Published — July 19, 2018
The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of your own lawyer to address your legal concerns, if any.
Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.
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Banks play a vital role in providing an environment conducive to the sustained development of the national economy, and the fiduciary nature of banking which requires high standards of integrity and performance is recognized by the State. In furtherance thereof, R.A. No. 8791, also known as the General Banking Law (“GBL”) was enacted to promote and maintain a stable and efficient banking and financial system that is globally competitive, dynamic and responsive to the demands of a developing economy such as the Philippines [See: Sec. 2, GBL].
The importance of banks to businesses cannot be overstated, considering that banks are the very institution that enterprises, big or small, run to in case of need for additional source of financing. Given the significant and sensitive role that banks play, the government has instituted regulatory measures to ensure that transacting with banks would be as safe and as risk-free as possible.
Supervisory powers of the Bangko Sentral ng Pilipinas
It is worthy to note that it is the Bangko Sentral ng Pilipinas (“BSP”) who exercises supervision over the activities and operations of banks, quasi-banks, trust entities and other financial institutions, and it has the power to inquire into the solvency or liquidity of banking institutions. This is important because in case of legitimate banking concerns and complaints, and matters involving compliance with banking laws and regulations, it is the BSP who has the power to enforce prompt corrective action [See: Sec. 4].
Reserve requirements
To control the volume of money created by the credit operations of the banking system, all banks are required to maintain reserves against potential liability that they may incur on the amounts deposited with them [See: Sec. 94, Central Bank Act]. These reserves would serve as the funding source in the event of an unusually large number of withdrawals and withdrawn amounts.
Single-borrower’s limit
To prevent banks from giving out excessive loans to a single borrower, the law deemed it necessary to put a limit as to how much any given borrower may loan from the bank. This is necessary because extending too much loan to a single borrower will be very risky, as the bank would ultimately lose in case that singular client suffers financial reverses himself, or anything that would adversely affect his state of finances.
Therefore, except as the BSP through the Monetary Board may otherwise prescribe for reasons of national interest, the total amount of loans, credit accommodations and guarantees that may be extended by a bank to any person, partnership, association, corporation or other entity shall at not exceed 20% of the net worth of such bank at any given time. The basis for determining compliance with single-borrower limit shall be the total credit commitment of the bank to the borrower [See: Sec. 35.1 GBL].
The said borrower’s limit may, however, be increased by an additional 10% of the bank’s net worth if the additional liabilities are adequately secured by trust receipts, shipping documents, warehouse receipts or other similar documents of title covering readily marketable, non-perishable goods which must be fully covered by insurance [See: Sec. 35.2 GBL].
Limit on DOSRI transactions
DOSRI stands for “Directors, Officers, Stockholders, and their Related Interests”. The persons mentioned cannot borrow from the bank, nor can he become a guarantor, indorser or surety for loans that the bank would be extending to others, except with the approval of the majority of the directors of the bank, excluding the director concerned. The required approval should likewise be entered into the bank’s records, and a copy of such entry shall be transmitted to the BSP [See: Sec. 36, GBL].
The general policy behind the DOSRI limit is to level the lending field between insiders and outsiders. The rules require that loans and other credit accommodations to DOSRI are to be in the regular course of business and upon terms no less favorable to the bank than those offered to those outside the DOSRI circle. The aim is to prevent the bank from becoming a captive source of finance of the DOSRI [See: Putnis, The Banking Regulation Review, 2015, p. 469].
Limit on equity investment
For commercial and universal banks, there are limits as to how much they can invest in equities in other enterprises. Under the law, a commercial bank’s investment in an enterprise shall not exceed 25% of the total net worth of the bank, and shall not exceed 35% in the total investments [See: Sec. 30, GBL]. On the other hand, a universal bank’s investment in an enterprise shall not exceed 25% of the total net worth of the bank, and shall not exceed 50% in the total investments [See: Sec. 23, GBL].
Penalties for violation
In order to ensure compliance with the measures discussed above, the Central Bank Act provides that persons responsible for such violation shall be punished by imprisonment of 2 to 10 years, or a fine ranging from P50,000.00 to P200,000.00, or a combination of both, at the discretion of the court [See: Sec. 36]. Moreover, whenever a bank persists in carrying on its business in an unlawful or unsafe manner, the BSP, through the Monetary Board, may put such bank under receivership and proceed with its liquidation [See: Sec. 30].
With all these measures in place, enterprises can have peace of mind that the banks, whom they would more often than not depend on for their additional funding needs, will remain stable. This contributes in giving the Philippine banking system a positive outlook, which is very important in encouraging the establishment of new businesses and sustain established ones. Ultimately, all of these would redound to the benefit not only of the economy, but also of the public at large.
Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries regarding laws on banking and other financial institutions, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.
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