LOAN FUNCTIONS
OF BANKS
1
The Manual Regulations of Banks provides that:
BOD of the bank is responsible for the written policies on
credit extension, risk diversification, & guidelines for risk
asset evaluation. (Sec. X301, MORB)
2
LOANS granted by banks are subject to:
- laws passed by Congress
- regulations issued by the BSP, and
- lending policies adopted by each bank.
NOTE: Although banks have the flexibility in adopting their internal credit policies, it is mandated that
these policies must conform to the policies issued by the BSP.
R.A. No. 7653 or the New Central Bank Act (NCBA) provides general guidelines for the BSP in the
issuance of regulations on bank operations, particularly the lending operations of banking institutions.
Section 104 of the NCBA provides as follows:
“Section 104. Guiding Principle. - The Monetary Board shall use the powers
granted to it under this Act to ensure that the supply, availability and cost of
money are in accord with the needs of the Philippine economy and that the
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.” 3
The General Banking Law (GBL) likewise provides regulations on banks’
loan operations which covers the –
(1) amount of loans, credit accommodations and guarantees to a
single individual,
(2) amount of loans, credit accommodations and guarantees to a
bank’s directors, officers, stockholders and their related
interests,
(3) loans and other credit accommodations against real estate,
(4) loans and other credit accommodations on security of chattels
and intangible properties.
4
PURPOSES OF LOANS
Under the GBL of 2000, banks shall grant loans & other
credit accommodations only in amounts and for the periods of
time essential to the effective completion of operations to be
financed consistent with safe and sound banking practice. The
amount, tenor or maturity of the loan must comport with the
actual requirements of the borrower. (New Sampaguita
Builders Construction, et. al. vs. PNB, G.R. No. 148753, July
30, 2004)
5
Although credit policies of banks differ from each other, pursuant to BSP guidelines, each bank’s credit policy
should include among provisions, the following:
A. Credit Approval - credit approving process for new accounts and their amendments, renewal or
refinancing;
B. Credit-Granting Criteria & Credit Analysis - involves the assessment of the creditworthiness of the
client to include the purpose of the credit, risk profile, sources of repayment and valuation of collateral, if
applicable
C. Credit Limits/Loan Portfolio - to mitigate concentration of credit risks to a particular market and
ensure loan portfolio diversification;
D. Types of Credit - like commercial credits, consumer or retail credits, real estate loans and investment
products including microfinance;
E. Acceptable Security - whether real estate or personal property, financial guarantees and credits secured
by deposits;
F. Terms and Conditions of Loans - depending on the type of credit, the standard terms and conditions of
loans granted by banks vary, and
G. Credits Granted to Related Parties - i.e. DOSRI Loans must be covered
by clear policies.
In Prudential Bank & Trust Company vs. Abasolo, G.R. No. 186738, Sept. 27, 2010, the Supreme Court explained
that: “to a banking institution, well-defined lending policies and sound lending practices are essential to perform its
lending function effectively and minimize the risk inherent in any extension of credit.”
6
GENERAL GUIDELINES
In granting loans and other credit accommodations, banks are guided by
the following:
1. It can only grant loans and other credit accommodations in amounts
and for the periods of time essential for the effective completion of
the operations to be financed;
2. The grant of loans and other credit accommodations should be
consistent with safe and sound banking practices; and
3. It must ascertain that the borrower, co-maker, endorser, surety and
guarantor are financially capable of fulfilling commitments to the
bank. (MORB ss X304 [2009]; also Sec. 40 of GBL)
7
MANDATORY CREDITS
Certain types of loans are classified as mandatory credits under
special laws. In other words, banks are required to extend certain types of
loans.
a. Thus, R.A. No. 10000 otherwise known as the Agri-Agra Report Credit
Act of 2009 requires the granting of agrarian reform credits. Agrarian
reform credits refer to loans granted to agrarian reform beneficiaries for
agricultural and agrarian reform purposes. ( See Sections X341 to
X341.15 of the MORB for the implementing regulations)
b. Another example is the mandatory allocation of credit resources to
Micro, Small, and Medium Enterprises (MSMEs). ( See Sections X342 to
X342.7 of the MORB for the implementing regulations)
8
“SAFE AND SOUND BANKING PRACTICES”
“A cornerstone of safe and sound banking is the design and
implementation of written policies and procedures related to identifying,
measuring, monitoring and controlling credit risk. Credit policies
establish the framework for lending and guide the credit-granting
activities of the bank. Such policies should be clearly defined, consistent
with prudent banking practices and relevant regulatory requirements,
and adequate for the nature and complexity of the bank’s activities”
(Bank for International Settlements, Principles for the Management of
Credit Risk 6 [2000)] as quoted in BSP’s “The General Banking Law”
Annotated, Book II, p. 273)
9
The following lending related activities are considered as unsafe and
unsound banking practices:
A. Engaging in hazardous lending and lax collection policies and practices;
B. Permitting officers to engage in lending practices beyond the scope of their
positions;
C. Operating the bank with inadequate internal controls; the for managing and
monitoring
D. Failure to keep accurate and updated books and records;
E. Operating the institution with excessive volume of out-of-territory loans; and
F. Non-observance of the principles and the requirements for managing and
monitoring large exposures and credit risk concentrations under Subsection
X301 (6a) and (6b) of the Manual of Regulations for Banks. (MORB, ss X149,
X408, Appendix 48 (2009)
10
DOCUMENTARY REQUIREMENTS:
In the exercise of its authority, there Monetary Board prescribes the
submission of the following documentary requirements by the credit
applicant:
1) The usual information sheet about the borrower;
2) A copy of the latest Income Tax Return (ITR) of the borrower and co-maker,
if applicable, duly stamped as received by the BIR;
3) If borrower is engaged in business, a copy of the borrower’s latest financial
statements as submitted for taxation purposes to the BIR;
4) A waiver of confidentiality of client information and/or an authority of the
bank to conduct random verification with the BIR in order to establish
authenticity of the ITR and accompanying financial statements submitted by
the client. . . (MORB ssX304.1)
11
Sec. 43, GBL –
The authority of the Monetary Board top prescribe the maturities, as
well as the related terms and conditions for various types of bank loans
and other credit accommodations, should consider the requirements of
the economy for the effective utilization of long-term funds. . . .
12
CREDITWORTHINESS OF THE BORROWER:
Section 40 of the GBL imposes as a pre-condition to the grant of a loan,
the ascertainment that the borrower is capable of fulfilling his
commitments to the bank.
The Manual of Regulations of Banks (MORB) also states that: “Credit
shall be granted on the basis of the primary source of loan repayment or
cash flow, integrity and reputation of the obligation or counterparty as
well as their legal capacity to assume the liability.”
13
CREDIT LINE
- normally given by banks to businessesmen-clients to assist them in
their business operations;
• with a fixed limit or ceiling provided the balance of the line does
not exceed the stipulated ceiling;
• the balance may perhaps never be cleared, since the credit revolves
round and round; hence the title “revolving credit line”;
14
CREDIT LINE
• the actual notes evidencing the debt are short term, but the
borrower may renew them up to the specified maximum throughout
the duration of the line;
• the bank is legally bound under the loan agreement to have funds
available whenever money is borrowed,
• at the maturity of the commitment, borrowings then owing can be
converted into a “term loan”
15
CREDIT LINE
Thus, when a borrower needs money, it makes a drawdown or
availment on the credit line in the form of a note or “promise to
pay” a certain principal amount. The balance of all unpaid
principals, otherwise known as outstanding drawdowns, at any
given time, should not exceed the ceiling or limit. After due
payment of any drawdown or availment, the borrower can make
succeeding drawdowns or availments within the maximum
amount committed, provided the line has not yet expired. (New
Sampaguita BuildersConstruction, et. al. vs. PNB, citing Miranda,
Essentials of Money, Credit and Banking, 5th rev. ed, 1981)
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CREDIT LINE
The bank may not unilaterally downgrade the credit line that it
previously extended by reducing the amount that can be availed of
by the borrower. If a bank enters into a well-defined contractual
relationship it is imperative that the bank and the other party should
honour and adhere to their respective rights and obligations there
under. Law and jurisprudence dictate that obligations arising from
contracts have the force of law between the contracting parties and
should be complied with in good faith. (Premier Dev. Bank vs. C.A.,
G.R. No. 159352, April 14, 2002)
17
Terms and Conditions
Sec. 43 of the GBL provides that the terms and conditions of the
loans to be extended by banks are subject to the regulations to be issued
by the MB. In addition, the GBL prescribes certain basic principles
regarding such terms and conditions.
1. ON AMORTIZATION
• must be adapted to the nature of the operations to be financed;
• For loans or other credit accommodations with more than 5 years maturities, at
least an annual periodic amortisation payments must be required;
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• For loans to be used for projects/Purposes which do not initially produce
revenues adequate for regular amortization payment, payment may be deferred
until such time that revenues are sufficient for the purpose, provided such
initial amortisation date should not be later than 5 years from the date the loan
is granted.
• For microfinance loans, the schedule of loan amortisation should consider the
projected cash flow of the borrower. (Sec. 44, GBL)
19
In syndicated loans, the lead bank may initially be the only lender.
However, it may not have sufficient available cash to lend the whole
amount needed by the borrower. Thus, after extending the loan to the
borrower to partially cover the latter’s needs, the lead bank may
propose loan syndication to other banks with the undertaking to share
the collateral that was already given by the borrower. The agreement to
share the collateral is perfected the moment there is a meeting of minds
thereon among the participating banks and the same agreement is
consummated with the execution of the documents contemplated like a
“mortgage trust indenture” or a “joint real estate mortgage”. (Gateway
Electronics Corporation v. Land Bank of the Philippines, G.R. Nos.
155217 and 156393, July 30, 2003)
20
INTEREST: (below are some law/MORB provisions & jurisprudence)
I. No interest ceiling - In the exercise of its powers, the Monetary Board (MB) suspended the implementation of the Usury
Law. (Advocates for Truth in Lending, Inc. vs. Bangko Sentra Monetary Board, GR No. 192986, Jan. 15, 2013). Section
X305 of the MORB provides that “the rate of interest, including commissions, premiums, fees and other charges, on any
loan or forbearance of any money, goods or credits regardless of maturity and whether secured or unsecured shall not be
subject to any regulatory ceiling.”
II. Interest Rate - The contracting parties to a loan agreement are free to agree on the applicable rate of interest. In the
absence of stipulation, Section X305.1 of the MORB states that:
“The rate of interest for the loan or forbearance of ay money, goods or credits and the rate allowed in judgments, in the
absence of express contract as to such rate of interest shall be six percent (6%) per annum. (As amended by Circular No. 799,
June 21, 2013)
III. Escalation Clause - “The unilateral determination and imposition of increased rates is violative of the principle of
mutuality of contracts ordained in Article 1308 [24] of the Civil Code. One-sided impositions do-not have the force of law
between the parties, because such impositions are not based on the parties’ essential equality.” (New Sampaguita Builders
Const., Inc. vs. PNB)
IV. Unconscionable Interest and Charges - Well settled is the rule that the interest rate that is fixed by both parties may be
invalid the same is excessive or unconscionable. (Advocates for Truth in Lending, Inc. vs. Bangko Sentral Monetary Board).
“While the Usury Law ceiling on interest rates was lifted by BSP Circular No. 905, nothing in said circular grants lenders
‘carte blanche’ authority to raise interest rates to levels that would either enslave their borrowers or lead to a hemorrhaging of
their assets.” (Imperial vs. Jaucian, GR No. 149004, April 14, 2004.
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2. ON PRE-PAYMENT AND RENEWAL
• borrower may at anytime prior to the agreed maturity date prepay, in
whole or in part, the unpaid balance of the loan subject to reasonable
terms and conditions as may be agreed upon between the bank and
its borrower. (Sec. 45, GBL)
• the MB prescribes the conditions/limitations under which banks may
grant extensions or renewals of its loans and other credit
accommodations. (Sec. 48, GBL)
22
3. ON INTEREST
• interest rate not subject to any regulatory ceiling (Sec. X305)
• rate of interest in the absence of stipulation - 6%/annum (Sec.
X305.1)
• escalation clause; when allowable - in the event that the applicable
maximum interest rate is increased by the MB on condition that
there is a stipulation that said rate be reduced in the event that the
applicable maximum interest rate is reduced by law or the MB.
(Sec. X305.2)
• floating interest rate - stated on the basis of Manila Reference Rates
(MRRs), T-BILL Rates or other market based reference rates plus a
margin as may be agreed upon by the parties. (Sec. X305.3)
23
RE: Escalation Clauses - unilateral increase of interest rate, not allowed,
despite the lifting by the BSP (Circular No. 905) of the ceiling of interest
rate under the Usury Law.
RE: Unconscionable Interest and Charges - fixed by both parties may be
invalidated by the courts. The rate may be equitably reduced for being
iniquitous, unconscionable and exorbitant. In Medel vs. Court of
Appeals, 359 Phil. 820, the Supreme Court found the stipulated interest
rate of 5.5%/ month or 66%/annum, unconscionable. “When the agreed
rate is iniquitous or unconscionable, it is considered contrary to morals,
if not against the law. Such stipulation is void”. (Imperial vs. Jaucian,
G. R. No. 149004, April 14, 2004)
24
The same rule applies to penalties and charges. Article 1229 of the Civil
Code empowers the judge to equitably reduce the penalty and charges if the
same is iniquitous or unconscionable.
There may even be cases when the bank may not be allowed to impose
penalty charges not because it is unconscionable but for some other reason.
In the case of Asiatrust Development Corporation vs. Concepts Trading
Corp., G. R. No. 130759, June 20, 2003, The Court ruled that penalty
charges cannot be imposed if due to the bank’s liberality, it waived the
demandability of the entire loan by entering into an agreement allowing the
borrower to continue paying the amortization after the said borrower had
been in default. There is, in effect, a waiver of the penalties and charges
imposable on the loan in the event of default.
25
DUTY OF BORROWERS:
• should familiarize themselves with the terms and conditions of the loan agreement before
signing the same.
• a borrower who is a businesswoman, who borrowed a substantial amount, is expected to be
acquainted with the banking procedures as regards loan applications. With this premise, the
borrower ought to have read the terms and conditions of the document that he or she is
signing, especially so when there will still blank spaces at the time when the borrower
affixed his or her signature thereon. The borrower must read the contract and learn the
manner by which the loans should be paid and settled. (Gloria Ocampo vs. Land Bank of the
Phil., GR No. 164968, July 3, 2009.)
• In fact, it is presumed that the borrower took ordinary care of his concerns by reading the
provisions of the contract of loan. (Ruiz vs. CA, GR No. 146942, April 23, 2003)
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4. CONTRACT OF ADHESION
• “is so called because it’s terms are prepared by only one party
while the other merely affixes his signature signifying his adhesion
thereto” (DBP vs. Perez, et. al. G. R. No. 148541, NOC. 11, 2004)
• The contracts of loan are generally considered as contracts of
adhesion as they are usually in printed form prepared by the bank.
Thus, in case of doubt, the doubt is resolved in favour of the
borrower. (RCBC vs. C. A., 305 SCRA 449)
27
5. DOSRI ACCOUNTS
- as additional protection to the public, and to prevent abuse by directors,
officers and stockholders of the bank, the present laws impose restrictions on
the borrowings and security arrangements on loans and other credit
accommodations to directors, officers, stockholders and their related interests
(“DOSRI”)
• DOSRI transactions are not illegal per se but are subject to certain
restrictions;
• reason for such restrictions, so that banks do not make unsound credit
decisions because of insider pressures,
• not wanting banks to have reduced earnings as a result of self-dealing on
more favourable terms than would be available to other bank customers.
28
Sec. 36 of the GBL provides for the “Restriction on Bank Exposure
to Directors, Officers, Stockholders and Their Related Interests. The
restriction prohibits a director or officer of any bank - directly/indirectly,
for himself or as representative of others:
1. borrow from such bank;
2. be a guarantor, indorse or surety for loans from such bank to
others, or
3. in any manner be an obligor or incur any contractual liability to
the bank
29
EXCEPT
a) with a written approval of majority of all directors, excluding the
concerned director (save those under a BSP-approved fringe
benefits plan);
b) the written approval entered upon the record of the bank and
c) a copy of such entry be transmitted to the supervising/examining
department of the SP.
Dealings of a bank with its DOSRI shall be upon terms not less
favourable to the bank than those offered to others.
30
Sanctions
After due notice to the board of directors of the bank, the office of
any bank director, or officer who violates the DOSRI provisions may be
declared vacant. DOSRIs who violate any of the provisions of DOSRI
rules shall be subject to the penalties prescribed under the Manual of
Regulations for Banks, without prejudice to sanctions prescribed under
Sanctions 36 and 37 of the New Central Bank Act.
31
DOSRI Accounts:
• The DOSRI restriction is designed to prevent due advantage to be granted to such bank officers and their
related interests in the grant of bank loans, credit accommodations and guarantees that may be extended
directly or indirectly, by a bank to its directors, officers, stockholders and their related interests; and limits the
outstanding loans, credit accommodations and guarantees that a bank may extend to each of its stockholders,
directors or officers and their related interests to an amount equivalent to their respective unencumbered
deposits and boo value of their paid-in capital contributions in the bank. (Republic of the Philippines vs.
Sandinganbayan, [First Division], GR No. 166859, April 12, 2011)
• The rules on DOSRI apply to cases where a bank officer acquires bank funds for his personal benefit, even if
such acquisition was facilitated by a fraudulent loan application in the name of another person. (Soriano vs.
Republic, GR No. 162336, Feb. 1, 2010)
• The prohibition is directed against a bank director or officer who becomes in any manner an obligation for
money borrowed from or loaned by the bank without the written approval of the majority of the bank’s board
of directors. To make a distinction between the act of borrowing and guarantying is therefore unnecessary
because in either situation, the director or officer becomes an obligor of the bank against whom the obligation
is juridically demandable. (Go vs. Bangko Sentra ng Pilipinas, GR No. 178429, Oct. 23, 2009)
• The fact that the loans are DOSRI in nature or without the benefit of the required approvals or in excess of the
Single Borrower’s Limit would not make said loans void for the reason. Instead, the bank or the officers
responsible for the approval and grant of the DOSRI loan would be subject only to sanctions under the law.
(Republic of the Philippines vs. Sandiganbayan (First Division) . . )
32
DOSRI Accounts:
• The DOSRI restriction is designed to prevent due advantage to be granted to such bank officers and their
related interests in the grant of bank loans, credit accommodations and guarantees that may be extended
directly or indirectly, by a bank to its directors, officers, stockholders and their related interests; and limits the
outstanding loans, credit accommodations and guarantees that a bank may extend to each of its stockholders,
directors or officers and their related interests to an amount equivalent to their respective unencumbered
deposits and boo value of their paid-in capital contributions in the bank. (Republic of the Philippines vs.
Sandinganbayan, [First Division], GR No. 166859, April 12, 2011)
• The rules on DOSRI apply to cases where a bank officer acquires bank funds for his personal benefit, even if
such acquisition was facilitated by a fraudulent loan application in the name of another person. (Soriano vs.
Republic, GR No. 162336, Feb. 1, 2010)
• The prohibition is directed against a bank director or officer who becomes in any manner an obligation for
money borrowed from or loaned by the bank without the written approval of the majority of the bank’s board
of directors. To make a distinction between the act of borrowing and guarantying is therefore unnecessary
because in either situation, the director or officer becomes an obligor of the bank against whom the obligation
is juridically demandable. (Go vs. Bangko Sentra ng Pilipinas, GR No. 178429, Oct. 23, 2009)
• The fact that the loans are DOSRI in nature or without the benefit of the required approvals or in excess of the
Single Borrower’s Limit would not make said loans void for the reason. Instead, the bank or the officers
responsible for the approval and grant of the DOSRI loan would be subject only to sanctions under the law.
(Republic of the Philippines vs. Sandiganbayan (First Division) . . )
33
SECURITY/COLLATERALS:
• Loans may either be secured or unsecured. On the other
hand, contracts of security may either be real or personal,
whereby in the former, fulfilment of the obligation is
secured by an encumbrance on property or a right on the
creditor’s part to go after specific property/ies of the
debtor or a third party for the repayment of the loan
obligation, whereas on the latter, performance of the
obligation is secured by the personal commitment of
another (called the guarantor or surety). [Acme Shoe,
Rubber & Plastic Corporation vs. Hon. Court of Appeals,
GR No. 103576, Aug. 22, 1996] 34
PERSONAL PROPERTY SECURITY ACT
• “Personal Property Security Act” (PPSA) or R.A. No. 11057 signed into law on
Aug. 17, 2018 by Pres. Duterte. This law established a “unified and modern
legal framework for securing obligations with personal property.” (Section 2,
R.A. No. 11057)
• Personal property within the contemplation of the law include bank accounts as
well as investment property held by secured creditors. Secured creditors include
banks that are included in the term “deposit-taking institution or intermediary”
• Security interest under the PPSA means “a property right in collateral that
secures payment or other performance of an obligation, regardless of whether
the parties have denominated it as a security interest, and regardless of the type
of asset, the status of the grantor or secured creditor, or the nature of the secured
obligation; including the right of a buyer of accounts receivable and a lessor
never an operating lease for not less than one (1) year.” (Section 3(j), R.A. No.
11057)
35
DEPOSIT AS SECURITY:
• The most common type of security involving deposits that is resorted to by banks appears in the
form of a Deed of Assignment.
• In “Manila Banking Corporation vs. Anastasia Teodoro, Jr., GR No. 53955, Jan.13, 1989, the
Supreme Court explained that:
“assignment of credit is an agreement by virtue of which the owner of a credit, known as a
the assignor, by a legal cause, such as sale, dation in payment, exchange or donation, and
without the need of the consent of the debtor, transfers his credit and its accessory rights to
another known as the assignee, who acquires the power to enforce it to the same extent as the
assignor could have enforced it against the debtor. It may be in the form... dation in payment,
such as when the debtor, in order to obtain release from his debt, assigns to his creditor a credit he
has against a third person . . . or it may even be merely by way of guaranty, as when the debtor
gives us a collateral, to secure his own debt in favor of the assignee, without transmitting
ownership. . . . “
• In “Victoria Yau Chu vs. Hon Court of Appeals,” GR No. 78519, Sept. 26, 1989, the Supreme
Court said that the assignment of deposit by way of security is in the nature of a pledge. However,
a public auction is no longer necessary to satisfy the obligation because the collateral is money.
36
ASSIGNMENT OF RIGHTS:
• The debtor may also secure his obligation to the bank by assigning
rights by way of security, i.e. the debtor may assign his receivables
from other persons.
• In one case, the assignment of rights, title and interest of the defendant
in the contract of lease of two buildings as well as her rights, title and
interest in the land on which the buildings were constructed to secure
an overdraft from a bank . . . was considered by the Supreme Court as
documents of mortgage contracts in as much as they were executed to
guarantee the principal obligations of the defendant consisting of
overdrafts or the indebtedness resulting therefrom. The Supreme Court
ruled that an assignment to guarantee an obligation is in effect a
mortgage and not an absolute conveyance of title, whIch confers
ownership in the assignee. (People’s Bank and Trust Company vs.
Odom, 64 Phil.126 [1937])
37
Thank You!
38
