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Philippine Law in Sales, Agency, Pledge and Mortgages document sample
Philippine Law in Sales, Agency, Pledge and Mortgages document sample
BANKING LAWS TABLE OF CONTENTS A. The New Central Bank Act Republic Act No. 7653 B. The General Banking Act Republic Act No. 337 In General Establishment of Domestic Banks Licensing of Foreign Banks Commercial Banking Corporations and Universal Banks Thrift Banks Act of 1996 Republic Act No. 7906 Building and Loans Associations Rural Banks Act of 1992 Republic Act No. 7353 C. An Act Liberalizing the Entry of Foreign Banks Republic Act No. 7721 D. Offshore Banking System Law Pres. Decree No. 1034 E. Foreign Currency Deposits Act Republic Act No. 6426, as amended F. An Act Creating the PDIC Republic Act No. 3531 G. The Truth in Lending Act Republic Act No. 3765 H. Law on Secrecy of Bank Deposits Republic Act No. 1405 Note: We have included several banking laws which are not in the bar coverage. Likewise, we have incorporated several laws on non-bank financial intermediaries. Since they are not covered by the bar exam, the reviewee has the option of not reading them. 2 BANKING LAWS BANKING AND FINANCE IN GENERAL Two types of financing 1. equity 2. debt-financing A cross-breed of the two may also occur. Intermediaries 1. Banks 2. Non-bank financial intermediaries 3. Exchanges 4. Others i.e. secondary markets Function of intermediaries 1. “Brokering” or matching investors with those in need of financing 2. Help in diminishing risks to investors 3. Provide liquidity 3 BANKING LAWS NEW CENTRAL BANK ACT Republic Act No. 7653 Approved 14 June 1993 IN GENERAL Mandate The Bangko Sentral ng Pilipinas is the State’s central monetary authority, mandated in the 1987 Constitution, which shall function and operate as an independent and accountable body corporate in the discharge of its mandated responsibilities concerning money, banking and credit. [Section 1, RA 7653] The Bangko Sentral shall enjoy fiscal and administrative autonomy. [Section 1, RA 7653] Objectives 1. The primary objective of the Bangko Sentral is to maintain price stability conducive to a balanced and sustainable growth of the economy. 2. It shall also promote and maintain monetary stability and the convertibility of the peso. 3. It shall also provide policy directions in the areas of money, banking and credit. 4. It has supervision over banks and has regulatory powers over the operations of finance companies and non-bank financial intermediaries performing quasi-banking functions. [Section 3, RA 7653] Typical functions of the Bangko Sentral 1. Supervision over banks and regulation of non-bank financial intermediaries engaged in quasi-banking functions 2. Bank of issue: as such, it has the sole power and authority to issue currency 3. Custodian of the nation’s reserves of foreign currency As such, it ensures convertibility of the peso and backs up Philippine currency. 4. It has control of credit 4 BANKING LAWS a. regulating money supply i.e. reserve requirements for banks b. open market operations i.e. Tbills c. controlling interest rate 5. Lender of last resort It has a "rediscounting window,” allowing banks to sell their promissory notes to it. 6. Custodian of cash reserves of banks 7. Government banker, agent and advisor 8. Central clearance and settlement agency Fiscal policy v. monetary policy Fiscal policy is concerned with revenue generation and expenditure while monetary policy involves regulating money supply and price stability. The Bangko Sentral will now concentrate on monetary policy and shed off fiscal responsibilities which in the past had distracted it from its primary function. [Section 129, RA 7653] MONETARY BOARD AND GOVERNOR Monetary Board The powers and functions of the Bangko Sentral are exercised by the Monetary Board. The Board is composed of seven (7) members appointed by the President for a term of six (6) years. No member may be reappointed more than once. The seven members are: 1. The Governor as Chairman; 2. A member of the Cabinet designated by the President; and 3. Five (5) members who shall come from the private sector, all of whom shall serve full-time. 5 BANKING LAWS Qualifications of the members of the Monetary Board 1. Must be natural born citizens of the Philippines 2. At least thirty five (35) years of age, with the exception of the Governor who should at least be forty (40) years old 3. Good moral character 4. Of unquestionable integrity 5. Of known probity and patriotism 6. With recognized competence in social and economic disciplines 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. The member of the Monetary Board coming from the private sector shall not hold any other public office or public employment during their tenure. No person shall be a member of the Monetary Board if he has been connected 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. Quorum in the Monetary Board The presence of four (4) members shall constitute a quorum. However, in all cases, the Governor or his duly designated alternate shall be among the four. 6 BANKING LAWS Withdrawal of persons having a personal interest In addition to the requirements of Republic Act No. 6713, any member of the Monetary Board with personal or pecuniary interest in any matter in the agenda of the Monetary Board shall disclose his interest to the Board and shall retire from the meeting when the matter is taken up. The decision taken on the matter shall be made public. The minutes shall reflect the disclosure made and the retirement of the member concerned from the meeting. Responsibility and liability of the members of the Monetary Board Members of the Monetary Board, officials, examiners, and employees of the Bangko Sentral who willfully violate RA 7653 or who are guilty of negligence, abuses or acts of malfeasance or misfeasance or fail to exercise extraordinary diligence in the performance of his duties shall be held liable for any loss or injury suffered by the Bangko Sentral or other banking institutions as a result of such violation, negligence, abuse, malfeasance, misfeasance or failure to exercise extraordinary diligence. Similar responsibility shall apply to members, officers and employees of the Bangko Sentral for; 1. The disclosure of any information of a confidential nature, or any information on the discussions or resolutions of the Monetary Board, or about the confidential operations of the Bangko Sentral, unless the disclosure is in connection with the performance of official functions with the Bangko Sentral, or is with prior authorizaytion of the Monetary Board or the Governor; or 2. The use of such information for personal gain or to the detriment of the Government, the Bangko Sentral or third parties. However, any data or information required to be submitted to the President and/or Congress, or to be published under the provisions of RA 7653 shall not be considered confidential. Authority of Governor to render opinions, decisions or rulings The Governor of the Bangko Sentral shall have the power to render opinions, decisions, or rulings which shall be final and executory, until reversed or modified by the Monetary Board, on matters regarding application or enforcement of laws pertaining to institutions supervised by the Bangko Sentral and laws pertaining to quasi-banks, as well as regulations, policies or instructions issued by the Monetary Board, and the implementation thereof. [Section 17(e), RA 7653] 7 BANKING LAWS Authority of the Governor in emergencies In case of emergencies where time is insufficient to call a meeting of the Monetary Board, the governor with the concurrence of two other members of the Board may decide any matter or take an action within the authority of the Board. He shall thereafter submit a report to the President and Congress within 72 hours after the action has been taken. At the soonest possible time, the Governor shall call a meeting of the Monetary board to submit his action for ratification. [Section 19, RA 7653] Outside interests of the Governor and the full-time members of the Board The Governor of the Bangko Sentral and the full-time members of the Board shall limit their professional activities to those pertaining directly to their positions with the Bangko Sentral. They may not accept any other employment, whether public or private, remunerated or ad honorem. Exceptions: 1. Positions in eleemosynary, civic, cultural or religious organizations 2. Whenever, by designation of the President, the Governor or the full-time member is tasked to represent the interest of the Government or other government agencies in matters connected with or affecting the economy or the financial system of the country CERTAIN OPERATIONS OF THE BANGKO SENTRAL Supervision and examination The Bangko Sentral shall have supervision over, and conduct periodic or special examination of, banking institutions and quasi-banks, including their subsidiaries and affiliates engaged in allied activities. This power however is subject to the provision of existing laws protecting or safeguarding the secrecy or confidentiality of bank deposits as well as investments of persons, natural or juridical, in debt instruments issued by the Government. [Section 25, RA 7653] 8 BANKING LAWS Subsidiary and affiliate A subsidiary means a corporation more than fifty percent (50%) of the voting stock of which is owned by a bank or quasi-bank and an affiliate means a corporation the voting stock of which, to the extent of fifty percent (50%) or less, is owned by a bank or quasi- bank or which is related or linked to such institution or intermediary through common stockholders or such other factors as may be determined by the Monetary Board. No restraining order on power of examination No restraining order or injunction shall be issued by the court enjoining the Bangko Sentral from examining any institution subject to supervision or examination by the Bangko Sentral, unless there is convincing proof that the action of the Bangko Sentral is plainly arbitrary and made in bad faith and the petitioner or plaintiff files with the clerk or judge of the court in which the action is pending a bond executed in favor of the Bangko Sentral, in an amount to be fixed by the court. [Section 25, RA 7653] Prohibitions on personnel of the Bangko Sentral In addition to the prohibitions found in RA 3019 and 6713, personnel of the Bangko Sentral are hereby prohibited from: 1. Being an officer, director, lawyer or agent, employee, consultant or stockholder, directly or indirectly, of 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 RA 7653; 2. 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; 3. Revealing in any manner, except upon 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 such institution. This prohibition shall not apply to the giving of information to the Monetary Boar or the Governor of the Bangko Sentral, or to any person authorized by either of them, in writing, to receive such information; and 4. Borrowing from any institution subject to supervision or examination by the Bangko Sentral unless said borrowings are adequately secured, fully disclosed to 9 BANKING LAWS the Monetary Boar, and shall be subject to such further rules and regulations as the Monetary Board may prescribe. CONSERVATORSHIP V. RECEIVERSHIP CONSERVATOR Grounds for appointment of conservator The Monetary Board may appoint a conservator whenever it finds that a bank or a quasi-bank is in a state of continuing inability or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors. [Section 29, RA 7653] The conservator should be competent and knowledgeable in bank operations and management. The conservatorship shall not exceed one (1) year. Powers of conservator 1. Take charge of the assets, liabilities and management of the bank or quasi-bank 2. Reorganize the management 3. Collect all monies and debts due said institution 4. Exercise all powers necessary to restore its viability Extent of the power of the conservator The conservator has the power to overrule or revoke the actions of the previous management and board of directors of the bank or quasi-bank. However, the power cannot extend to the post-facto repudiation of perfected transactions, otherwise they would infringe against the non-impairment clause of the Constitution. Section 28-A of RA No. 265 merely gives the conservator the power to revoke contracts that are deemed to be defective under existing law (i.e., void, voidable, unenforceable, or rescissible); hence, the conservator merely takes the place of a bank’s board of directors. What the board of directors cannot do, such as repudiating a contract validly entered into under the doctrine of implied authority, the conservator cannot do either. [First Philippine International Bank v. CA, 252 SCRA 255 (1986)] 10 BANKING LAWS Termination of conservatorship The Monetary Board shall terminate the conservatorship when it is satisfied that the institution can continue to operate on its own and the conservatorship is no longer necessary. The conservatorship shall likewise be terminated should the Monetary Board determine that the continuance in business of the institution would involve probable loss to its depositors or creditors, in which case proceedings for receivership and liquidation shall be pursued. [Section 29, RA 7653] PROCEEDINGS IN RECEIVERSHIP AND LIQUIDATION Grounds for proceedings in receivership and liquidation The Monetary Board shall institute proceedings for receivership whenever it finds that a bank or quasi-bank: 1. Is unable to pay its liabilities as they become due in the ordinary course of business; provided that this shall not include inability to pay caused by extraordinary demands induced by financial panic in the banking community; 2. Has insufficient realizable assets to meet its liabilities; 3. Cannot continue in business without involving probable loss to its depositors or creditors; or 4. Has willfully violated a cease and desist order that has become final, involving acts or transactions which amount to fraud or a dissipation of the assets of the institution. No need of prior notice and hearing In such cases, the Monetary Board may summarily and without need for prior hearing, forbid the institution from doing business in the Philippines and designate the Philippine Deposit Insurance Corporation as receiver of the banking institution. [Section 30, RA 7653] Who acts as receiver For a bank, the Philippine Deposit Insurance Corporation shall serve as receiver; for a quasi-bank, any person of recognized competence in banking or finance may be designated as receiver. 11 BANKING LAWS Tasks of the receiver The receiver shall immediately (1) gather and take charge of all assets and liabilities of the institution, (2) administer the same for the benefit of its creditors, and (3) exercise the general powers of a receiver. (4) The receiver shall determine as soon as possible, but not later than ninety (90) days from takeover, whether the institution may be rehabilitated or otherwise placed in such a condition so that it may be permitted to resume business with safety to its depositors and creditors and the general public. Resumption Any determination for the resumption of business of the institution shall be subject to prior approval of the Monetary Board. Liguidation If the receiver determines that the institution cannot be rehabilitated or permitted to resume business, the Monetary Board shall notify in writing the board of directors of its findings and direct the receiver to proceed with the liquidation of the institution. Procedure for liquidation The receiver shall then: 1. File ex parte with the proper regional trial court, and without the requirement of prior notice or any other action, a petition for assistance in the liquidation of the institution pursuant to a liquidation plan adopted by the Philippine Deposit Insurance Corporation in the case of a bank or by the Monetary Board in the case of a quasi-bank; 2. Upon acquiring jurisdiction, the court shall, upon motion by the institution, assist the enforcement of individual liabilities of the stockholders, directors and officers, and decide on other issues as may be material to implement the liquidation plan adopted; and 3. Convert the assets of the institution to money, dispose of the same to creditors and other parties, for the purpose of paying the debts of such institution in accordance with the rules on concurrence and preference of credit under the Civil Code of the Philippines and he may, in the name of the institution, institute such actions as may be necessary to collect and recover accounts and assets of, or defend any action against, the institution. 12 BANKING LAWS Custodia legis and exemption from levy, attachment or execution The assets of an institution under receivership or liquidation shall be deemed in custodia legis in the hands of the receiver and shall, from the moment the institution was placed under such receivership or liquidation, be exempt from any order of garnishment, levy, attachment, or execution. [Section 30, RA 7653] Actions of Monetary Board final and may be questioned only through certiorari The actions of the Monetary Board taken regarding the designation of a conservator and appointment of a receiver shall be final and executory and may not be restrained or set aside by the court except on petition for certiorari on the ground that the action taken was in excess of jurisdiction or with such grave abuse of discretion as to amount to lack or excess of jurisdiction. The petition for certiorari may only be filed by the stockholders of record representing the majority of the capital stock within ten (10) days from receipt by the board of directors of the institution of the order directing receivership, liquidation or conservatorship. Designation of conservator not precondition to designation of receiver The designation of a conservator or the appointment of a receiver shall be vested exclusively with the Monetary Board. The designation of a conservator is not a precondition to the designation of a receiver. THE BANGKO SENTRAL AND THE MEANS OF PAYMENT Unit of monetary value The unit of monetary value in the Philippines is the peso. Currency The word "currency" is hereby defined as meaning all Philippine notes and coins issued or circulating in accordance with the provisions of RA 7653. Bank of issue The Bangko Sentral has the sole power and authority to issue currency within the territory of the Philippines [Section 50, RA 7653] 13 BANKING LAWS Notes and coins issued by the BSP shall be liabilities of the BSP and may be issued only against and in amounts not exceeding, the assets of the BSP. Said notes and coins shall be a first and paramount lien on all assets of the BSP [Section 51, RA 7653] All notes and coins issued by the BSP are fully guaranteed by the RP and shall be legal tender in the Philippines for all debts, both public and private. [Section 52, RA 7653] Demand deposits "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. 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 control of the Monetary Board in accordance with the powers granted it with respect thereto under RA 7653. Legal character of checks 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. [Section 60, RA 7653] However, 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. [Section 60, RA 7653] DOMESTIC MONETARY STABILIZATION Guiding principle The Monetary Board shall endeavor to control any expansion or contraction in monetary aggregates which is prejudicial to the attainment or maintenance of price stability. Action when abnormal movements occur in the monetary aggregates, credit, or price level 14 BANKING LAWS Whenever abnormal movements in the monetary aggregates, in credit, or in prices endanger the stability of the Philippine economy or important sectors thereof, the Monetary Board shall: 1. Take such remedial measures as are appropriate and within the powers granted to the Monetary Board and the Bangko Sentral; 2. Submit to the President of the Philippines and the Congress, and make public, a detailed report which shall includes, as a minimum, a description and analysis of: a. The causes of the rise or fall of the monetary aggregates, of credit or of prices; b. The extent to which the changes in the monetary aggregates, in credit, or in prices have been reflected in changes in the level of domestic output, employment, wages, and economic activity in general and the nature and significance of any such changes; and c. The measures which the Monetary Board has taken and the other monetary, fiscal or administrative measures which it recommends to be adopted. INTERNATIONAL MONETARY STABILIZATION International monetary stabilization The Bangko Sentral shall exercise its powers to preserve the international value of the pesos and to maintain its convertibility into other freely convertible currencies primarily for, although not necessarily limited to, current payments for foreign trade and invisibles. [Section 64, RA 7653] International reserves In order to maintain the international stability and convertibility of the Philippine peso, the Bangko Sentral shall maintain international reserves adequate to meet any foreseeable net demands on the Bangko Sentral for foreign currencies. [Section 65, RA 7653] Composition of the international reserves 1. Gold 2. Assets in foreign currencies 15 BANKING LAWS 16 BANKING LAWS Action when international stability of the pesos is threatened Whenever the international reserve of the Bangko Sentral falls to a level which the Monetary Board considers inadequate to meet the prospective net demands on the Bangko for foreign currencies, or whenever the international reserve appears to be in imminent danger of falling to such a level, or whenever the international reserve is falling as a result of payments or remittances abroad which, in the opinion of the Monetary Board, are contrary to the national welfare, the Monetary Board shall: 1. Take such remedial measures as are appropriate and within the powers granted to the Monetary Board and the Bangko Sentral; 2. Submit to the President of the Philippines and the Congress, and make public, a detailed report which shall includes, as a minimum, a description and analysis of: a. The nature and causes of the existing or imminent decline; b. The remedial measures already taken or to be taken by the Monetary Board; c. The monetary, fiscal or administrative measures further proposed; and d. The character and extent of the cooperation required from other government agencies for the successful execution of the policies of the Monetary Board. INSTRUMENTS OF BANGKO SENTRAL ACTION Means of action In order to achieve the primary objective of price stability, the Monetary Board shall rely on its moral influence and the powers granted to it under RA 7653 for the management of monetary aggregates. Purchases and sales of gold The Bangko Sentral may buy and sell gold in any form. Purchases and sales of foreign exchange The Bangko sentral may buy and sell foreign notes and coins, and documents and instruments of types customarily employed for the international transfe rof funds. 17 BANKING LAWS The Bangko Sentral may engage in future exchange operations. To whom can engage The Bangko Sentral may engage in foreign transactions with the following entities or persons only: 1. Banking institutions operating in the Philippines; 2. The Government, its political subdivisions and instrumentalities; 3. Foreign or international financial institutions; 4. Foreign governments and their instrumentalities; and 5. Other entities or persons which the Monetary Board is hereby empowered to authorize as foreign exchange dealers. Foreign asset position of the Bangko Sentral The Bangko Sentral shall endeavor to maintain at all times a net positive foreign asset position so that its gross foreign exchange assets will always exceed its gross foreign liabilities. Emergency restrictions on foreign exchange operations Emergency restrictions on foreign exchange operations include: 1. Temporarily suspending or restricting sales of foreign exchange by the Bangko Sentral; 2. Subjecting all transactions in gold and foreign exchange to license by the Bangko Sentral; and 3. Requiring that any foreign exchange thereafter obtained by any person residing or entity operating in the Philippines be delivered to the Bangko Sentral or to any bank or agent designated by the Bangko Sentral for the purpose, at the effective exchange rate or rates. [Section 72, RA 7653] Emergency restrictions may be imposed for the following purposes: 1. In order to achieve the primary objective of the Bangko Sentral; 18 BANKING LAWS 2. To protect the international reserves of the Bangko Sentral in the imminence of, or during an exchange crisis, or in time of national emergency; and 3. To give the Monetary Board and the Government time in which to take constructive measures to forestall, combat, or overcome such a crisis or emergency. [Section 72, RA 7653] Such measures may be adopted with the concurrence of at least five (5) members of the Monetary Board and with the approval of the President of the Philippines. [Section 72, RA 7653] Exchange rates The Bangko Sentral shall determine the exchange rate policy of the country. Foreign exchange holdings of the banks In order that the Bangko Sentral may at all times have foreign exchange resources sufficient to enable it to maintain the international stability and convertibility of the peso, or in order to promote the domestic investment of bank resources, the Monetary Board may require the banks to sell to the Bangko Sentral or to other banks all or part of their surplus holdings of foreign exchange. [Section 76, RA 7653] LOANS TO BANKING AND OTHER FINANCIAL INSTITUTIONS Guiding principles The rediscounts, discounts, loans and advances, which the Bangko Sentral is authorized to extend to banking institutions, shall be used to influence the volume of credit consistent with the objective of price stability. Types of credit operations 1. Normal credit operations 2. Special credit operations 3. Emergency credit operations Normal credit operations 1. Commercial credits 19 BANKING LAWS 2. Production credits 3. Other credits Commercial credits The Bangko Sentral may rediscount, discount, buy and sell bills, acceptances, promissory notes and other credit instruments with maturities of not more than one hundred eighty (180) days from the date of their rediscount, discount or acquisition by the Bangko Sentral and resulting from transactions related to: 1. The importation, exportation, purchase or sale of readily saleable goods and products, or their transportation within the Philippines; or 2. The storing of non-perishable goods and products which are duly insured and deposited, under conditions assuring their preservation in authorized bonded warehouses or in other places approved by the Monetary Board. Production credits The Bangko Sentral may rediscount, discount, buy and sell bills, acceptances, promissory notes and other credit instruments having maturities of not more than three hundred sixty (360) days from the date of their rediscount, discount or acquisition by the Bangko Sentral and resulting from transactions related to the production or processing of agricultural, animal, mineral, or industrial products. Other credits Special credit instruments not otherwise rediscountable under commercial and production credits may be eligible for rediscounting in accordance with the rules and regulations which the Bangko Sentral shall prescribe. Special credit operation 1. Loans for liquidity purposes Loans for liquidity purposes The Bangko Sentral may extend loans and advances to banking institutions for a period of not more than seven (7) days without any collateral for the purpose of providing liquidity to the banking system in times of need. [Section 83, RA 7653] Emergency loans and advances 20 BANKING LAWS In periods of national and/or local emergency or of imminent financial panic which directly threaten monetary and banking stability, the Monetary Board may, by a vote of at least five (5) of its members, authorize the Bangko Sentral to grant extraordinary loans or advances to banking institutions secured by assets. [Section 84, RA 7653] The Monetary Board may, at its discretion, likewise authorize the Bangko Sentral to grant emergency loans or advances to banking institutions, even during normal periods, for the purpose of assisting a bank in a precarious financial condition or under serious financial pressures brought by unforeseen events, or events which, though foreseeable, could not be prevented by the bank concerned. This requires that the Monetary Board has ascertained that the bank is not insolvent and has the assets to secure the advances and that the concurrent vote of at least five (5) members of the Monetary Board is obtained. [Section 84, RA 7653] OPEN MARKET OPERATIONS FOR THE ACCOUNT OF THE BANGKO SENTRAL Principle of open market operations The open market purchases and sales of securities by the Bangko Sentral shall be made exclusively in accordance with its primary objective of achieving price stability. In pursuit of this principle, the Bangko Sentral may engage in the purchase and sale of government securities as well as issue and negotiate obligations of the Bangko Sentral. BANK RESERVES Reserve requirements In order to control the volume of money created by the credit operations of the banking system, all banks operating in the Philippines shall be required to maintain reserves against their deposit liabilities. The required reserves of each bank shall be proportional to the volume of its deposit liabilities and shall ordinarily take the form of a deposit in the Bangko Sentral. [Section 94, RA 7653] No interest on bank reserves Since the requirement to maintain bank reserves is imposed primarily to control the volume of money, the Bangko Sentral shall not pay interest on the reserves maintained with it unless the Monetary Board decides otherwise as warranted by circumstances. [Section 94, RA 7653] 21 BANKING LAWS Deposit substitutes The term "deposit substitutes" is defined as an alternative form of obtaining funds from the public, other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower's own account, for the purpose of re-lending or purchasing of receivables and other obligations. Required reserves against foreign currency The Monetary Board is similarly authorized to prescribe and modify the minimum reserve ratios authorized applicable to deposits denominated in foreign currencies. Increase in reserve requirements Whenever in the opinion of the Monetary Board it becomes necessary to increase reserve requirements against existing liabilities, the increase shall be made in a gradual manner and shall not exceed four percentage points in any thirty-day period. Banks and other affected financial institutions shall be notified reasonably in advance of the date on which such increase is to become effective. Exemption from attachment and other purposes of reserves Deposits maintained by banks with the Bangko Sentral as part of their reserve requirements shall be exempt from attachment, garnishment, or any other order or process of any court, government agency or any other administrative body issued to satisfy the claim of a party other than the Government, or its political subdivision or instrumentalities. SELECTIVE REGULATION OF BANK OPERATIONS Guiding principle The Monetary Board shall use the powers granted to it under RA 7653 to ensure that the supply, availability and cost of money are in accord with the needs of the Philippine economy and that bank credit is not granted for speculative purposes prejudicial to the national interests. Regulations on bank operations shall be applied to all banks of the same category uniformly and without discrimination. Margin requirements against letters of credit 22 BANKING LAWS The Monetary Board may at any time prescribe minimum cash margins for the opening of letters of credit, and may related the size of the required margin to the nature of the transaction to be financed. FUNCTIONS AS BANKER AND FINANCIAL ADVISOR OF THE GOVERNMENT Designation of Bangko Sentral as banker of the government The Bangko Sentral shall act as a banker of the Government, its political subdivisions and instrumentalities. The Bangko Sentral shall represent the government with the International Monetary Fund and other financial institutions. Official deposits The Bangko Sentral shall be the official depository of the Government, its political subdivisions and instrumentalities as well as of government-owned or controlled corporations. THE MARKETING AND STABILIZATION OF SECURITIES FOR THE ACCOUNT OF THE GOVERNMENT Issue of government obligations The issue of securities representing obligations of the Government, its political subdivisions or instrumentalities may be made through the Bangko Sentral, which may act as agent of, and for the account of, the Government or its respective subdivisions or instrumentality, as the case may be. The Bangko Sentral shall not be a member of any stock exchange or syndicate, but may intervene therein for the sole purpose of regulating their operations in the placing of government securities. [Section 118, RA 7653] Servicing and redemption of public debt The servicing and redemption of the public debt shall also be effected through the Bangko Sentral. 23 BANKING LAWS Financial advice on official credit operations Before undertaking any credit operation abroad, the Government, through the Secretary of Finance, shall request the opinion, in writing, of the Monetary Board on the monetary implications of the contemplated action. Such opinion must similarly be requested by all political subdivisions and instrumentalities of the Government before any credit operation abroad is undertaken by them. Whenever the Government, or any of its political subdivisions or instrumentalities, contemplates borrowing within the Philippines, the prior opinion of the Monetary Board shall likewise be requested in order that the Board may render an opinion on the probable effects of the proposed operation on monetary aggregates, the price level, and the balance of payments. In order to assure effective coordination between the economic, financial and fiscal policies of the government and the monetary, credit and exchange policies of the Bangko Sentral, the Deputy Governor designated by the Governor of the Bangko Sentral shall be an ex officio member of the National Economic and Development Authority Board. PROHIBITIONS Prohibitions The Bangko Sentral shall not acquire shares of any kind or accept them as coolateral, and shall not participate in the ownership or management of any enterprise, either directly or indirectly. The Bangko Sentral shall not engage in development banking or financing. TRANSITORY PROVISIONS Phaseout of fiscal agency functions Unless circumstances warrant otherwise and approved by the Congress Oversight Committee, the Bangko Sentral shall within a period of three (3) years but in no case longer than five (5) years from the approval of RA 7653, phase out all fiscal agency functions, and transfer the same to the Department of Finance. [Section 129, RA 7653] 24 BANKING LAWS Phaseout of regulatory powers over the operations of finance corporations and other institutions performing similar functions The Bangko Sentral shall within a period of five (5) years from the effectivity of RA 7653 phase out its regulatory powers over finance companies without quasi-banking functions and other institutions performing similar functions, the same to be assumed by the Securities and Exchange Commission. [Section 130, RA 7653] GENERAL BANKING ACT Republic Act No. 337, as amended An act regulating banks and banking institutions and for other purposes Approved 23 February 1995 IN GENERAL Rule on bank operations Only entities duly authorized by the Monetary Board of the Bangko Sentral may engage in the lending of funds obtained from the public through the receipt of deposits of any kind and all entities regularly conducting such operations shall be considered as banking institutions. Banks or banking institutions Entities engaged in the lending of funds obtained from the public through the receipt of deposits of any kind, and all entities regularly conducting such operation. Banks or banking institutions must be duly authorized by the Monetary Board of the Central Bank. Public shall mean twenty or more lenders. Quasi-banking functions “Quasi-banking functions” shall mean borrowing funds, for the borrower’s own account, through the issuance, endorsement or acceptance of debt instruments of any kind other than deposits, or through the issuance of participations, certificates of assignment, or similar instruments with recourse, trust certificates, or of repurchase agreements, from 25 BANKING LAWS twenty or more lenders at any one time, for purposes of re-lending or purchasing of receivables and other obligations. However, commercial, industrial, and other non-financial companies, which borrow funds through any of these means for the limited purposes of financing their own needs or the needs of their agents or dealers, shall not be considered as performing quasi- banking functions. Financial intermediaries “Financial intermediaries” shall mean persons or entities whose principal functions include the lending, investing or placement of funds or evidence of indebtedness or equity deposited with them, acquired by them or otherwise coursed through them, either for their own account or for the account of others. Non-banking financial institutions performing quasi-banking functions The following entities shall not be considered as banking institutions but shall be subject to regulation by the Monetary Board: 1. Entities regularly engaged in the lending of funds or purchasing of receivables or other obligations with funds obtained from the public through the issuance, endorsement or acceptance of debt instruments of any kind for their own account, or through the issuance of certificates of assignment or similar instruments with recourse, trust certificates, or of repurchase agreements, whether any of these means of obtaining funds from the public is done on a regular basis or occasionally. 2. Entities regularly engaged in the lending of funds which receive deposits occasionally. 3. Trust companies, building and loan associations, and non-stock savings and loan associations. These entities will be subject to regulation by the Monetary Board which may include, but need not be limited to: 1. the imposition of net worth to risk assets ratios; 2. reserve requirements; 3. interest rate ceilings; 26 BANKING LAWS 4. methods of computation thereof; 5. prescribing charges which may be collected; 6. minimum capitalization; and 7. submission of statistical reports. Non-bank financial intermediaries The operations and activities of non-bank financial intermediaries, except insurance companies, shall be subject to regulation by the Monetary Board which may include, but need not be limited to, the imposition of constraints covering the: 1. minimum size of funds received; 2. methods of marketing and distribution; 3. terms and maturities of funds received; and 4. uses of funds. If such entities are authorized by the Central Bank to perform quasi-banking functions, they may be further subject to regulation as discussed below. Note: Sec. 130 of the CB Act phasing out the regulation of MB over NBFCs not engaged in quasi-banking functions. Determination of functions The determination of whether a person or an entity is a) performing banking or quasi- banking functions; or b) engaged in other types of financial intermediation shall be decided by the Monetary Board, subject to judicial review. Regulation “Regulation” shall mean the issuance of rules of conduct or the establishment of modes or standards of operation for uniform application to all institutions or functions covered, taking into consideration in determining such coverage the distinctive character of the operations of institutions and the substantive similarities of specific functions to which such rules, modes or standards are to be applied. In some instances, these entities may be subject to special examination. 27 BANKING LAWS Supervision “Supervision” shall include not only the issuance of rules but also the overseeing to ascertain that regulations are complied with, investigating or examining to determine whether an institution is conducting its business on a sound financial basis, and inquiring into the solvency and liquidity of the institution. Relationship between bank and depositor Fixed savings and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. In other words, the relationship between the bank and the depositor is that of a debtor and creditor. In the case of rent of safety deposit box. The contract is a special kind of deposit and cannot be characterized as an ordinary contract of lease because the full and absolute possession and control of the deposit box is not given to the renters. The prevailing rule is that the relation between the bank renting out and the renter is that of bailer and bailee the bailment being for hire and mutual benefiit. [CA Agro-industrial Dev. Corp. v. CA, 219 SCRA 426 (1983)] Types of deposits 1. Time Deposit-Interest rate stipulated depending on the number of days. During this period, the money deposited cannot be withdrawn. The bank uses this money to lend to others. That is why in these accounts, the depositor is paid higher rates of interest for the use of the money. 2. Savings deposit-Interest fixed under the fine prints, if one deposits today, he cannot withdraw the amount not until 60 days later. The bank can lend out such funds; that is why it pays interests on such deposits. 3. Demand deposit or current accounts- No interest is fixed by the bank because the depositor can take out his funds any time. It is called demand deposit because the depositor can withdraw the money deposited on the very same day when he deposited it. Note: As a general rule, only commercial banks can accept demand deposits on checking accounts. By way of exception, savings banks and even rural banks, are allowed by the CB to accept checking accounts because their capitalizaition may be large. 28 BANKING LAWS Money market transactions Money market is a market dealing in standardized short-term credit instruments (involving large amounts) where lenders and borrowers do not deal directly with each other but through a mediator or dealer in the open market. It involves “commercial papers” which are instruments “evidencing indebtedness of any person or entity… which are issued, endorsed, sold or transferred or in any manner conveyed to another person or entity, with or without recourse.” The fundamental function of the money market devise in its operation is to match and bring together in a most impersonal manner both the “fund users” and the “fund suppliers.” The money market is an “impersonal market” free from personal considerations. The market mechanism is intended to provide quick mobility of money and securities. The General Banking Act discriminates against banks in two aspects 1. Period- Under the Civil Code, a period is presumed to be for the benefit of both parties. Insofar as banks are concerned, the period is always for the benefit of the debtor if the bank is the creditor. The debtor can compel the creditor bank to accept payment of a debt before it is due, and recover interest deducted in advance. 2. Foreclosure of mortgage- The general rule is that there is no right of redemption in judicial foreclosure of mortgage. There is only 90 day equity redemption period. The exception is with the banks aside from the 90-day equity redemption period, banks are required to give a one-year redemption period. Alien bank mortgage An alien bank can bid in a public auction of mortgaged property if such property was mortgage to it in the course of an ordinary banking transaction. If the mortgage was not within the normal banking transaction, it must be prohibited from bidding. Mortgage loans Loans against real estate security shall not exceed 70% of the appraised value of the real estate security, plus 70 %of the appraised value of the improvements with title to the property being with the mortgagor. 29 BANKING LAWS Loans on the security of chattels shall not exceed 50% of the appraised value of the security. Classification of banks 1. Commercial banks 2. Thrift banks a. Savings and mortgage banks b. Stock savings and loan associations c. Private development banks 3. Rural banks Indispensable to the national interest The banking industry is hereby declared as indispensable to the national interest and, notwithstanding the provisions of any law to the contrary, any strike or lockout involving banks, if unsettled after seven (7) calendar days, shall be reported by the Central Bank to the Preside who shall immediately certify the same to the appropriate court, government agency or commission for resolution. ESTABLISHMENT OF DOMESTIC BANKS Form of organization Domestic banking institutions, except building and loan associations, shall be organized in the form of stock corporations. No banking institution shall issue no-par value stock. The Securities and Exchange Commission shall not register the articles of incorporation of any bank, or any amendment thereto, unless accompanied by a certificate of authority issued by the Monetary Board, under its official seal. At least two thirds of the members of the board of directors of any bank or banking institution which may be established after the approval of this Act shall be Filipino citizens. 30 BANKING LAWS Requisites for issuance of certificate of authority Such certificate shall not issue unless the Monetary Board is satisfied from the evidence submitted to it: 1. that all the requirements of existing laws and regulations to engage in the business for which the applicant is proposed to be incorporated have been complied with; 2. that the public interest and economic conditions, both general and local, justify the authorization; and 3. that the amount of capital, the financing organization, direction and administration, as well as the integrity and responsibility of the organizers and administrators reasonably assure the safety of the interests which the public may entrust to them. Receipt and disposition of deposits No bank which may be established and licensed to do business in the Philippines shall receive deposits, unless incorporated under the laws of the Republic of the Philippines. This prohibition, however, shall not apply to branches and agencies of foreign banks which, at the time of approval of the General Banking Act, are actually receiving deposits. After approval of the Act, all deposits so received by such branches and agencies of foreign bank shall not be invested in any manner outside the territorial limits of the Republic of the Philippines. Voting stock requirements At least seventy percent (70%) of the voting stock of any banking institution which may be established after the approval of the Act shall be owned by citizens of the Philippines, except where a new bank is established as a result of: a) the local incorporation of any of the existing branches or agencies of foreign banks in the Philippines; or b) the consolidation of existing banks in any of which there are foreign owned voting stocks at the time of consolidation. The Monetary Board may, with the approval of the President, increase the percentage of foreign-owned voting stocks in any domestic bank from thirty percent (30%) to forty percent (40%). 31 BANKING LAWS The percentage of foreign-owned voting stocks in a bank shall be determined by the citizenship of the individual stockholders in that bank. In the case of corporations owning bank shares, the citizenship of each stockholder in that corporation shall be the basis of computing the percentage. Ownership of stocks in banks by corporations The total voting stocks which any corporation, including its wholly or majority owned subsidiaries, may own in any bank shall not exceed thirty percent (30%) of the voting stock of that bank. In the case of a corporation which is wholly owned, or the majority of the voting stock of which is owned, by any one person or by persons related to each other within the third degree of consanguinity or affinity, that corporation may own not more than twenty percent (20%) of the voting stock of any bank. LICENSING OF FOREIGN BANKS License to conduct business No foreign bank or banking corporation formed, organized or existing under any law other than those of the Philippines shall be permitted to transact business in the Philippines, or maintain by itself or assignee any suit for the recovery of any debt, claims, or demand whatsoever, until after it shall have obtained, upon order of the Monetary Board, a license for that purpose from the Securities and Exchange Commission. No foreign building and loan association or building and loan association not formed, organized, or existing under the laws of the Philippines shall be permitted to transact business in the Philippines. Requisites for issuance of license 1. Public and economic conditions, both general and local, justify the issuance of such order. 2. The foreign bank or banking corporation is solvent and in sound financial condition. 3. A duly appointed agent in the Philippines has been authorized to accept summons and legal processes. 32 BANKING LAWS Investment rights 1. Foreign banking institutions without branches in the Philippines, including their wholly or majority owned subsidiaries and their holding companies having majority holding in such foreign banking institutions, may invest, with prior approval of the Monetary Board, in equities of local companies engaged in financial allied undertakings. However, they shall maintain minority participation in such enterprise. 2. With prior approval of the Central Bank, these foreign entities may also purchase equities in domestic banks, subject to restrictions. Revocation of license 1. The foreign bank is in imminent danger of insolvency. 2. Its continuance in business will involve probable loss to those transacting business with it. CLASSIFICATION OF PRIVATE BANKS COMMERCIAL BANKING CORPORATIONS AND UNIVERSAL BANKS Commercial bank A commercial banking corporation, in addition to the general powers incident to corporations, shall have all such powers as shall be necessary to carry on the business of commercial banking: 1. by accepting drafts and issuing letters of credit, by discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debts; 2. by receiving deposits; 3. by buying and selling foreign exchange and gold or silver bullion; and 4. by lending money against personal security or against securities consisting of personal property of mortgages on improved real estate and the insured improvements thereon. A commercial bank may also accept or create demand deposits subject to withdrawal by check. 33 BANKING LAWS A commercial bank may offer NOW accounts (special types of savings deposit which can be withdrawn by means of a Negotiable Order of Withdrawal and is offered only to natural persons). A commercial bank may likewise acquire readily marketable bonds and other debt securities subject to such rules as the Monetary Board may promulgate. A commercial bank, finally, may invest to the extent allowed under applicable law and regulations in equities of allied undertaking, whether financial or non-financial. Investment in allied undertakings Commercial banks, including Government banks and foreign banks with existing local branches, may invest in equities of allied undertakings. Equity investments shall not be permitted in non-related activities. Limitations on investments in allied undertakings: 1. The total investment in equities shall not exceed twenty five percent (25%) of the net worth of the bank. 2. The equity investment in any one enterprise shall not exceed fifteen percent (15%) of the net worth of the bank; 3. The total equity investment of the bank in any single enterprise shall remain a minority holding in that enterprise; and 4. The equity investment in other banks shall be deducted from the investing bank’s net worth for purposes of computing the prescribed ratio of net worth to risk assets. Financial allied undertakings 1. Leasing companies 2. Banks 3. Investment houses 4. Financing companies 5. Credit card operations 34 BANKING LAWS 6. Financial institutions catering to small and medium scale enterprises Non-financial allied undertakings 1. Warehousing companies 2. Storage companies 3. Safe deposit box companies 4. Companies engaged in the management of mutual funds but not in the mutual funds themselves 5. Management corporations engaged or to be engaged in activity similar to the engagement of mutual funds 6. Companies engaged in the provision of computer services 7. Insurance agencies 8. Companies engaged in home building and home development 9. Companies providing drying and/or milling facilities for agricultural crops Universal bank or expanded commercial banking authority The Monetary Board may authorize -- to further national development objectives or support national priority projects -- a commercial bank, a bank authorized to provide commercial banking services, as well as a government owned and controlled bank, to operate under an expanded commercial banking authority. By virtue of such expanded power, the universal bank may, in addition to powers authorized for commercial banks: 1. exercise the power of an Investment House as provided in PD 129; 2. invest in the equity of a non-allied undertaking; or 3. own a majority or all of the equity in a financial intermediary other than a commercial bank or a bank authorized to provide commercial banking services. 35 BANKING LAWS Limitations on exercise of power as investment house Universal bank may perform the functions of an investment house either directly OR indirectly through a subsidiary investment house (it cannot perform such functions both directly and indirectly). If performed directly, such functions shall be undertaken by a separate and distinct department in the bank. If performed indirectly through an investment house, universal bank may not directly exercise such powers as are exclusively reserved to investment houses. Limitations on equity investment of a universal bank 1. The total investment in equities shall not exceed fifty percent (50%) of the net worth of the bank. 2. The equity investment in any one enterprise whether allied or non-allied shall not exceed fifteen percent (15%) of the net worth of the bank. 3. The equity investment of the bank, or of its wholly- or majority-owned subsidiary, in a single non-allied undertaking shall not exceed thirty five percent (35%) of the total equity in the enterprise nor shall it exceed thirty five percent (35%) of the voting stock in that enterprise. 4. The equity investment in other banks shall be deducted from the investing bank’s net worth for purposes of computing the prescribed ratio of net worth to risk assets. Capitalization Commercial bank - P 2 billion Universal bank - P 4.5 billion Ownership in a thrift bank or rural bank A commercial bank or any bank authorized to provide commercial banking services, or to operate under an expanded commercial banking authority may own more than thirty percent (30%) of the voting stock of a thrift bank or a rural bank up to a majority or all of the equity thereof. Subject to the prior approval of the Monetary Board. 36 BANKING LAWS Combined capital accounts The combined capital accounts of each commercial bank shall not be less than an amount equal to ten percent (10%) of its risk assets Risk assets is defined as its total assets minus the following assets: 1. Cash on hand; 2. Amounts due from the Central Bank; 3. Evidence of indebtedness of the Philippine Government or Central Bank or any other evidence of indebtedness fully guaranteed by the Philippine Government; 4. Loans to the extend covered by hold-out on, or assignment of, deposits maintained in the lending bank and held in the Philippines; 5. Loans or acceptances under letters of credit to the extend covered by marginal deposits; and 6. Other non-risk items which the Monetary Board may, from time to time, authorize to be deducted from total assets. Purchase, holding or conveyance of real estate Any commercial bank may purchase, hold, and convey real estate for the following purposes: 1. Such as shall be necessary for its immediate accommodation in the transaction of its business; 2. Such as shall be mortgaged to it in good faith by way of security for debts; 3. Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings; and 4. Such as its shall purchase at sales under judgments, decrees, mortgages, or trust deeds held by it and such as it shall purchase to secure debts due to it. However, no such bank shall hold the possession of any real estate under mortgage or trust deed, or the title and possession of any real estate purchased to secure any debt due to it, for a longer period than five years. 37 BANKING LAWS Establishment of branches Any commercial bank organized under Philippine laws may, with the prior approval of the Monetary Board, establish branches in the Philippines or branches and agencies outside the Philippines, and the bank shall be responsible for all business conducted in such branches to the same extent and in the same manner as though such business had all been conducted in the head office. A bank and its branches shall be treated as a unit. THRIFT BANKS Thrift banks “Thrift banks” shall include savings and mortgage banks, private development banks, and stock savings and loan associations organized under existing laws and any banking corporation that may be organized for the following purposes: 1. Accumulating the savings of depositors and investing them together with capital loans secured by bonds, mortgages in real estate and insured improvements thereon, chattel mortgage, bonds, and other forms of security or in loans for personal and household finance, whether secured or unsecured, or in financing for home building and home development, in readily marketable and debt securities; in commercial papers, and accounts receivables, drafts, bills of exchange, acceptances or notes arising out of commercial transactions; and in such other investments and loans which the Monetary Board will determine as necessary in the furtherance of national economic objectives; 2. Providing short term working capital, or medium- and long-term financing to businesses engaged in agriculture, services, industry and housing; and 3. Providing diversified financial and allied services for its chosen market and constituencies especially for small and medium enterprises and individuals. Scope of authority Thrift banks may: 1. Accept savings and time deposits; 2. Act as correspondent for other financial institutions; 3. Purchase, hold and convey real estate; 38 BANKING LAWS 4. Open letters of credit; 5. extend credit facilities to private and government employees; 6. Extend credit against the security of jewelry, precious stones and similar articles; 7. Accept foreign currency deposits; 8. Invest in equity of allied undertakings; 9. Rediscount papers with the PNB, LBP, DBP, and other GOCCs; 10. Issue domestic letters of credit; 11. Invest in marketable bonds and other debt securities; 12. Grant loans, secured or not secured; and 13. With prior approval of the Monetary Board: a. Open current or checking accounts; b. Act as collection agent for government entities; c. Act as official depository of national agencies and municipal, city or provincial funds where the bank is located; d. Issue mortgage and chattel certificates; e. Engage in quasi-banking and money market operations; and f. Offer NOW accounts. Thrift banks may perform services similar to those offered by commercial banks under an expanded authority when permitted by the Bangko Sentral ng Pilipinas. Capitalization Capitalization may vary according to the location of the head office: Within Metro Manila - P250 million Outside Metro Manila - P 40 million 39 BANKING LAWS Incentives and exemptions 1. Reserve requirement differential 2. Liberalized branching rules 3. Notices of statement of condition 4. Tax exemptions 5. Exemption from publication requirement 6. Exemption from notarial charges 7. Exemption from registration fees Equity ownership At least 40% of the voting stock of a thrift bank shall be owned by Filipino citizens. Exception: In case of merger or consolidation of existing Thrift Banks with foreign holdings, the resulting holding shall not be increased but may be reduced and, once reduced, shall not be increased thereafter beyond 60% of the voting stock of the Thrift Bank. Minors as depositors Minors in their own rights and in their own names may make deposits and withdraw the same, and may receive dividends and interests. If the guardian shall give notice in writing to any thrift bank not to make payments of deposits, dividends or interest to the minor of whom he is the guardian, then such payment shall be made only to the guardian. BUILDING AND LOAN ASSOCIATIONS Building and loan associations Building and loan associations are corporations whose capital stock is required or is permitted to be paid in by the stockholders in regular, equal periodical payments and whose purpose is: 40 BANKING LAWS 1. to accumulate the savings of its stockholders; 2. to repay to said stockholders their accumulated savings and profits upon surrender of their shares; 3. to encourage industry, frugality, and home building among its stockholders; and 4. to loan its funds, and funds borrowed for the purpose, to stockholders on the security of unencumbered real estate and with the pledge of shares of the capital stock owned by such stockholders as collateral security. Prohibition It shall be unlawful for any building and loan association to make any loan upon property that is suitable for us only as theatre, public hall, church, convent, school, club, hotel, garage, or other public building. Monetary Board may grant exemptions in cases of public hall, school, hotel and other public buildings to facilitate the investment of idle funds. Investment in bonds With the approval of the Monetary Board, a building and loan association may also invest such of its funds as may otherwise remain idle in bonds and obligations of the Republic of the Philippines or any of its subdivisions, or GOCCs. Capital stock The capital stock of such associations shall be paid in by the stockholders in regular, equal, periodical payments known as dues, at such times and in such amounts as shall be provided in their by laws. The dues on each share of stock subscribed for by a stockholder shall continue to be paid by the stockholder to the association until the share has been duly withdrawn, cancelled, or forfeited or until the share has reached its matured value. Matured value is when the due paid on each share and the net earnings thereof, in accordance with the by laws, shall amount to the matured of the share. Certificates of stock Certificates of stock shall be issued to each stockholder upon the payment of the membership fees and first installment of the dues. 41 BANKING LAWS Installment shares v. paid-up shares While still being paid, the shares are called installment shares. After they are fully paid, they are called paid-up shares. Once paid-up, relationship between the association and stockholder is changed into that of debtor and creditor. Free shares and pledged shares Shares which have not been pledged as security for the payment of a loan shall be called “free” shares,” and shares which have been so pledged shall be called “pledged shares.” Surrender of shares Stockholders may surrender their shares and withdraw from the association after paying twelve (12) monthly installment of dues upon giving sixty (60) days’ notice in writing to the board of directors and the withdrawal value shall be the total sum of the dues paid thereon plus not less than ninety percent (90%) of all dividends earned by such shares up to the end of the last preceding fiscal period plus such interest for the time elapsed since the end of the period as shall be allowed by the board of directors. Stockholders who have not paid twelve (12) monthly installments of dues may, after giving sixty (60) days’ notice to the board, surrender their shares and withdraw from the association, and the withdrawal value shall be the total sum of the due paid thereon plus such dividend or interest as may be allowed by the board of directors. RURAL BANKS Scope of authority A rural bank may perform any or all of the following services: 1. Extend loans and advances primarily for the purpose of meeting the normal and credit needs of farmers, fishermen, or farm families as well as cooperatives, merchants, private and public employees; 2. Accept savings and time deposits; 3. Ac as correspondent bank of other financial institutions; 42 BANKING LAWS 4. Rediscount paper with the LBP, DBP, or any other bank, including its branches and agencies. 5. Act as a collection agent; 6. Offer other banking services as provided in Section 772 of RA 337, as amended; 7. Extend financial assistance to private and public employees in accordance with RA 3779, as amended; and 8. With prior approval of the Monetary Board: a. Accept current or checking accounts; b. Accept NOW accounts; c. Act as trustee over estates or properties of farmers and merchants; d. Act as official government depository; e. Sell domestic drafts; and f. Invest in allied undertakings. Rationale The rationale behind rural banking system is the need to promote comprehensive rural development with the end in view of the following: 1. A more equitable distribution of opportunities, income and wealth; 2. A sustained increase of goods and services produced by the nation for the benefit of the people; and 3. An expanding productivity as a key to raising the quality of life for all. This can be achieved by making credit available and readily accessible in the rural areas. Capital stock With the exception of shareholdings of corporations organized primarily to hold equities in rural banks, and of Filipino-controlled domestic banks, the capital stock of any rural 43 BANKING LAWS bank shall be fully-owned and held by Philippine citizens or entities qualified under Phil. law to own and hold such capital stock. Board All members of the BOD shall be Filipino citizens. However, there is no prohibition against any appointive or elective public official from serving as director, officer, consultant or in any capacity in the bank. Incentives Foreclosure of mortgages exempt from newspaper publication requirements if the loan, excluding interest due and unpaid, does not exceed P100,000. Exempt from payment of all taxes, fees and charges of whatever nautre and description, except corporate income taxes and local taxes, fees and charges for aperiod of five years from the date of commencement of operations. Free from notarization fees Free from registration fees and DST in RD. ACT LIBERALIZING ENTRY OF FOREIGN BANKS Republic Act No. 7721 An act liberalizing the entry and scope of operations of foreign banks in the Philippines and for other purposes Declaration of policy The State shall: 1. Develop a self-reliant and independent national economy effectively controlled by Filipinos; and 2. Encourage, promote and maintain a stable, competitive, efficient and dynamic banking and financial system. Pursuant to this policy, the Philippine banking and financial system is hereby liberalized to create a more competitive environment and encourage greater foreign participation 44 BANKING LAWS through increase in ownership in domestic banks by foreign banks and the entry of new foreign bank branches. In allowing increased foreign participation in the financial system, it shall be the policy of the State that the financial system shall remain effectively controlled by Filipinos. Three (3) modes of entry for foreign banks The Monetary Board may authorize foreign banks to operate in the Philippine banking system through any of the following modes of entry: 1. by acquiring, purchasing or owning up to sixty percent (60%) of the voting stock of an existing bank; 2. by investing in up to sixty percent (60%) of the voting stock of a new banking subsidiary incorporated under Philippine laws; or 3. by establishing branches with full banking authority. A foreign bank or a Philippine corporation, however, may own up to sixty percent (60%) of the voting stock of only one domestic bank or new banking subsidiary. Guidelines for entry In approving entry applications of foreign banks, the Monetary Board shall: 1. ensure geographic representation and complementation; 2. consider strategic trade and investment relationships between the Philippines and the country of incorporation of the foreign bank; 3. study the demonstrated capacity, global reputation for financial innovations and stability in a competitive environment of the applicant; 4. see to it that reciprocity rights are enjoyed by Philippine banks in the applicant’s country; and 5. consider willingness to fully share their technology. Only those among the top one hundred fifty (150) foreign banks in the world or the top five (5) banks in their country of origin as of the date of application shall be allowed entry in (b) and (c) of modes of entry. 45 BANKING LAWS In approving entry, Monetary Board shall adopt such measures as may be necessary: 1. to ensure that, at all times, the control of seventy (70%) of the resources or assets of the entire banking system is held by domestic banks which are at least majority-owned by Filipinos; 2. prevent a dominant market position by one bank or the concentration of economic power in one or more financial institutions, or in corporations, partnerships, groups or individuals with related interests; and 3. secure the listing in the Philippine Stock Exchange of the shares of stocks of banking corporations established under (a) and (b) modes of entry. To qualify to establish a branch or subsidiary, the foreign bank applicant must be widely-owned and publicly-listed in its country of origin, unless the foreign bank applicant is owned by the government of its country of origin. Capital requirements Locally incorporated subsidiaries shall have the same minimum capital requirements as domestic banks of the same category. For foreign bank branches, they shall permanently assign capital of not less than the U.S. dollar equivalent of P210,000,000.00 at the exchange rate on the date of effectivity of this law. The permanently assigned capital shall be inwardly remitted and converted into Philippine currency. Branches A foreign bank shall be entitled to three (3) branches upon remittance of minimum capital requirement. A foreign bank may open three (3) additional branches in locations designated by the Monetary Board by inwardly remitting and converting into Philippine currency as permanently assigned capital the U.S. dollar equivalent of P35,000,000.00 per additional branch at the exchange rate on the date of effectivity of this law. Total number of branches for each new foreign bank entrant shall not exceed six (6). 46 BANKING LAWS Head office guarantee The head office of foreign bank branches shall guarantee prompt payment of all liabilities of its Philippine branches. Equal treatment Foreign banks authorized to operate under the law shall perform the same functions, enjoy the same privileges, and be subject to the same limitations imposed upon a Philippine bank of the same category. These limits include, among others, the single borrower’s limit and capital to risk asset ratio as well as the capitalization required for expanded commercial banking activities under the General Banking Act and other related laws of the Philippines. OFFSHORE BANKING SYSTEM LAW Presidential Decree No. 1034 Authorizing the establishment of an offshore banking system in the Philippines Approved 30 September 1976 Offshore banking Offshore banking shall refer to the conduct of banking transactions in foreign currencies involving the receipt of funds from external sources and the utilization of such funds in transactions with non-residents or other offshore banking units. Offshore banking unit Offshore banking unit shall mean a branch, subsidiary or affiliate of a foreign banking corporation which is duly authorized by the Central Bank to transact offshore banking business in the Philippines. Deposits Deposits shall mean funds in foreign currencies which are accepted and held by an offshore banking unit in the regular course of business, with the obligation to return an equivalent amount to the owner thereof, with or without interest. 47 BANKING LAWS Who are qualified to operate an offshore banking unit? Only banks which are organized under any law other than those of the Republic of the Philippines, their branches, subsidiaries or affiliates, shall be qualified to operate offshore banking units in the Philippines. Local branches of foreign banks already authorized to accept foreign currency deposits under RA 6426 may opt to apply for authority to operate an offshore banking unit under PD 1034. However, upon their receipt of a corresponding certificate of authority to operate as an offshore banking unit, the license to transact business under RA 6426 shall be deemed automatically withdrawn. Certificate of authority to operate The Monetary Board is authorized to issue certificates of authority to operate offshore banking units. In issuing such certificate, the Monetary Board shall take into consideration the applicant’s: 1. liquidity and solvency position; 2. net worth and resources; 3. management; 4. international banking expertise; 5. contribution to the Philippine economy; and 6. other relevant factors such as participation in equity of local commercial banks and appropriate geographic representation. The Central Bank is authorized to collect a fee of not less than US $20,000 upon issuing any certificate of authority to operate and annually thereafter on the anniversary date of such certificate. Corporate undertaking No application to operate as an offshore banking unit shall be considered unless the applicant shall have first submitted to the Central Bank a sworn undertaking of its head office or parent or holding company, duly supported by an appropriate resolution of its board of directors, that, among other things: 48 BANKING LAWS 1. it will, on demand, provide the necessary specified currencies to cover liquidity needs that may arise or other shortfall that its offshore banking unit may incur; 2. the operations of its offshore banking unit shall be managed soundly and with prudence; 3. it will train and continually educate a specific number of Filipinos in international banking and foreign exchange trading with a view to reducing the number of expatriates; 4. it will provide and maintain in its offshore banking unit net office funds in the minimum amount of US $ 1,000,000; and 5. it will start operations of its offshore banking unit within 180 days from receipt of its certificate of authority to operate such unit. Transactions of offshore banking units Transactions of offshore banking units with non-residents or with other offshore banking units shall be freely allowed, but safeguards will be established to prevent circumvention of foreign exchange regulations. Transactions of offshore banking units with residents of the Philippines, including those with local commercial banks and local branches of foreign banks authorized to receive foreign currency deposits under RA 6426, shall be subject to applicable law and regulations. Tax and other incentives The provisions of any law to the contrary notwithstanding, the transactions of offshore banking units with non-residents and other offshore banking units shall be subject to a five percent (5%) tax on the net income from such transactions which shall be in lieu of all taxes on the said transactions. The transactions of offshore banking units with local commercial banks, including branches of foreign banks that may be authorized by the Central Bank to transact business with offshore banking units, shall likewise be subject to the same tax, except net income from such transactions as may be specified by the Secretary of Finance, upon recommendation of the Monetary Board, to be subject to the usual income tax payable by banks. 49 BANKING LAWS Any income of non-residents from transactions with said offshore banking units shall be exempt from any tax. In the case of transaction with residents (other than other offshore banking units or local commercial banks including local branches of foreign banks that may be authorized by the Central Bank to transact business with offshore banking units), interest income from loans granted to such residents shall be subject only to a ten percent (10%) withholding tax as final tax. Effect of certain laws The Usury Law, Uniform Currency Law, and PDIC law shall not apply to transactions and/or deposits in offshore banking units in the Philippines. The provisions of RA 1405 or the Law on Secrecy of Bank Deposits shall apply to deposits in offshore banking units. FOREIGN CURRENCY DEPOSIT ACT Republic Act No. 6426, as amended An act instituting a foreign currency deposit system in the Philippines and for other purposes Approved 04 April 1974 Authority to deposit foreign currencies Any person, natural or juridical, may 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. Exception Foreign currencies which are required by the Central Bank to be surrendered in accordance with the provisions of RA 7653 may not be deposited. Authority of the banks to accept foreign currency deposits The banks designated by the Central Bank shall have the authority: 1. To accept deposits and to accept foreign currencies in trust; 2. To issue certificates to evidence such deposits; 50 BANKING LAWS 3. To discount said certificates; 4. To accept said deposits as collaterals for loans subject to such rules and regulations as may be promulgated by the Central Bank; and 5. To pay interest in foreign currency on such deposits. Foreign currency cover requirements Depositary banks shall maintain at all times a one hundred percent (100%) foreign currency cover for their liabilities, except as the Monetary Board may otherwise prescribe or allow. At least fifteen percent (15%) of such cover shall be in the form of foreign currency deposit with the Central Bank and the balance in the form of foreign currency loans or securities, which loans or securities shall be of short term maturities and readily marketable. Foreign currency cover shall be in the same currency as that of the corresponding foreign currency deposit liability, unless the Monetary Board may otherwise prescribe or allow. The Central Bank may pay interest on the foreign currency deposit, and if requested, shall exchange the foreign currency notes and coins into foreign currency instruments drawn on its depositary banks. Central Bank may exempt from the 15% foreign currency cover in the form of foreign currency deposit with the Central Bank in cases of depository banks which, on account of their net worth, resources, past performance, or other pertinent criteria, have been qualified by the Monetary Board to function under an expanded foreign currency deposit system. Said banks may also be exempt from the limitations on the maturity periods for loans and securities subject to prior approval by the Central Bank. Withdrawability and transferability of deposits There shall be no restriction on the withdrawal by the depositor of his deposit or on the transferability of the same abroad except those arising from the contract between the depositor and the bank. 51 BANKING LAWS Tax exemption All foreign currency deposits made under RA 6426, as amended, as well as foreign currency deposits authorized under PD 1304, including interest and all other income or earnings of such deposits, are hereby exempted from any and all taxes whatsoever irrespective of whether or not these deposits are made by residents or non-residents so long as the deposits are eligible or allowed under the said laws and, in the case of non- residents, irrespective of whether or not they are engaged in trade or business in the Philippines. Secrecy of foreign currency deposits All foreign currency deposits authorized under RA 6426, as amended by PD 1305, as well as foreign currency deposits authorized under PD 1034, are hereby declared as and considered of an absolutely confidential nature and, except upon the written permission of the depositor, in no instance shall foreign currency deposits be examined, inquired or looked into by any person, government official, bureau or entity whether public or private. Unlike the Law on Secrecy of Banks Deposits Act, there is only one exception for foreign currency deposits and that is when there is a written permission from the depositor. Exemption from attachment, garnishment and other process Foreign currency deposits shall be exempt from attachment, garnishment, or any other order or process of any court, legislative body, government agency, or any administrative body whatsoever. Salvacion v. Central Bank of the Philippines 278 SCRA 27 FACTS: Greg Bartelli, an American tourist, was arrested for committing four counts of rape and serious illegal detention against Karen Salvacion. Police recovered from him several dollar checks and a dollar account in the China Banking Corp. He was, however, able to escape from prison. In a civil case filed against him, the trial court awarded Salvacion moral, exemplary and attorney’s fees amounting to almost P1,000,000.00. Salvacion tried to execute the judgment on the dollar deposit of Bartelli with the China Banking Corp. but the latter refused arguing that Section 11 of Central Bank Circular No. 960 exempts foreign currency deposits from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body whatsoever. 52 BANKING LAWS Salvacion therefore filed this action for declaratory relief in the Supreme Court. ISSUE: Should Section 113 of Central Bank Circular No. 960 and Section 8 of Republic Act No. 6426, as amended by PD 1246, otherwise known as the Foreign Currency Deposit Act be made applicable to a foreign transient? HELD:The provisions of Section 113 of Central Bank Circular No. 960 and PD No. 1246, insofar as it amends Section 8 of Republic Act No. 6426, are hereby held to be INAPPLICABLE to this case because of its peculiar circumstances. Respondents are hereby required to comply with the writ of execution issued in the civil case and to release to petitioners the dollar deposit of Bartelli in such amount as would satisfy the judgment. RATIO: Supreme Court ruled that the questioned law makes futile the favorable judgment and award of damages that Salvacion and her parents fully deserve. It then proceeded to show that the economic basis for the enactment of RA No. 6426 is not anymore present; and even if it still exists, the questioned law still denies those entitled to due process of law for being unreasonable and oppressive. The intention of the law may be good when enacted. The law failed to anticipate the iniquitous effects producing outright injustice and inequality such as the case before us. The SC adopted the comment of the Solicitor General who argued that the Offshore Banking System and the Foreign Currency Deposit System were designed to draw deposits from foreign lenders and investors and, subsequently, to give the latter protection. However, the foreign currency deposit made by a transient or a tourist is not the kind of deposit encouraged by PD Nos. 1034 and 1035 and given incentives and protection by said laws because such depositor stays only for a few days in the country and, therefore, will maintain his deposit in the bank only for a short time. Considering that Bartelli is just a tourist or a transient, he is not entitled to the protection of Section 113 of Central Bank Circular No. 960 and PD No. 1246 against attachment, garnishment or other court processes. Further, the SC said: “In fine, the application of the law depends on the extent of its justice. Eventually, if we rule that the questioned Section 113 of Central Bank Circular No. 960 which exempts from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body whatsoever, is applicable to a foreign transient, injustice would result especially to a citizen aggrieved by a foreign guest like accused Greg Bartelli. This would negate Article 10 of the New Civil Code which provides that “in case of doubt in the interpretation or application of laws, it is presumed that the lawmaking body intended right and justice to prevail.”” Deposit insurance coverage The deposits under RA 6426 shall be insured under the provisions of RA 3591, as amended, or the Charter of the Philippine Deposit Insurance Corporation. 53 BANKING LAWS Insurance payment shall be in the same currency in which the insured deposits are denominated. ACT CREATING THE PHILIPPINE DEPOSIT INSURANCE CORPORATION Republic Act No. 3591 An act establishing the Philippine Deposit Insurance Corporation, defining its powers and duties and for other purposes 22 June 1963 Creation of PDIC There is hereby created a Philippine Deposit Insurance System which shall insure the deposits of all banks which are entitled to the benefits of insurance under RA 3591. PDIC may also be appointed as receiver of a banking institution. Deposit The term “deposit” means the unpaid balance of money or its equivalent received by a bank in the usual course of business and for which it has given or is obliged to give credit to a commercial, checking, savings, time or thrift account or which is evidenced by a passbook, check and/or certificate of deposit, printed or issue in accordance with Central Bank rules and regulations and other applicable laws, together with such other obligations of the bank which, consistent with banking usages and practices, the Board of Directors shall determine and prescribe by regulations to be deposit liabilities of the bank. Provided that any obligation of a bank which is payable at the office of the bank located outside of the Philippines shall not be a deposit for any of the purposes of this Act or included as part of the total deposits or of insured deposits. Provided further, that, subject to the approval of the Board of Directors, any insured bank which is incorporated under the laws of the Philippines which maintains a branch outside the Philippines may elect to include for insurance its deposit obligations payable only at such branch. 54 BANKING LAWS Insured deposit The term “insured deposit” means the net amount due to any depositor for deposits in an insured bank (after deducting offsets) less any part thereof which is in excess of one hundred thousand pesos (P100,000). Therefore, the maximum amount of insured deposit for every depositor is only P100,000. All these types of deposits are covered: demand, savings and time deposits; if a depositor has all three types of accounts, he can only recover up to P100,000. He is considered as one depositor. In determining such amount due to any depositor, there shall be added together all deposits in the bank maintained in the same capacity and the same right for his benefit either in his own name or in the name of others. Banks and its branches considered as one unit. The provisions of any law to the contrary notwithstanding, an owner/holder of any negotiable certificate of deposit shall be recognized as a depositor entitled to the rights provided in this Act unless his name is registered as owner/holder thereof in the books of the issuing bank. Insurance of deposits in foreign currency Deposit obligations in foreign currency of any insured bank are likewise insured. Deposit insurance coverage and payment for insured deposits maintained in foreign currencies in a closed insured bank shall be determined in accordance with the following rules: 1. The deposit in foreign currency shall be converted into its equivalent amount in Philippine pesos at the interbank rate obtaining on the date the bank was closed or on insolvency, and the insurance coverage shall extend to such computed amount, but in no case to exceed P40,000 for each depositor; and 2. The liability of PDIC to each depositor shall be payable in Philippine pesos in the amount of insurance coverage as computed above. Trust funds The term means funds held by an insured bank in a fiduciary capacity and include, without being limited to, funds as trustee, executor, administrator, guardian or agent. Trust funds are not considered as insured deposits. 55 BANKING LAWS Deposit insurance coverage The deposit liabilities of any bank or banking institution, which is engaged in the business of receiving deposits, shall be insured with the PDIC. Coverage is compulsory. Termination of insured status Two instances: when it fails or refuses to pay assessment and when it becomes insolvent. Should any bank fail or refuse to pay any assessment required to be paid by such bank, and should the bank not correct such failure or refusal within 30 days after written notice has been given by the PDIC, the insured status of such bank shall be terminated by the Board of Directors. The bank shall give written notice of such termination to each of the depositors and the PDIC shall publish the notice of the termination of the insured status of the bank. After the termination of the insured status of the bank, deposits of each depositor in the bank, less all subsequent withdrawals from any deposits of such depositor, shall continue to be insured for a period of 90 days. Unsafe or unsound practices These refer to any action or lack of action which is contrary to generally accepted standards of prudent operation, the possible consequences of which, if continued, would result in abnormal risk of loss or damage to a bank, depositors and its shareholders or even the depletion of the Insurance Fund administered by the PDIC. Cease and desist order (CDO) A cease and desist order shall refer to the Order issued by PDIC, through its Board of Directors, to a member insured bank, or its directors or agents to correct (a) unsafe or unsound practices in conducting the business of the bank, (b) violations of any law or regulation to which the insured bank is subject, or (c) violations of the provisions of RA 3591, as amended or any order, rule or instruction issued by the PDIC or any written condition imposed by PDIC in connection with any transaction with or grant by the PDIC. 56 BANKING LAWS The object of the CDO is to protect depositors and the PDIC against existing or potential risk exposures from said practices or violations. Payment of insured deposit An insured bank shall be deemed closed on account of insolvency when ordered closed by the Monetary Board. Whenever an insured bank shall have been closed on account of insolvency, payment of insured deposits in such bank shall be made by PDIC as soon as possible either (1) by cash or (2) making available to each depositor a transferred deposit in another insured bank in an amount equal to the insured deposit of such depositor. Proof of claims may be required by PDIC before payment. If it is not satisfied, PDIC may require the final determination of a court of competent jurisdiction before paying such claim. Depositor shall retain his claim against the bank for any uninsured portion of his deposit. Bar of claim by depositor If, after the PDIC shall have given at least three months’ notice to the depositor by mailing a copy thereof to his last known address appearing on the records of the closed bank, the depositor in the closed bank shall fail to file a claim for his insured deposit from the PDIC within eighteen (18) months after the Monetary Board shall have ordered the closure of said bank, all rights of the depositor against the PDIC with respect to the insured deposit shall be barred, and all rights of the depositor against the closed bank and its shareholders or the receivership estate to which the PDIC may have become subrogated, shall thereupon revert to the depositor. Provided, that the claimant shall enforce his duly filed claim against the PDIC within one year after the eighteen-month period heretofore mentioned. Subrogation The PDIC, upon payment, shall be subrogated to all rights of the depositor against the closed bank to the extent of such payment. Payments made by PDIC shall be considered as a preferred credit similar to taxes. 57 BANKING LAWS Discharge of the PDIC The PDIC shall be discharged from its obligation to a depositor upon payment of an insured deposit by itself or upon payment of a transferred deposit to any person by the new bank or by an insured bank in which a transferred deposit has been made available. Other powers of PDIC 1. Provide financial assistance to an insured bank in danger of closing. 2. Borrow from the Central Bank and from any bank designated as depository or fiscal agent of the Philippine Government. 3. Issue bonds, debentures and other obligations with the approval of the President of the Philippines. 4. Act as receiver of any banking corporation. Receiver Receiver includes a receiver, commission, person, or other agency charged by law with the duty to take charge of the assets and liabilities of a bank which has been forbidden from doing business in the Philippines, as well as the duty to gather, preserve, and administer such assets and liabilities for the benefit of the depositors and creditors of said bank, and to continue into liquidation whenever authorized under RA 3591, as amended, or other laws, and to dispose of the assets and to wind up the affairs of such bank. THE TRUTH IN LENDING ACT Republic Act No. 3765 An act to require the disclosure of finance charges in connection with extensions of credit Approved 22 June 1963 Declaration of policy It is hereby declared to be the policy of the State to protect its citizens from a lack of awareness of the true cost of credit to the user by assuring a full disclosure of such cost with a view of preventing the uninformed use of credit to the detriment of the national economy. 58 BANKING LAWS Finance charge “Finance charge” includes interest, fees, service charges discounts, and such other charges incident to the extension of credit. Credit “Credit” means any loan, mortgage, deed of trust, advance, or discount; any conditional sales contract; any contract to sell, or sale or contract of sale of property or services, either for present or future delivery, under which part or all of the price is payable subsequent to the making of such sale or contract; any rental purchase contract; any contract or arrangement for the hire, bailment, or leasing of property; any option, demand, lien, pledge of other claim against, or for the delivery of, property or money; any purchase, or other acquisition of, or any credit upon the security of, any obligation or claim arising out of any of the foregoing; and any transaction or series of transactions having a similar purpose or effect. Creditor “Creditor” means any person engaged in the business of extending credit (including any person who, as a regular business practice, makes loans or sells or rents property or services on a time, credit, or installment basis, either as principal or as agent) who requires as an incident to the extension of credit the payment of a finance charge. Disclosure of finance charges Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of transaction, a clear statement in writing setting forth the following information: 1. the cash price or delivered price of the property or service to be acquired; 2. the amounts, if any, to be credited as downpayment and/or trade in; 3. the difference between the amounts set forth under clauses (1) and (2); 4. the charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which are not incident to the extension of credit; 5. the total amount to be financed; 59 BANKING LAWS 6. the finance charge expressed in terms of pesos and centavos; and 7. the percentage that the finance charge bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid balance of the obligation. Penalty for failure to disclose prescribed information Any creditor who, in connection with any credit transaction, fails to disclose to any person any information in violation of Republic Act No. 3765 or any regulation issued pursuant thereto shall be liable to such person in the amount of P100 or in an amount equal to twice the finance charge required by such creditor in connection with such transaction, whichever is greater, except that such liability shall not exceed P2000 on any credit transaction. Action to recover such penalty Action to recover such penalty may be brought by such person within one year from the date of occurrence of the violation in any court of competent jurisdiction. In any such action in which any person is entitled to a recovery, the creditor shall be liable for reasonable attorney’s fees and court costs as determined by the court. Effect of non-disclosure on contract or transaction It shall not affect the validity or enforceability of any contract or transaction. Willful violation of the law Any person who willfully violates any provision of this Act or any regulation extended thereto shall be fined by not less than P1000 nor more than P5000, or imprisonment for not less than six (6) months nor more than one year, or both. Consolidated Bank and Trust Corporation v. Court of Appeals G.R. No. 91494, 14 July 1995 Banks are allowed to collect handling charges on loans over P500,000 with a maturity of 730 days or less. However, in the case at bar, Consolidated Bank was not allowed to collect from the private respondents handling charges because it failed to conform to the Truth in Lending Act. All banks and non-bank financial intermediaries authorized to engage in quasi-banking functions are required to strictly adhere to the provisions of Republic Act No. 3765, otherwise known as the Truth in Lending Act, and shall make the true and effective cost of borrowing an integral part of every loan 60 BANKING LAWS contract. The promissory notes signed by private respondents do not contain any stipulation on the payment of handling charges. Petitioner bank, therefore, cannot charge private respondent such handling charges. International Harvester Macleod, Inc. v. Medina G.R. No. 33623, 22 March 1990 Mariano Medina, Jr. purchase on installment 24 truck engines from International Harvester Macleod, Inc. (IHMI). The latter imposed and collected the total sum of P325,596 as finance charges on the installment sales as evidenced by a Retail Notes Analysis and covering transmittal letters, which were prepared by IHMI, delivered to, and signed by Medina. In the Retail Notes Analysis, IHMI used the works “Finance Income Unearned,” “Finance Rate,” “Rate per year,” “Total Amount Finance,” and “Date Finance Begun,” to denote certain entries therein. The trial court ruled that IHMI imposed and collected the amount of P325,596 purely as financing charges and this is conclusive of the fact that it engaged in the business of a financing company without authority from the Securities and Exchange Commission in gross violation of Republic Act No. 5980 or the Finance Company Act. The Supreme Court reversed, ruling that IHMI is not engaged in the business of a financing company. Evidently, the financing transactions that is regulated by Republic Act No. 5980 involves the buying, discounting or factoring of promissory notes and sales on credit or installment. IHMI did not purchase from itself the Retail Notes Analysis executed by Medina. IHMI only extended credit to Medina by allowing him to pay for the 24 truck engines in installment. While the increased price of the sale included a “financing charge,” that charge was simply another name for the interest to be paid by the installment buyer on the deferred payment of the purchase price of the vehicles sold and delivered to him by IHMI. The use of the words “finance charge,” “financing,” or “finance operation” in the documents prepared and letters sent by IHMI to Medina was in compliance with the Truth in Lending Act which requires a creditor (or seller) to fully disclose to the debtor (or buyer) the true cost of credit “with a view of preventing the uninformed use of credit to the detriment of the national economy.” IHMI used the word “finance charge” instead of “interest” in the Retail Notes Analysis which it delivered to Medina because that is the term used in the Truth in Lending Act. IHMI correctly pointed out that its transaction with Medina differs from a financing transaction under Republic Act No. 5980 in that there were only two parties in its transaction with Medina, namely: IHMI and Medina; while in a financing transaction under Republic Act No. 5980, there are three parties involved, namely: (1) the installment buyer; (2) the seller; and (3) the financing company. The buyer executes a note or notes for the unpaid balance of the price of the thing purchased by him on installment. 61 BANKING LAWS The seller assigns the notes or discounts them with a financing company which is subrogated in the place of the seller as creditor of the installment buyer. The transaction between IHMI and Medina did not involve any discounting, factoring or assignment of IHMI’s credit against Medina to a finance company. The transaction was bilateral, not trilateral. No financing company stepped into the shoes of IHMI as assignee or purchaser of IHMI’s credit against Medina. Medina himself, not a financing company, paid IHMI for the truck engines. Medina made his installment payments or amortization to IHMI and not to a financing company. Since IHMI’s business of selling trucks in installment is not the business of a financing company under Republic Act No. 5980, it did not need SEC authorization to engage in it. LAW ON SECRECY OF BANK DEPOSITS Republic Act No. 1405, as amended An act prohibiting disclosure of or inquiry into, deposits with any banking institution and providing penalty therefor Policy of the law It is hereby declared to be the policy of the Government to give encouragement to the people to deposit their money in banking institutions and to discourage private hoarding so that the same may be properly utilized by banks in authorized loans to assist in the economic development of the country. [Section 1, RA 1405] General rule All deposits of whatever nature with banks or banking institutions in the Philippines including investments in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are hereby considered as of an absolutely confidential nature and may not be examined, inquired or looked into by any person, government official, bureau or office. [Section 2, RA 1405] It shall be unlawful for any official or employee of a bank to disclose to any person, other than those mentioned in Section 2 hereof, any information concerning said deposits. [Section 3, RA 1405] Exceptions 1. Upon written permission of the depositor, including: 62 BANKING LAWS a. in determining estate of a decedent; and b. tax compromise cases; 2. In cases of impeachment; 3. Upon order of a competent court in cases of bribery or dereliction of duty of public officials; 4. In cases where the money deposited or invested is the subject matter of the litigation; and 5. Cases of unexplained wealth under Republic Act No. 3019 or the Anti-Graft and Corrupt Practices Act. Penalty for violation of law Any violation of this law will subject offender upon conviction to an imprisonment of not more than five (5) years or a fine of not more than twenty thousand pesos (P20,000) or both, in the discretion of the court. [Section 5, RA 1405] Tatalon Barrio Council v. Chief Accountant, et. al. GR No. 18360, 31 January 1963 In this case, the Supreme Court ruled that savings and current accounts are privileged documents which fall within the protection of Republic Act No. 1405, and their disclosure can only be justified under any of the cases enumerated in Section 2 of the Act, which do not include the prosecution of criminal actions for violation of the provisions of the Anti-Graft and Corrupt Practices Act and of Article 216 of the Revised Penal Code. This has since been overturned by the case of PNB v. Gancayco. Philippine National Bank v. Gancayco GR No. 18343, 30 September 1965 FACTS: Emilio Gancayco and Florentino Flor, as special prosecutors of the Department of Justice, required the Philippine National Bank to produce at a hearing the records of the bank deposits of Ernesto Jimenez, former administrator of the Agricultural Credit and Cooperative Administration, who was then under investigation for unexplained wealth. PNB refused to disclose his bank deposits, invoking Section 2 of Republic Act No. 1405. On the other hand, the prosecutors cited the Anti-Graft and Corrupt Practices Act, particularly Section 8 therewith, to wit: 63 BANKING LAWS “Section 8. Dismissal due to unexplained wealth. - If in accordance with the provisions of RA 1379, a public official has been found to have acquired during his incumbency, whether in his name or in the name of other persons, an amount of property and/or money manifestly out of proportion to his salary and to his other lawful income, that fact shall be a ground for dismissal or removal. Properties in the name of the spouse and unmarried children of such public official, may be taken into consideration, when their acquisition through legitimate means cannot be satisfactorily shown. Bank deposits shall be taken into consideration in the enforcement of this section, notwithstanding any provision of law to the contrary.” PNB then filed an action for declaratory judgment in the CFI of Manila which ruled that Section 8 of the Anti-Graft and Corrupt Practices Act clearly intended to provide an additional ground for the examination of bank deposits. Hence, this appeal. ISSUE: Whether or not a bank can be compelled to disclose the records of accounts of a depositor who is under investigation for unexplained wealth? HELD: Yes. Republic Act No. 3019 provided another exception to Section 2 of Republic Act No. 1405. RATIO: No reconciliation is possible between Republic Act No. 1405 and Republic Act No. 3019 as the two laws are so repugnant to each other. Thus, while Section 2 of Republic Act No. 1405 provides that bank deposits are “absolutely confidential … and, therefore, may not be examined, inquired or looked into,” except in those cases enumerated therein, Section 8 of Republic Act No. 3019 (Anti-graft law) directs in mandatory terms that bank deposits “shall be taken into consideration in the enforcement of this section, notwithstanding any provision of law to the contrary.” The only conclusion possible is that Section 8 of the Anti-Graft Law is intended to amend Section 2 of Republic Act No. 1405 by providing an additional exception to the rule against the disclosure of bank deposits. With regard to the claim that disclosure would be contrary to the policy making bank deposits confidential, it is enough to point out that while Section 2 of Republic Act No. 1405 declares bank deposits to be “absolutely confidential,” it nevertheless allows such disclosure in the following instances: (1) Upon written permission of the depositor; (2) In cases of impeachment; (3) Upon order of a competent court in cases of bribery or dereliction of duty of public officials; (4) In cases where the money deposited is the subject of the litigation. Cases of unexplained wealth are similar to cases of bribery or dereliction of duty and no reason is seen why these two classes of cases cannot be excepted from the rule making bank deposits confidential. The policy as to one cannot be different from the policy as to the other. This policy expresses the notion that a public office is a public trust and any person who enters upon its discharge does so with the full knowledge that his life, so far as relevant to his duty, is open to public scrutiny. 64 BANKING LAWS Banco Filipino Savings and Mortgage Bank v. Purisima GR No. 56429, 28 May 1988 The Bureau of Internal Revenue accused Customs special agent Manuel Caturla before the Tanodbayan of having illegal acquired property manifestly out of proportion to his salary and other lawful income. During the preliminary investigation, the Tanodbayan issued a subpoena duces tecum to the Banco Filipino Savings and Mortgage Bank, commanding its representative to appear at a specified time at the Office of the Tanodbayan and furnish the latter with duly certified copies of the records in all its branches and extension offices of the loans, savings and time deposits and other banking transactions, in the names of Caturla, his wife, Purita, their children, and/or Pedro Escuyos. Caturla moved to quash the subpoena for violating Sections 2 and 3 of RA 1405 which was denied by the Tanodbayan. In fact, the Tanodbayan issued another subpoena which expanded its scope including the production of bank records not only of the persons enumerated above but of additional persons and entities as well. The Banco Filipino filed an action for declaratory relief with the CFI of Manila which was denied by the lower court. Thus this special civil action of certiorari in the SC. The issue here is whether or not the Law on Secrecy of Bank Deposits precludes production by subpoena duces tecum of bank records of transactions by or in the names of the wife, children and friends of a special agent of the Bureau of Customs accused before the Tanodbayan of having allegedly acquired property manifestly out of proportion to his salary and other lawful income in violation of RA 3019? The Supreme Court ruled in the negative. In PNB v. Gancayco, we ruled that: “while Section 2 of Republic Act No. 1405 provides that bank deposits are “absolutely confidential … and, therefore, may not be examined, inquired or looked into,” except in those cases enumerated therein, Section 8 of Republic Act No. 3019 (Anti-graft law) directs in mandatory terms that bank deposits “shall be taken into consideration in the enforcement of this section, notwithstanding any provision of law to the contrary.” The only conclusion possible is that Section 8 of the Anti-Graft Law is intended to amend Section 2 of Republic Act No. 1405 by providing an additional exception to the rule against the disclosure of bank deposits.” The inquiry into illegally acquired property - or property not legitimately acquired - extends to cases where such property is concealed by being held by or recorded in the name of other persons. This proposition is made clear by RA 3019 which quite categorically states that the term “legitimately acquired property of a public officer or employee shall not include … property unlawfully acquired by the respondent, but its ownership is concealed by its being recorded in the name of, of held by, respondent’s spouse, ascendants, descendants, relatives or any other persons. 65 BANKING LAWS To sustain the petitioner’s theory, and restrict the inquiry only to property held by or in the name of the government official or employee, or his spouse and unmarried children is unwarranted in the light of the provisions of the statutes in question, and would make available to persons in government who illegally acquire property an easy and fool-proof means of evading investigation and prosecution; all they have to do would be to simply place the property in the possession or name of persons other than their spouse and unmarried children. This is an absurdity that we will not ascribe to the lawmakers. Philippine Commercial & Industrial Bank, et. al. v. Court of Appeals, et. al. GR no. 84526, 28 January 1991 A group of laborers obtained a favorable judgment against the Marinduque Mining and Industrial Corporation for the payment of backwages amounting to P205,853 before the National Labor Relations Commission. A writ of execution was issued and the Deputy Sheriff served the writ, but it was unsatisfied. The sheriff prepared on his own a Notice of Garnishment addressed to six banks in Bacolod City, including petitioner PCIB, directing the bank concerned to issue a check in satisfaction of the judgment. While the in house lawyer of the Corporation warned the PCIB to withhold any release of its deposit with the bank, the bank issued a manager’s check in the amount of P37,466 which was the exact balance of the private respondent’s account as of that day. The said check was also encashed by the sheriff the next day. Marinduque Mining thus filed a complaint before the RTC of Manila against PCIB and the deputy sheriff, alleging that its current deposit with the petitioner bank was levied upon, garnished, and with undue haste unlawfully allowed to be withdrawn, and notwithstanding the alleged unauthorized disclosure of the said current deposit and unlawful release thereof, the latter have failed and refused to restore the amount of P37,466 to the former’s account despite repeated demands. Trial court rendered judgment in favor of Marinduque Mining Corporation. On appeal, the Court of Appeals initially reversed the trial court’s order but later affirmed it. Thus, this petition to the SC. The issue is whether or not the petitioners violated RA 1405, otherwise known as the Secrecy of Bank Deposits Act, when they allowed the sheriff to garnish the deposit of Marinduque Mining Corporation? SC held no. The SC first ruled that the release of the deposit by the bank was not done in undue and indecent haste. We find the immediate release of the funds by the petitioner bank on the strength of the notice of garnishment and writ of execution, whose issuance, absent any patent defect, enjoys the presumption of regularity. The SC likewise did not find any violation whatsoever by the petitioners of RA 1405, otherwise known as the Secrecy of Bank Deposits Act. The Court, in China Banking Corporation v. Ortega, had the occasion to dispose of this issue when it stated, to wit: 66 BANKING LAWS “It is clear from the discussion of the conference committee report on Senate Bill No. 351 and House Bill No. 3977, which later became Republic Act No. 1405, that the prohibition against examination of or inquiry into a bank deposit under Republic Act No. 1405 does not preclude its being garnished to insure satisfaction of a judgment. Indeed, there is no real inquiry in such a case, and if existence of the deposit is disclosed, the disclosure is purely incidental to the execution process. It is hard to conceive that it was ever within the intention of Congress to enable debtors to evade payment of their just debts, even if ordered by the Court, through the expedient of converting their assets into cash and depositing the same in a bank.” Since there is no evidence that the petitioners themselves divulged the information that the private respondent had an account with the petitioner bank and it is undisputed that the said account was properly the object of the notice of garnishment and writ of execution carried out by the deputy sheriff, a duly authorized officer of the court, we cannot therefore hold the petitioners liable under RA 1405. Mellon Bank v. Magsino et. al. GR No. 71479, 18 October 1990 This case involves the erroneous transfer of US $1,000,000 to Victoria Javier instead of US $1,000 only. Dolores Ventosa requested the transfer of $1000 from the First National Bank of West Virginia, USA to Victoria Javier in Manila through the Prudential Bank. Accordingly, the First National Bank requested the petitioner, Mellon Bank, to effect the transfer. Unfortunately, the wire sent by Mellon Bank to Manufacturers Hanover Bank, a correspondent of Prudential Bank, indicated the amount transferred as “US $1,000,000.00” instead of US $1,000.00. Hence, Manufacturers Hanover Bank transferred one million dollars less bank charges of $6.30 to the Prudential Bank for the account of Victoria Javier. Javier opened a new dollar account in Prudential Bank and deposited $999,943. Immediately, thereafter, Javier and her husband made withdrawals from the account, deposited them in several banks only to withdraw them later in an apparent plan to conceal, launder and dissipate the erroneously sent amount. One of the things they bought was real property in California, USA which was the subject of an action for recovery by Mellon Bank. Later, it filed a case in the Philippines for the recovery of the whole amount, including the purchase price of the real property located in the US. Among other things, private respondents raised the issue of whether or not, by virtue of the principle of election of remedies, an action filed in California, USA, to recover real property located therein and to constitute a constructive trust on said property precludes the filing in our jurisdiction of an action to recover the purchase price of said real property. SC ruled that the filing of a recovery suit in the US does not preclude the filing of an action in the Philippines for the recovery of the purchase price. With regard to our subject matter, Erlinda Baylosis of the Philippine Veteran’s Bank and Pilologo Red, Jr. of Hongkong and Shanghai Banking Corporation were required to give testimonies with regard to the deposits and checks issued by the private respondents Javier, et. al.. These testimonies were questioned for being immaterial and irrelevant as well as covered by RA 1405 on confidentiality. 67 BANKING LAWS SC said: Private respondents’ protestations that to allow the questioned testimonies to remain on record would be in violation of the provisions of RA 1405 on the secrecy of bank deposits is unfounded. Section 2 of said law allows the disclosure of bank deposits in cases where the money deposited is the subject matter of the litigation. Inasmuch as the civil case is aimed at recovering the amount converted by the Javiers for their own benefit, necessarily, an inquiry into the whereabouts of the illegally acquired amount extends to whatever is concealed by being held or recorded in the name of persons other than the one responsible for the illegal acquisition. 68 BANKING LAWS NON-BANK FINANCIAL INTERMEDIARIES NON-BANK FINANCIAL INTERMEDIARIES 1. The Investment House Law Pres. Decree 129 2. Investment Company Act Republic Act No. 2629 3. Financing Company Act Republic Act No. 5580, as amended 4. Pawnshops Pres. Decree No. 114 5. Trust Corporations Chapter VII, General Banking Act THE INVESTMENT HOUSES LAW Presidential Decree No. 129 Governing the establishment, operation and regulation of Investment Houses 15 February 1973 Investment houses An investment house is any enterprise which engages in the underwriting of securities of other corporations. Under its Rules and Regulations, an investment house is defined an “any enterprise which engages or purports to engage, whether regularly or on an isolated basis, in the underwriting of securities of another person or enterprise, including securities of the Government and its instrumentalities. Underwriting 69 BANKING LAWS Underwriting is the act or process of guaranteeing the distribution and sale within the Philippines of securities of any kind issued by another corporation. The distribution and sale may be on public or private placement basis. Private placement Refers to the underwritten sale of securities to less than 20 persons or enterprises. Public placement Refers to the underwritten sale of securities to at least 20 persons or enterprises. Organization and citizenship requirements Investment Houses shall be organized in the form of stock corporations. At least forty percent (40%) of the voting stock of any Investment House shall be owned by citizens of the Philippines. In determining the percentage of foreign-owned voting stocks in Investment Houses, the basis for the computation shall be the citizenship of each stockholder, and, if the stockholder is a corporation, the citizenship of the individual stockholders holding voting rights in that corporation. In approving foreign equity applications in Investment Houses, the SEC shall approve such applications only if the same or similar rights are enjoyed by Philippine nationals in the applicant’s country. Foreign nationals may become members of the board of directors to the extent of the foreign participation in the equity of said enterprise. Capital requirements In the case of newly-organized Investment Houses, the minimum paid-in capital shall be three hundred million pesos (P300,000,000). The Monetary Board may prescribe a higher minimum capitalization in order to promote and ensure the stability of the Philippine capital market and the competitiveness of the investment house industry in line with the national economic goals. Requirements for registration 70 BANKING LAWS The Securities and Exchange Commission shall not register the articles of incorporation of any Investment House, or any amendment thereto, unless it is satisfied from the evidence submitted to it: a. That all the requirements of the PD 129 and of existing laws or regulations to engage in the business have been complied with; b. That the proposed enterprise will not be in conflict with public interest and economic growth; and c. That the amount of capital, the proposed organization, direction and administration, as well as the integrity, experience and expertise of the organizers and the proposed managerial staff, provide reasonable assurance that the enterprise will be conducted with financial prudence. Prohibition No Investment House shall engage in banking operations as defined in Section 2 of Republic Act No. 337, as amended. Powers of investment houses In addition to the powers granted to corporations in general, an Investment House is authorized to do the following: 1. Arrange to distribute on a guaranteed basis securities of other corporations and of the Government or its instrumentalities. 2. Participate in a syndicate undertaking to purchase and sell, distribute or arrange to distribute on a guaranteed basis securities of other corporations and of the Government or its instrumentalities. 3. Arrange to distribute or participate in a syndicate undertaking to purchase and sell on a best-efforts basis securities of other corporations and of the Government or its instrumentalities. 4. Participate as soliciting dealer or selling group member in tender offers, block sales, or exchange offering of securities; deal in options, right or warrants relating to securities and such other powers which a dealer may exercise under the Securities Act. 5. Promote, sponsor, or otherwise assist and implement ventures, projects and programs that contribute to the economy’s development. 71 BANKING LAWS 6. Act as financial consultant, investment adviser, or broker. 7. Act as portfolio manager and/or financial agent. 8. Subject to prior approval by the Monetary Board, the provisions of Chapter IV of the Central Bank Charter, and such rules and regulations as may be issued by the Monetary Board, engage in foreign exchange operations. 9. Act as trustee of a trust fund or trust property, subject to the provisions of the General Banking Act. Conversion into a commercial bank An Investment House may be converted into a commercial bank authorized to operate under an expanded commercial banking authority, subject to applicable laws and regulations and with prior approval of the Monetary Board. Central Bank regulatory powers Investment Houses shall be subject to such regulations of the Central Bank on non-bank financial intermediaries as may be promulgated. The regulations which may include, but need not be limited to a) minimum size of fund acceptance or receipt, b) methods of marketing and distribution, c) terms of placement and maturities, and d) uses of funds may be modified by the Monetary Board insofar as they apply to Investment Houses. Quasi-banking powers The Monetary Board may, at its discretion, determine whether Investment Houses may be permitted to perform quasi-banking functions. If the Monetary Board decides to permit Investment Houses to engage in quasi-banking functions, the Board may require as a condition precedent the obtaining of a certificate of authority for the purpose from the Monetary Board. Whenever the Monetary Board authorizes an Investment House to engage in quasi- banking functions, it may subject said Investment House to further regulations, which may include but need not necessarily be limited to a) liquidity reserve requirements; b) capital-to-risk assets ratios; c) interest rate ceilings; and d) such other constraints as the Board may deem necessary. 72 BANKING LAWS Dealer or broker An Investment House may engage in the business of a dealer or a broker under the Securities Act without obtaining a separate license for the purpose. Use of the term “Investment House” No person, association, partnership or corporation other than those duly licensed as an Investment House shall advertise or hold itself out as being engaged in the business of an Investment House. INVESTMENT COMPANY ACT Republic Act No. 2629 Approved 18 June 1960 Investment company Any issuer which is or holds itself out as being engaged primarily in the business of investing, reinvesting, or trading in securities. Nature and purpose Investment companies are financial institutions that raise funds by selling their own issues of securities to individual investors. The funds obtained will be used to invest in securities of other enterprises. The objective of an investment company is to provide individual investors with safe and profitable use of their savings and to relieve them of the burden of direct responsibility of managing their own savings. Types of investment companies 1. Open-end company - also called mutual funds 2. Closed-end company Powers and functions 1. Offer for sale, sell, or deliver after sale, within the Philippines, any security or any interest in any security, whether the issuer of such security is the investment company or another person. 73 BANKING LAWS 2. Purchase, redeem, retire, or otherwise acquire or attempt to acquire, within the Philippines, any security, or any interest in any security, whether the issuer of such security is such investment company or another person. Security Any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral trust certificate, pre-organization certificate or subscription, investment contract, voting trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, or, in general, any interest or instrument commonly known as a “security” or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. (Section 3(bb), RA 2629). Note that there is an expanded definition under the Revised Securities Act. Form All shares of its capital stock shall be common and voting shares. Capitalization No public offering may be made unless the investment company has a paid up capital of at least P500,000 (Section 13(1), RA 2629). However, Rule 2.1 provides that the minimum subscribed and paid in capital should be at least 50 million. FINANCING COMPANY ACT Republic Act No. 5980, as amended An Act Regulating the Organization and Operation of Financing Companies Declaration of policy It is hereby declared to be the policy of the State to regulate the activities of financing and leasing companies: 1. to place their operations on a sound, competitive, stable and efficient basis as other financial institutions; 74 BANKING LAWS 2. to recognize and strengthen their critical role in providing medium and long-term credit for investments in capital goods and equipment especially by small and medium enterprises particularly in the countryside; and 3. to curtail and prevent acts or practices prejudicial to the public interest. As such, they may be in a better position to extend efficient service in a fair manner to the general public and to industry, commerce and agriculture and thereby more fully contribute to the sound development of the national economy. Financing companies Financing companies are corporations, except banks, investment houses, savings and loans associations, insurance companies, cooperatives, and other financial institutions organized or operating under special laws, which are primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial, or agricultural enterprises. It may extend such credit: 1. by direct lending; or 2. by discounting or factoring commercial papers or accounts receivable; or 3. by buying and selling contracts, leases, chattel mortgages, or other evidences of indebtedness; or 4. by financial leasing of movable as well as immovable property. Financial leasing Financial leasing is a mode of extending credit through a non-cancelable lease contract under which the lessor purchases or acquires, at the instance of the lessee, machinery, equipment, motor vehicles, appliances, business and office machines, and other movable or immovable property in consideration of the periodic payment by the lessee of a fixed amount of money sufficient to amortize at least seventy percent (70%) of the purchase price or acquisition cost, including any incidental expenses and a margin of profit over an obligatory period of not less than two (2) years. During the two-year period, the lessee has the right to hold and use the leased property with the right to expense the lease rentals paid to the lessor. Lessee also bears the cost of repairs, maintenance, insurance and preservation of the leased property. 75 BANKING LAWS However, lessee has no obligation or option to purchase the leased property from the owner-lessor at the end of the lease contract. 76 BANKING LAWS Liability of lessors Financing companies shall not be liable for loss, damage or injury caused by a motor vehicle, aircraft, vessel, equipment, machinery or other property leased to a third person or entity except where the motor vehicle, aircraft, vessel, equipment, machinery or other property is operated by the financing company, its employees or agents at the time of the loss, damage or injury. Rights and powers of financing companies Financing companies shall have the following powers, in addition to those granted by this Act and by other laws: 1. Engage in quasi-banking and money market operations with the prior approval of the Bangko Sentral. 2. Engage in trust operations subject to the provisions of the General Banking Act upon prior approval of the Bangko Sentral. 3. Issue bonds and other capital instruments subject to pertinent rules and regulations of the Bangko Sentral. 4. Rediscount their paper with governmental financial institutions subject to relevant laws, rules and regulations. 5. Participate in special loan or credit programs sponsored by or made available through governmental financial institutions. 6. Provide foreign currency loans and leases to enterprises who earn foreign currency by exports or other means, subject to existing laws and rules and regulations of the Bangko Sentral. Form of organization and capital requirements Financing companies shall be organized in the form of stock corporations at least forty percent (40%) of the voting stock of which is owned by citizens of the Philippines. They shall have paid-up capital of not less than ten million pesos (P10,000,000) in case the financing company is located in Metro Manila and first class cities, five million pesos (P5,000,000) in other classes of cities, and two million five hundred thousand pesos (P2,500,000) in municipalities. 77 BANKING LAWS No foreign national may be allowed to own stock in any financing company unless the country of which he is a national accords the same reciprocal rights to Filipinos in the ownership of financing companies or their counterpart entities in such country. Requirements for registration Aside from requiring compliance with the provisions of the Corporation Code, the SEC shall not register the articles of incorporation of any financing company unless its office is satisfied on the evidence submitted to it, that: 1. All the requirements of existing laws to engage in the business for which the applicant is proposed to be incorporated or organized have been complied with; 2. The organization, direction and administration, as well as the integrity and responsibility of the organizers and administrators reasonably assure the protection of the interest of the general public; and 3. All the requirements of RA 5980 have been complied with. Revocation and suspension of registration 1. Financing company is insolvent 2. It violated any provision of the law Supervision and regulation The SEC is empowered to enforce the provisions of RA 5980, as amended, and issue implementing regulations except insofar as the Bangko Sentral may have supervisory authority for financing companies licensed to perform quasi-banking functions, and insofar as the Monetary Board has authority to prescribe financing company rates and charges. Prohibited acts The Act imposes a fine of not less than P10,000 but not more than P100,000, or imprisonment of not more than six(6)months or both, at the discretion of the court, on "persons, associations, partnerships or corporations, including managing officers thereof," upon the following unlawful acts: 1. Engaging in the business of finance companies without authority from the SEC through advertisement in whatever from, or through other representations without authority. 78 BANKING LAWS 2. Using trade or firm name containing the words "financing company" or "leasing company" or "finance and leasing company" or "finance and investment company" or any other designation that would give the public the impression that it is engaged in the business of a financing company or leasing company without authority. 3. Holding themselves out to be financing companies without authority from the SEC. 4. Any officer, employee, or agent of a financing company who shall knowingly and willingly make any statement in any application, report or document required to be filed under the Act, which is false or misleading with respect to any material fact, or overvalue or aid in overvaluing any securities for the purpose of influencing in any way the action of the company on any loan, or discounting. 5. Any officer, employee or examiner of the SEC directly charged with the implementation of the Act who shall commit, connive, aid or assist in the commission of acts enumerated above. PAWNSHOPS Presidential Decree 114 in relation to CB Circular No. 374 Pawnshop A pawnshop is a person (single proprietorship) or entity (corporation/partnership) engaged in the business of lending money on personal property delivered as security for loans. Purpose of the law To regulate the establishement of pawnshops and to place their operation on any sound and stable basis: 1. To derive maximum benefit as source of credit 2. To prevent and mitigate practices prejudicial to the public; and 3. To prescribe minimum requirements 79 BANKING LAWS Requirements for establishing a pawnshop 1. Registration a. With DTI if single proprietorship b. With SEC if corporation or partnership c. In all cases, with the BSP d. With the Board of Investments if there is foreign equity participation 2. Secure a license to operate from the LGU concerned 3. Minimum paid in capital of P100,000 4. Citizenship a. If single proprietor, must be a Filipino b. If partnership, 70% of capital owned by Filipinos c. If corporation, 70% of voting capital should be owned by Filipinos d. If no voting stock, 70% of members entitled to vote should be Filipinos General requirements as to operation Owner who has other businesses not directly related or incidental to his pawnshop business must keep the latter separate from his other businesses. Maintain adequate security i.e. fire and burglar proof safe where pawns/records are kept. Insure place of business and pawns against fire and burglars. Accountable officers/employees shall be bonded. Accounting records Loans cannot be less than 30% of the appraised value of the personal property unless the borrower stipulated in writing that he is borrowing a lesser amount. 80 BANKING LAWS In addition to interest charges, pawnshops may impose a maximum service charge of P5.00 but in no case to exceed 1% of the principal loan. No other charges, fees, and commissions shall be collected by pawnshop in connection with the loan transaction or payment thereof. Borrower shall not pay insurance premiums. Conduct of business 1. Borrower offers to pledge personal property as security for loan. 2. Property is appraised. 3. Loan agreement is entered into. 4. Pawnshop issues receipt (pawn ticket). 5. Pawnshop lends money to pawner. 6. Pawner pays charges not to exceed P5.00. 7. Pawned property is placed in vault/safe. 8. If upon maturity, borrower fails to pay, pawnshop will wait for 90 days after maturity before it can sell the thing pledged at a public auction. 9. Pawnshop has to comply with notice requirements, to wit: a. Before the 90-day period expires, notice to the borrower that the pawn will be sold if not redeemed within 90 days from maturity specifying time, date, and place of auction sale. b. If there is no redemption, pawnshop will sell the pawn after publishing a notice of sale in at least two newspapers in the city/municipality of operation six (6) days before the date of sale. In remote areas where there is no newspaper, by posting at City Hall or Municipal Building and two other conspicuous public places where pawnshop operates. c. Sale of pawn by auctioneer/notary public to higher bidder. 81 BANKING LAWS Supervisory powers of the Bangko Sentral BSP official in charge of non-bank financial intermediaries or authorized agent may inspect, examine, and investigate the records of pawnshop to ensure compliance with PD 114. Said official or agent makes recommendations to the Monetary Board. Impose penalties for violation of PD 114. TRUST CORPORATIONS Chapter VII General Banking Act Trust corporation A trust corporation is any corporation formed or organized for the purpose of acting as trustee, administering any trust or holding property in trust or on deposit for the use, benefit or behoof of others. A corporation or a bank may engage in the business of a trust corporation. Standard of care A trust company or any bank authorized to engaged in the business of a trust company shall administer the funds or property under its custody with the skill, care, prudence and diligence necessary under the circumstances then prevailing that a prudent man, acting under like capacity and familiar with such matters, would exercise in the conduct of an enterprise of a like character and with similar aims. No trust company or bank engaged in the business of a trust company shall, for the account of the trustor or the beneficiary of the trust, purchase or acquire property from, or sell, transfer, assign or lend money or property to, or purchase debt instruments of any of the departments, directors, officers, stockholders, or employees of the trust company or bank, or relatives within the first degree of consanguinity or affinity, or the related interests, of such director, officers, and stockholders, unless the transaction is specifically authorized by the trustor and the relationship of the trustee and the other party involved in the transaction is fully disclosed to the trustor or beneficiary of the trust prior to the transaction. 82 BANKING LAWS Powers (in addition to general powers incident to corporations) 1. To act as trustee on any mortgage or bond issued by any municipality, corporation, or any body politic and to accept and execute any other municipal or corporate trust not inconsistent with law. 2. To act under the order or appointment of any court of record as guardian, receiver, trustee or depository of the estate of any minor, insane person, idiot, habitual drunkard, or other incompetent or irresponsible person, and as receiver and depository of any moneys paid into court by parties to any legal proceedings and of property of any kind which may be brought under the jurisdiction of the court by property legal proceedings. 3. To act as the executor of any last will or testament when it is named in the last will and testament as the executor thereof. 4. To act under appointment of a court of competent jurisdiction as administrator of the estate of any deceased person, with the will annexed, or as administrator of the estate of any deceased person when there is no will, and when in either case there is no person qualified, competent, willing, able and entitled to accept such administration. 5. To accept and execute any legal trust confided to it by any court of record or by any person or corporation for the holding, management, and administration of any estate, real or personal, and the rents, issues, and profits thereof. 6. To establish and manage common trust funds, subject to such rules and regulations as may be prescribed by the Monetary Board. Commercial banking activity A trust company may, with the approval of the Monetary Board, do a commercial banking business, but such business must be kept separate and distinct from its trust business. Any banking corporation may, with the approval of the Monetary Board, be authorized to engage in the business of a trust company, but it shall be subject to the provisions on trust operations. Bond/security requirements and paid in capital Except as may otherwise be provided in this Act, no bond or other security shall be required from any trust company for the faithful performance of its duties as trustee, executor, administrator, guardian, receiver or depositary. 83 BANKING LAWS However, the court officer appointing such company as trustee, executor, administrator, guardian, receiver or depositary may, upon proper application, showing special cause therefor, require any corporation which shall seek to be or shall have been so appointed to give adequate security for the protection of the funds or property confided to the corporation and, upon failure of such corporation to give the security required, its appointment as trustee, executor, administrator, guardian, receiver or depositary shall be revoked. Section 65, however, provides: “As security for the faithful performance of its trust duties, every trust company, before transacting trust business, shall carry on deposit with the Central Bank, cash or securities approved by the Monetary Board in an amount equal to not less than two hundred and fifty thousands pesos (P250,000). This may be increased by the Central Bank. Paid in capital and surplus of the company must be at least equal to the amount required to be deposited with the central Bank. Separation of trust funds and property All moneys, properties, or securities received by any trust company shall be kept separate and distinct from all other funds, properties and assets of its general business. The accounts of all such moneys, properties or securities shall likewise be kept separate and distinct from the accounts of its general business. Capital stock may be invested The capital stock and funds of a trust company may be loaned or otherwise invested as its by laws prescribe; if it does a commercial banking business in addition to its trust business, the investment of its funds other than trust funds shall be governed by the relevant provisions of the General Banking Act. Surplus and dividend Every trust company, before the distribution of a dividend, shall carry to surplus 10% of its net profits accruing since the last preceding dividend until the surplus shall amount to 20% of its authorized capital stock and no part of the surplus shall at any time be paid out in dividends, but losses accruing in the course of its business may be charged against the surplus.
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