of the authority of the agents dealing withthese. The failure of ABC to investigate into the circumstancessurrounding the mortgage of the subject property belies its

contention of good faith.

52429 Phil. 225 (2002).53Id. at 239.54The General Banking Law of 2000, Section 2.


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L. Banks may Exclude Persons in their Premises

Banks are mandated to exercise a higher degree of diligence inthe handling of its affairs than that expected of an ordinary businessenterprise. Banks handle transactions involving millions of pesos andproperties worth considerable sums of money. The banking businesswill thrive only as long as it maintains the trust and confidence of itscustomers/clients. Indeed, the very nature of their work, the degreeof responsibility, care and trustworthiness expected of officials andemployees of the bank is far greater than those of ordinary officersand employees in the other business firms. Hence, no effort must

be spared by banks and their officers and employees to ensureand preserve the trust and confidence of the general public andits customers/clients, as well as the integrity of its records and thesafety and well-being of its customers/clients while in its premises.For the said purpose, banks may impose reasonable conditions orlimitations to access by non-employees to its premises and records,such as the exclusion of non-employees from the working areas foremployees, even absent any imminent or actual unlawful aggressionon or an invasion of its properties or usurpation thereof, provided

that such limitations are not contrary to the law.55

M. Charging of Interest for Loans

The charging of interest for loans forms a very essential andfundamental element of the banking business. In fact, it may beconsidered to be the very core of the bankings existence or being.56

IV. Liability For Acts Of Officers And Employees

A banks liability as obligor is not merely vicarious but primary,wherein the defense of exercise of due diligence in the selection andsupervision of its employees is of no moment.

Banks handle daily transactions involving millions of pesos.By the very nature of their work the degree of responsibility, careand trustworthiness expected of their employees and officials is fargreater than those of ordinary clerks and employees. Banks are

expected to exercise the highest degree of diligence in the selectionand supervision of their employees.

55UCPB vs. Basco, G.R. No. 142668, August 31, 2004.56Spouses Anastacio-Calina vs. DBP, G.R. No. 159748, July 31, 2007.



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i. The bank must not only exercise high standards of

integrity and performance, it must also insure that itsemployees do likewise because this is the only way toinsure that the bank will comply with its fiduciary duty.

ii. A bank is liable for the wrongful acts of its officers donein the interest of the bank or in their dealings as bankrepresentatives but not for acts outside the scope of theirauthority.57A bank holding out its officers and agentsas worthy of confidence will not be permitted to profitby the frauds they may thus be enabled to perpetrate inthe apparent scope of their employment; nor will it bepermitted to shirk its responsibility for such frauds, eventhough no benefit may accrue to the bank therefrom.58Accordingly, a banking corporation is liable to innocentthird persons where the representation is made in thecourse of its business by an agent acting within the generalscope of his authority even though the agent is secretlyabusing his authority and attempting to perpetrate a

fraud upon his principal or some other person, for his ownultimate benefit.59

A. Negligence of Manager

The bank, as employer, is liable for the negligence or the misdeedof its branch manager.60Obviously, confidence in the banking system,which necessarily includes reliance on bank managers, is vital inthe economic life of our society.61

B. Negligence of Officers

(i) As a general rule, a banking corporation is liable for thewrongful or tortious acts and declarations of its officers oragents within the course and scope of their employment.

57Prudential Bank vs. Court of Appeals, G.R. No. 108957, June 14, 1993, 223SCRA 350.

58

10 Am Jur 2d, p. 114.59Ibid.60The Consolidated Bank and Trust Corporation vs. Court of Appeals, G.R. No.

138569, September 11, 2003; Prudential Bank vs. Court of Appeals, G.R. No. 125536,March 16, 2000, 328 SCRA 264.

61BPI Family Savings Bank, Inc. vs. First Metro Investment Corporation, G.R.No. 132390, May 21, 2004.


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A bank will be held liable for the negligence of its officers

or agents when acting within the course and scope of theiremployment. It may be liable for the tortious acts of itsofficers even as regards that species of tort of which maliceis an essential element. A bank is liable for the fraudulentacts or representations of an officer or agent acting withinthe course and apparent scope of his employment orauthority. And if an officer or employee of a bank, in hisofficial capacity, receives money to satisfy an evidence ofindebtedness lodged with his bank for collection, the bank

is liable for his misappropriation of such sum.(ii) If a corporation knowingly permits its officer, or any other

agent, to perform acts within the scope of an apparentauthority, holding him out to the public as possessingpower to do those acts, the corporation will, as againstany person who has dealt in good faith with the corpora-tion through such agent, be estopped from denying suchauthority.62

C. Negligence of Tellers

Likewise, banks tellers must exercise a high degree of diligencein insuring that they return the passbook only to the depositor or hisauthorized representative. The tellers know, or should know, thatthe rules on savings account provide that any person in possessionof the passbook is presumptively its owner. If the tellers give thepassbook to the wrong person, they would be clothing that personpresumptive ownership of the passbook, facilitating unauthorized

withdrawals by that person.

* Note: Appropriation of money by a teller is not estafa. What is in-

volved is the possession of money in the capacity of a bank

teller. The Supreme Court considered deposits received by ateller in behalf of a bank as being only in the material pos-

session of the teller. This interpretation applies with equal

force to money received by a bank teller at the beginning of a

business day for the purpose of servicing withdrawals. Suchis only material possession. Juridical possession remains

with the bank. If the teller appropriates the money for per-sonal gain then the felony committed is theft and not estafa.

Further, since the teller occupies a position of confidence,

62Ibid.



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and the bank places money in the tellers possession due to

the confidence reposed on the teller, the felony of qualified

theft would be committed.63

D. Right to Recover from Employees

However, banks may recover from its employees for anypayments made in view of the latters negligent or criminal acts.64

The Supreme Court in one case applied the Civil Code provisionthat [W]hoever pays for the damages caused by his dependents or

employees may recover from the latter what he has paid or deliveredin satisfaction of the claim.

E. Liability for Damages

It is settled that in order that a plaintiff may maintain anaction for the injuries of which he complains, he must establish thatsuch injuries resulted from a breach of duty which the defendantowed to the plaintiff a concurrence of injury to the plaintiff andlegal responsibility by the person causing it. The underlying basis

for the award of tort damages is the premise that an individual wasinjured in contemplation of law; thus there must first be a breachbefore damages may be awarded and the breach of such duty shouldbe the proximate cause of the injury.65

1. Actual and Compensatory Damages

A deposit being a contract of loan or an obligation consisting inthe payment of money, the damages to be awarded should be similarto those stated in Rizal Commercial Banking Corporation vs. AlfaRTW Manufacturing Corporation, citing Eastern Shipping Lines,Inc. vs. Court of Appeals, to wit:

II. With regard particularly to an award of interest, inthe concept of actual and compensatory damages, the rate ofinterest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in thepayment of a sum of money, i.e.,a loan or forbearance of

63Roque vs. People, G.R. No. 138954, November 25, 2004.64Pacific Banking Corporation vs. Court of Appeals, G.R. No. L-45656, May 5,

1989, citing Art. 2181, Civil Code.65Aznar vs. Citibank, N.A., (Philippines), G.R. No. 164273, March 28, 2007;

BPI Express Card Corporation vs. Court of Appeals, 357 Phil. 262, 276 (1998).


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money, the interest due should be that which may

have been stipulated in writing. Furthermore, theinterest due shall itself earn legal interest fromthe time it is judicially demanded. In the absenceof stipulation, the rate of interest shall be 12%per annum to be computed from default, i.e.,from

judicial or extrajudicial demand under and subjectto the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearanceof money, is reached, an interest on the amount of damages

awarded may be imposed at the discretion of the courtat the rate of 6%per annum. No interest, however, shallbe adjudged on unliquidated claims or damages exceptwhen or until the demand can be established withreasonable certainty. Accordingly, where the demand isestablished with reasonable certainty, the interest shallbegin to run from the time the claim is made judiciallyor extrajudicially (Art. 1169, Civil Code) but when suchcertainty cannot be so reasonably established at the time

the demand is made, the interest shall begin to run onlyfrom the date the judgment of the court is made (at whichtime the quantification of damages may be deemed tohave been reasonably ascertained). The actual base forthe computation of legal interest shall, in any case, be onthe amount finally adjudged.

3. When the judgment of the court awarding a sum ofmoney becomesfinal and executory, the rate of legalinterest whether the case falls under paragraph 1

or paragraph 2, above, shall be 12%per annumfromsuch finality until its satisfaction,this interim periodbeing deemed to be by then an equivalent to a forbearanceof credit.

2. Exemplary Damages

The law allows the grant of exemplary damages by way of ex-ample for the public good.66The public relies on the banks fiduciaryduty to observe the highest degree of diligence. The banking sector

is expected to maintain at all times this high level of meticulous-ness.67

66Prudential Bank vs. Court of Appeals,supra, Note 59.67Ibid.



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3. Moral Damages

The financial credit of a businessman is a prized and valuableasset, it being a significant part of the foundation of his business.Any adverse reflection thereon constitutes some material loss tohim.68

As a general rule, a corporation being an artificial personwithout feelings, emotions and senses, and having existence only inlegal contemplation is not entitled to moral damages,69because itcannot experience physical suffering and mental anguish.70However,

for breach of thefi

duciary duty required of a bank, a corporate clientmay claim such damages when its good reputation is besmirched bysuch breach, and social humiliation results therefrom.71

It is not enough that one merely suffered sleepless nights,

mental anguish or serious anxiety as a result of the actuations of

the other party. It is also required that a culpable act or omission

was factually established, that proof that the wrongful act or

omission of the defendant is shown as the proximate cause of the

damage sustained by the claimant and that the case is predicated

on any of the instances expressed or envisioned by Arts. 221972and

68Araneta vs. Bank of America, G.R. No. L-25414, July 30, 1971.69LBC Express, Inc. vs. Court of Appeals, 236 SCRA 602, 607, September 21,

1994; See Layda vs. Court of Appeals, 90 Phil. 724, 730, January 29, 1952.70Article 2217 of the Civil Code.71Bank of the Philippine Islands vs. Casa Montessori Internationale, G.R. No.

149454, May 28, 2004; Morales, THE PHILIPPINE GENERAL BANKING LAW (Annotated2002), pp. 3-4; Citing Simex International (Manila) Inc. vs. Court of Appeals, supra,and Mambulao Lumber Co. vs. Philippine National Bank, 130 Phil. 366, 391, Janu-ary 30, 1968; Simex International (Manila) Incorporated vs. Court of Appeals, G.R.No. 88013, March 19, 1990.

72Art. 2219. Moral damages may be recovered in the following and analogouscases:

(1) A criminal offense resulting in physical injuries;(2) Quasi-delicts causing physical injuries;(3) Seduction, abduction, rape, or other lascivious acts;(4) Adultery or concubinage;(5) Illegal or arbitrary detention or arrest;(6) Illegal search;(7) Libel, slander or any other form of defamation;(8) Malicious prosecution;(9) Acts mentioned in Article 309;(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and

35.x x x


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222073of the Civil Code.74

Inculpa contractualor breach of contract, moral damages arerecoverable only if the defendant has acted fraudulently or in badfaith, or is found guilty of gross negligence amounting to bad faith,or in wanton disregard of his contractual obligations. The breachmust be wanton, reckless, malicious or in bad faith, oppressive orabusive.75

* Notes: (i) Although there is a fiduciary relationship between

a bank and its depositors and the extent of diligence

expected of it in handling the accounts entrusted to itscare is more than ordinary, the bank may not be held

responsible for such damages in the absence of fraud,

bad faith, malice, or wanton attitude.76The Supreme

Court pronounced in BPI Express Card Corporation vs.

Court of Appeals:77

We do not dispute the findings of the lower court

that private respondent suffered damages as a result

of the cancellation of his credit card. However, there

is a material distinction between damages and injury.Injury is the illegal invasion of a legal right; damage

is the loss, hurt, or harm which results from the inju-

ry; and damages are the recompense or compensation

awarded for the damage suffered. Thus, there can be

damage without injury to those instances in which the

loss or harm was not the result of a violation of a legal

duty. In such cases, the consequences must be borne by

the injured person alone, the law affords no remedy for

damages resulting from an act which does not amount

to a legal injury or wrong. These situations are oftencalled damnum absque injuria.78

(ii) A depositor has the right to recover reasonable moral

damages even if the banks negligence may not have

73Art. 2220. Willful injury to property may be a legal ground for awarding mor-al damages if the court should find that, under the circumstances, such damages arejustly due. The same rule applies to breaches of contract where the defendant actedfraudulently or in bad faith.

74Equitable Banking Corp. vs. Calderon, G.R. No. 156168, December 14, 2004,446 SCRA 271, 276.

75Id.at 277.76Moran vs. Court of Appeals, G.R. No. 105836, March 7, 1994.77Supranote 57.78Id. at 275-276.



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been attended with malice and bad faith, if the former

suffered mental anguish, serious anxiety, embarrass-

ment and humiliation.79Moral damages are not meant

to enrich a complainant at the expense of defendant.

It is only intended to alleviate the moral suffering she

has undergone. The award of exemplary damages is

justified, on the other hand, when the acts of the bank

are attended by malice, bad faith or gross negligence.

The award of reasonable attorneys fees is proper where

exemplary damages are awarded. It is proper where de-

positors are compelled to litigate to protect their inter-

est.80

F. Respondeat Superior, Diligence in the Selection and

Supervision of Employees

A bank is bound by the negligence of its employees underthe principle of respondeat superior or command responsibility.The defense of exercising the required diligence in the selectionand supervision of employees is not a complete defense in culpacontractual, unlike inculpa aquiliana.81

V. Classification Of Banks

Banks are classified into: (CUT-RICO)

(a) Universal banks;

(b) Commercial banks;

(c) Thrift banks, composed of:

(i) Savings and mortgage banks,

(ii) Stock savings and loan associations, and

(iii) Private development banks, as defined in the ThriftBanks Act (Republic Act No. 7906).

(d) Rural banks, as defined in the Rural Banks Act (RepublicAct No. 7353);

79Civil Code, Article 2217.80Bank of The Philippine Islands vs. Court of Appeals, G.R. No. 136202, Janu-

ary 25, 2007; Prudential Bank vs. Court of Appeals,supranote 26.81Cangco vs. Manila Railroad Co., 38 Phil. 769 (1918); De Guia vs. Meralco, 40

Phil. 706 (1920).


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(e) Cooperative banks, as defined in the Cooperative Code

(Republic Act No. 6938);(f) Islamic banks as defined in the Charter of Al Amanah

Islamic Investment Bank of the Philippines (RepublicAct No. 6848); and

(g) Other classifications of banks as determined by theMonetary Board of the Bangko Sentral ng Pilipinas.(Section 3, GBL)

A. Business Name

(i) Only a bank that is granted universal/commercial bankingauthority may represent itself to the public as such inconnection with its business name.

(ii) Thrift Banks may be allowed to adopt and use any name:Provided, That the words A Thrift Bank, Savings Bank,A Private Development Bank or A Stock Savings andLoan Association, as the case may be, are affixed after itsbusiness name.

(iii) Rural Banks/Cooperative Banks may adopt a corporatename or use a business name/style with the word Ruralor Coop, as the case may be. Said banks may also adopt aname without such words:Provided, That the identifyingphrase, A Cooperative Bank or A Rural Bank, as thecase may be, is affixed after its business name:Provided,further, That where the name of the bank is shown onletterheads, billboards and other advertising materials,the size of the letters of such phrase shall be at least one-half (1/2) the size of the business name.

Any bank not organized under the Rural Banks Actand any person, association, or corporation doingthe business of banking, not authorized under theRural Banks Act which shall use the words RuralBank as part of the name or title of such bank orof such person, association, or corporations, shall bepunished by a fine of not less than Fifty pesos (P50)

for each day during which said words are so used.82

82Section 28, Republic Act No. 7353 (An Act Providing for the Creation, Orga-nization and Operation of Rural Banks, and for Other Purposes).



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B. Universal Banks

Universal banks are large commercial banks licensed by theBangko Sentral ng Pilipinas (BSP) to do both commercial andinvestment banking.83

A universal bank shall have the authority to exercise:

a. the powers authorized for a commercial bank,

b. the powers of an investment house as provided in existinglaws, and

c. the power to invest in non-allied enterprises. (Section 23,GBL)

The operations of universal banks are discussed in Chapter 4.

C. Commercial Banks

A commercial bank shall have:

a. the general powers incident to corporations,

b. all such powers as may be necessary to carry on thebusiness of commercial banking, such as:

(i) accepting drafts and issuing letters of credit;

(ii) discounting and negotiating promissory notes, drafts,bills of exchange, and other evidences of debt;

(iii) accepting or creating demand deposits;

(iv) receiving other types of deposits and deposit substi-

tutes;(v) buying and selling foreign exchange and gold or

silver bullion; acquiring marketable bonds and otherdebt securities; and

(vi) extending credit, subject to such rules as the Mon-etary Board may promulgate.

These rules may include the determinationof bonds and other debt securities eligible for

investment, the maturities and aggregateamount of such investment. (Section 29, GBL)

83Asian Bonds Glossary (asianbondsonline.adb.org).


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The operations of commercial banks are discussed in

Chapter 4.

D. Rural Banks

The State recognizes the need to promote comprehensive ruraldevelopment with the end in view of attaining acquitable distributionof opportunities, income and wealth; a sustained increase in theamount of goods and services produced by the nation for the benefitof the people; and in expanding productivity as a key raising thequality of life for all, especially the underprivileged.84

Towards these ends, the State encourages and assists in theestablishment of rural banking system designed to make neededcredit available and readily accessible in the rural areas onreasonable terms.85

Loans or advances extended by rural banks shall be primar-ily for the purpose of meeting the normal credit needs of farmers,fishermen or farm families owning or cultivating land dedicated toagricultural production as well as the normal credit needs of coop-

eratives and merchants. In granting of loans, the rural bank shallgive preference to the application of farmers and merchant whosecash requirements are small.86

In areas where there are no government banks, rural banksmay deposit in private banks more than the amount prescribed by theSingle Borrowers Limit subject to Monetary Board regulations.87

* Note: Single Borrowers limit is discussed in Chapter 4.

E. Thrift Banks

i. It is the policy of the State to:

(a) Recognize the indispensable role of the private sec-tor, to encourage private enterprise, and to provideincentives to needed investments;

84

Section 1, Republic Act No. 7353 (An Act Providing for the Creation, Organi-zation and Operation of Rural Banks, and for Other Purposes).85Ibid.86Section 6, Republic Act No. 7353 (An Act Providing for the Creation, Organi-

zation and Operation of Rural Banks, and for Other Purposes).87Section 17, Republic Act No. 7353 (An Act Providing for the Creation, Orga-

nization and Operation of Rural Banks, and for Other Purposes).



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(b) Promote economic development pursuant to the

socio-economic program of the government, to expandindustrial and agricultural growth, to encourage theestablishment of more private thrift banks in order tomeet the needs for capital, personal and investmentcredit or medium- and long-term loans for Filipinoentrepreneurs;

(c) Encourage and assist the establishment of thrift banksystem which will promote agriculture and industryand at the same time place within easy reach of the

people the medium- and long-term credit facilities atreasonable cost;

(d) Encourage industry, frugality and the accumulationof savings among the public, and the members andstockholders of thrift banks; and

(e) Regulate and supervise the activities of thriftbanks in order to place their operations on a sound,stable and efficient basis and to curtail or prevent

acts or practices which are prejudicial to the publicinterest.88

ii. Thrift banks include savings and mortgage banks, pri-vate development banks, and stock savings and loans as-sociations organized under existing laws, and any bank-ing corporation that may be organized for the followingpurposes:

(1) Accumulating the savings of depositors and invest-

ing them, together with capital loans secured bybonds, mortgages in real estate and insured im-provements thereon, chattel mortgage, bonds andother forms of security or in loans for personal orhousehold finance, whether secured or unsecured, orin financing for home building and home develop-ment; in readily marketable and debt securities; incommercial papers and accounts receivables, drafts,bills of exchange, acceptances or notes arising out of

commercial transactions; and in such other invest-ments and loans which the Monetary Board may de-

88Section 2, Republic Act No. 7906 (An Act Providing for the Regulation of theOrganization and Operations of Thrift Banks, and for Other Purposes).


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termine as necessary in the furtherance of national

economic objectives;(2) Providing short-term working capital, medium-

and long-term financing, to businesses engaged inagriculture, services, industry and housing; and

(3) Providing diversified financial and allied services forits chosen market and constituencies specially forsmall and medium enterprises and individuals.89

iii. The following are the powers of thrift banks:

(a) Accept savings and time deposits;

(b) Open current or checking accounts:Provided, Thatthe thrift bank has net assets of at least Twenty mil-lion pesos (P20,000,000) subject to such guidelinesas may be established by the Monetary Board; andshall be allowed to directly clear its demand depositoperations with the Bangko Sentral and the Philip-pine Clearing House Corporation;

(c) Act as correspondent for other financial institu-tions;

(d) Act as collection agent for government entities,including but not limited to, the Bureau of InternalRevenue, Social Security System, and the Bureau ofCustoms;

(e) Act as official depository of national agencies and ofmunicipal, city or provincial funds in the municipal-ity, city or province where the thrift bank is located,subject to such guidelines as may be established bythe Monetary Board;

(f) Rediscount paper with the Philippine National Bank,the Land Bank of the Philippines, the DevelopmentBank of the Philippines, and other government-owned or -controlled corporations. Said institutionsshall specify the nature of paper deemed acceptable

for rediscount, as well as rediscounting rate to becharged by any of these institutions; and

89Section 3,supra.



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(g) Issue mortgage and chattel mortgage certificates,

buy and sell them for its own account or for theaccount of others, or accept and receive them inpayment or as amortization of its loan.

Such mortgage and chattel mortgage certifi-cates shall be issued exclusively in nationalcurrency and exclusively for the financing ofequipment loans, mortgage loans for the ac-quisition of machinery and other fixed instal-lations, conservation, enlargement or improve-ment of productive properties and real estatemortgage loans for:

(1) the construction, acquisition, expansionor improvement of rural and urban prop-erties;

(2) the refinancing of similar loans and mort-gages; and

(3) such other purposes as may be authorizedby the Monetary Board.

A thrift bank shall coordinate the amounts andmaturities of its certificates with those of itsloans, so as to ensure adequate cash receiptsfor the payment of principal and interest atthe time they become due. The bank shallaccept its own certificates at least at the actual

price of issue, in any prepayment of loanswhich mortgage or chattel mortgage debtorsmay wish to make:Provided, That the date ofmaturity of the certificates is not later than thedate on which the payment would otherwisebecome due, in the absence of the aforesaidprepayment.

(h) Purchase, hold and convey real estate under thesame conditions as those governing commercial

banks;

(i) Engage in quasi-banking and money market opera-tions;

(j) Open domestic letters of credit;


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(k) Extend credit facilities to private and government

employees:Provided, That in the case of a borrowerwho is a permanent employee or wage earner, thetreasurer, cashier or paymaster of the office employ-ing him is authorized, notwithstanding the provi-sions of any existing law, rules and regulations tothe contrary, to make deductions from his salary,wage or income pursuant to the terms of his loan, toremit deductions to the thrift bank concerned, andcollect such reasonable fee for his services;

(l) Extend credit against the security of jewelry, preciousstones and articles of similar nature, subject to suchrules and regulations as the Monetary Board mayprescribe; and

(m) Offer other banking services.

Thrift banks may perform the services under (b), (d), (e), (g)and (i) only upon prior approval of the Monetary Board. It may also

perform commercial banking services, operate under an expandedbanking authority, or exercise such other powers incident to acorporation with prior approval of the Monetary Board.90

F. Cooperative Banks

i. A cooperative bank is one organized by, the majorityshares of which is owned and controlled by, cooperativesprimarily to provide financial and credit services tocooperatives. The term cooperative bank shall include

cooperative rural banks.91

ii. A cooperative bank may perform the following functions:

(1) To carry on banking and credit services for thecooperatives;

(2) To receivefinancial aid or loans from the Governmentand the Central Bank of the Philippines for andin behalf of the cooperative banks and primary

cooperatives and their federations engaged in

90Section 10,supra.91Section 100, Republic Act No. 6938 (An Act to Ordain a Cooperative Code of

the Philippines).



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business and to supervise the lending and collection

of loans;(3) To mobilize savings of its members for the benefit of

the cooperative movement;

(4) To act as a balancing medium for the surplus fundsof cooperatives and their federations;

(5) To discount bills and promissory notes issued anddrawn by cooperatives;

(6) To issue negotiable instruments to facilitate theactivities of cooperatives;

(7) To issue debentures subject to the approval of andunder conditions and guarantees to be prescribed bythe Government;

(8) To borrow money from banks and other financialinstitutions within the limit to be prescribed by theCentral Bank; and

(9) To carry out all other functions as may be prescribedby the Cooperative Development Authority:Provided,That the performance of any banking function shallbe subject to prior approval by the Central Bank ofthe Philippines.

iii. Membership of a cooperative bank shall include onlycooperatives and federations of cooperatives.92

G. Islamic Banks

i. R.A. 6848 created the Al-Amanah Islamic InvestmentBank of the Philippines, or the Islamic Bank. Its principaldomicile and place of business is in Zamboanga City. Itmay establish branches, agencies or other offices atsuch places in the Philippines or abroad subject to thelaws, rules and regulations of the Bangko Sentral ngPilipinas.93

92Section 102,supra.93Section 2, Republic Act No. 6848 (An Act Providing for the 1989 Charter of

the Al-Amanah Islamic Investment Bank of the Philippines, Authorizing its Con-duct of Islamic Banking Business and Repealing for this Purpose Presidential Decree


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ii. The primary purpose of the Islamic Bank is to promote

and accelerate the socio-economic development of theAutonomous Region by performing banking,financing andinvestment operations and to establish and participate inagricultural, commercial and industrial ventures basedon the Islamic concept of banking.94

iii. All business dealings and activities of the Islamic Bankshall be subject to the basic principles and rulings ofIslamic Sharia within the purview of the declared policy.Any zakat or tithe paid by the Islamic Bank on behalf

of its shareholders and depositors shall be considered aspart of compliance by the Islamic Bank with its obligationto appropriate said zakat fund and to disburse it inlegitimate channels to be ascertained first by the ShariaAdvisory Council.95

iv. Notwithstanding the provisions of any law to the contrary,the Islamic Bank is authorized to operate an InvestmentHouse pursuant to Presidential Decree No. 129, as

amended, and as a Venture Capital Corporation pursuantto Presidential Decree No. 1688 and, by virtue thereof,carry on the following types of commercial operations:

(1) The Islamic Bank may have a direct interest as ashareholder, partner, owner or any other capacity inany commercial, industrial, agricultural, real estateor development project under mudarabah form ofpartnership or musharaka joint venture agreement

or by decreasing participation, or otherwise investunder any of the various contemporary Islamicfinancing techniques or modes of investment forprofit sharing;

(2) The Islamic Bank may carry on commercial operationsfor the purpose of realizing its investment bankingobjectives by establishing enterprises or financingexisting enterprises, or otherwise by participating inany way with other companies, institutions or banks

Numbered Two Hundred and Sixty-four as Amended by Presidential Decree Num-bered Five Hundred and Forty-Two Creating The Philippine Amanah Bank).

94Section 3,supra.95Ibid.



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performing activities similar to its own or which

may help accomplish its objectives in the Philippinesor abroad, under any of the contemporary Islamicfinancing techniques or modes of investment forprofit sharing; and

(3) The Islamic Bank may perform all business venturesand transactions as may be necessary to carry out theobjectives of its charter within the framework of theIslamic Banks financial capabilities and technicalconsiderations prescribed by law and convention:Provided, That these shall not involve any riba orother activities prohibited by the Islamic Shariaprinciples.

H. Other Banks

The following are Government-Owned Banks:

(i) Philippine Veterans Bank

On June 18, 1963, the Philippine Veterans Bank was createdwith the enactment of Republic Act No. 3518, which became itscharter. Under the provisions of this law, the P100 million authorizedcapital of the Bank will be divided into 510,000 common shares and490,000 preferred shares with a par value of P100.00. The commonshares were fully subscribed by the Government for and on behalf ofthe veterans, their widows and orphans, and paid out of the VeteransTrust Fund. The preferred shares, which were to be sold to theveterans at the rate of one share each, were eventually distributed tothem at no cost on their part. While PVB was conceived and createdas a private commercial bank that is owned by the veterans, the lawprovided that it shall be a government depository as a gesture ofappreciation by a grateful nation to the veterans for the sacrificesthat they offered on the altar of freedom.96

(ii) Land Bank of the Philippines

Republic Act No. 3844 (Agricultural Land Reform Code)

created the Land Bank of the Philippines to finance the acquisitionand distribution of agricultural estates for division and resale to

96Website of Philippine Veterans Bank (www.veteransbank.com.ph).


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small landholders as well as the purchase of the landholding by the

agricultural lessee.97

(iii) Development Bank of the Philippines

In 1947, the government created the Rehabilitation FinanceCorporation (RFC) under R.A. 85 which absorbed the assets andtook over the functions of the Agricultural Industrial Bank. TheRFC provided credit facilities for the development of agriculture,commerce and industry and the reconstruction of properties damagedby the war. In 1958, the RFC was reorganized into the Development

Bank of the Philippines. The change in corporate name marked theshift from rehabilitation to broader activities.98

I. Non-Stock Savings and Loan Associations

Non-stock savings and loan association is a non-stock, non-profitcorporation engaged in the business of accumulating the savings ofits members and using such accumulations for loans to members toservice the needs of households by providing long-term financing for

home building and development and for personal finance.99

The Association confines its membership to a well-defined groupof persons and cannot transact business with the general public.100

J. Quasi-Banks

Quasi-banks refer to entities engaged in the borrowing of fundsthrough the issuance, endorsement or assignment with recourseor acceptance of deposit substitutes for purposes of relending or

purchasing of receivables and other obligations.101

In this connection, deposit substitutes is an alternative formof obtaining funds from the public, other than deposits, through theissuance, endorsement, or acceptance of debt instruments for theborrowers own account, for the purpose of relending or purchasingof receivables and other obligations. These instruments may include,but need not be limited to, bankers acceptances, promissory notes,

97Website of Land Bank of the Philippines (www.landbank.com).98Website of Development Bank of the Philippines (www.devbankphil.com.

ph).99Republic Act No. 8367.100Ibid.101Section 4, GBL.



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participations, certificates of assignment and similar instruments

with recourse, and repurchase agreements.102

K. Offshore Banks

i. P.D. 1034(Authorizing The Establishment Of An OffshoreBanking System In The Philippines) has the followingwhereas clauses:

WHEREAS, conditions conducive to the establish-ment of an offshore banking system, such as political sta-

bility, a growing economy and adequate communicationfacilities, among others, exist in the Philippines;

WHEREAS, it is in the interest of developing coun-tries to have as wide access as possible to the sources ofcapital funds for economic development;

WHEREAS, an offshore banking system based inthe Philippines will be advantageous and beneficial to thecountry by increasing our links with foreign lenders, fa-

cilitating the flow of desired investments into the Philip-pines, creating employment opportunities and expertisein international finance, and contributing to the nationaldevelopment effort.

WHEREAS, the geographical location, physical andhuman resources, and other positive factors provide thePhilippines with the clear potential to develop as anotherfinancial center in Asia;

ii. Offshore Banking refers to the conduct of bankingtransactions in foreign currencies involving the receipt offunds from external sources and the utilization of suchfunds.

Offshore Banking Unit means a branch, subsidiaryor affiliate of a foreign banking corporation which is dulyauthorized by the Bangko Sentral ng Pilipinas (BSP) totransact offshore banking business in the Philippines.

iii. Subject to such regulatory guidelines as the MonetaryBoard may prescribe, only banks which are organizedunder any law other than those of the Republic of the

102Section 95, NCBA.


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Philippines their branches, subsidiaries or affiliates,

shall be qualifi

ed to operate offshore banking units inthe Philippines. However, local branches of foreign banksalready authorized to accept foreign currency depositsunder the provisions of R.A. 6426103may opt to apply forauthority to operate an offshore banking unit: Provided,that, upon their receipt of a corresponding certificateof authority to operate as an offshore banking unit, thelicense to transact business under the provisions of R.A.6426 shall be deemed automatically withdrawn.

iv. The Monetary Board of the BSP is authorized to issuecertificates of authority to operate offshore banking units:Provided, however, that, in issuing such certificates,the Monetary Board shall take into consideration theapplicants liquidity and solvency position, networth andresources, management, international banking expertise,contribution to the Philippine economy, and other relevantfactors such as participation in equity of local commercialbanks and appropriate geographic representation.

The Central Bank of the Philippines is authorized tocollect a fee of not less than US$ 20,000.00 upon issuingany certificate of authority to operate and annuallythereafter on the anniversary date of such certificate.

v. No application to operate as an offshore banking unitshall be considered unless the applicant shall have firstsubmitted to the BSP a sworn undertaking of its headoffice or parent or holding company, duly supported by an

appropriate resolution of its board of directors, that, amongother things: (a) it will, on demand, provide the necessaryspecified currencies to cover liquidity needs that mayarise or other shortfall that is offshore banking unit mayincur; (b) the operations of its offshore banking unit shallbe managed soundly and with prudence; (c) it will trainand continually educate a specific number of Filipinos ininternational banking and foreign exchange trading witha view to reducing the number of expatriates; (d) it will

provide and maintain in its offshore banking unit netoffice funds in the minimum amount of US$ 1,000,000.00

103An Act Instituting a Foreign Currency Deposit System in the PhilippinesAnd for other Purposes.



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and (e) it will start operations of its offshore banking unit

within 180 days from receipt of its certifi

cate of authorityto operate such unit.

vi. Transactions of offshore banking units with non-residents or with other offshore banking units shall befreely allowed: Provided, that the BSP may establish suchsafeguards as may be necessary to prevent circumventionof applicable foreign exchange regulations. Transactionsof offshore banking units with resident of the Philippines,including those with local commercial banks and local

branches of foreign banks authorized to receive foreigncurrency deposits under Republic Act No. 6426, shall besubject to applicable law and regulations.

The Monetary Board of the Central Bank of thePhilippines shall promulgate such rules and regulationsas may be necessary to carry out and implement theprovisions of this Decree.

vii. Tax and Other Incentives:

(a) The provisions of any law to the contrary notwith-standing, the transactions of offshore banking unitauthorized hereunder with non-residents and otheroffshore banking units shall be subject to a five percent (5%) tax on the net, income from such transac-tions which shall be in lieu of all taxes on the saidtransactions: Provided, however, that transactionsof offshore banking units with local commercialbanks, including branches of foreign banks that may

be authorized by the BSP to transact business withoffshore banking units, shall likewise be subject tothe same tax, except net income from such transac-tions as may be specified by the Secretary of Finance,upon recommendation of the Monetary Board, to besubject to the usual income tax payable by banks.Any income of non-residents from transactions withsaid offshore banking units shall be exempt fromany tax.

(b) In the case of transaction with residents (other thanother offshore banking units or local commercialbanks including local branches of foreign banks thatmay be authorized by the BSP to transact businesswith offshore banking units), interest income from


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loans granted to such residents shall be subject only

to a ten per cent (10%) withholding tax asfi

nal tax.(c) Notwithstanding the provision of any law to the

contrary, foreign personnel may be assigned by anyforeign bank to work in its offshore banking unitin the Philippines. Such foreign personnel, theirspouses and unmarried children under twenty-oneyears of age, shall be issued a multiple entry specialvisa, valid for a period of one year, to enter thePhilippines: Provided, however, that a responsible

officer of such foreign bank submits a certificate ofthe effect that the person who seeks entry in thePhilippines is an employee of the said foreign bankand will work exclusively for its offshore bankingunit in the Philippines and that he will be paid bythe foreign bank in the Philippines compensation inforeign currencies: Provided, further, that in the caseof the spouse and unmarried children mentionedherein the certificate shall be to the effect that they

are dependents of the foreign personnel working inthe offshore banking unit.

The admission and stay of the foreign person-nel and their dependents mentioned in the nextpreceding paragraph shall be co-terminous with thevalidity of the multiple entry special visa:Provided,however, that their stay may be extended yearlyupon submission to the Commission on Immigra-

tion and Deportation of a sworn certification by aresponsible officer of the offshore banking unit in thePhilippines that such banks authority to operate asan offshore banking unit is valid and subsisting andthat the personnel concerned has been paid in thePhilippines, from the date of original admission, thecompensation mentioned in the next preceding para-graph, for which that tax due thereon has been with-held and paid to the Bureau of Internal Revenue.

The foreign personnel and their respectivespouses and dependents shall be exempt from: thePayment of all fees due under the immigration andalien registration laws; securing alien certificatesof registration; and obtaining emigration clearance



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certificates, and all types of clearances required by

any government department or agency, except thatupon their final departure from the Philippines, theemployer of the said foreign personnel shall so advicein writing the Commission on Immigration andDeportation at least five (5) working days prior tosuch departure, and the finally departing personnelshall be required to submit to the said office a taxclearance from the Bureau of Internal Revenue.

(d) Aliens employed by offshore banking units. There

shall be levied, collected and paid for each taxableyear upon the gross income received by every alienindividual employed by offshore banking units es-tablished in the Philippines as salaries, wages, an-nuities, compensations, remunerations and emolu-ments from such offshore banking un

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