The following will highlight important stipulations of different commercial documents mentioned. These stipulations will give the reader an overview on how financing institutions (such as banks) shape our developing economy by providing loan accommodation to applicants in need of financial assistance.
I. Promissory Note:
1. Principal amount of the loan. However, except as the Monetary Board may otherwise prescribe for reasons of national interest, the total amount of loans, credit accommodations and guarantees as may be defined by the Monetary Board that may be extended by a bank to a corporation shall at no time exceed twenty percent (20%) of the net worth of such bank.
2. Amount of interest. The amount of the interest that will be charged will be based on the transfer pool rate after considering the cost of money and interest expenses, giving both the lender and the borrower a win-win situation. Based on the current banking practice, the amount of interest would range from 9% to 13% depending on the inflation rates, transfer pool rates and cost of money as determined by the Treasury Department.
3. Authority given to the bank (lender) to set-off from the borrower’s account any existing deposits which he may have in the bank (lender), in order to pay the principal loan in case of default.
4. Amount of attorney’s fees and penalty charges in case the borrower defaults in payment of the principal obligation. This stipulation is intended to protect the interest of the bank (lender) against defaulting corporations.
II. Credit Line Agreement:
1. A voluntary undertaking that the borrower is desirous to obtain credit accommodation from the lender, freely accepting the terms and conditions set forth in the agreement; and that the lender is willing to extend such credit accommodation.
2. Principal amount of the credit line agreement;
3. The kind of credit line that would fit the needs of the borrower. Under the LC/TR Line (Letter of Credit/Trust Receipt) Line, a bank extends to a borrower a loan covered by the letter of credit, with the trust receipt as security of the loan. A trust receipt is a “security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except through utilization, as collateral, of the merchandise imported or purchased. This is a requirement in case the need of the borrower involves importation of goods. However, this credit line may also be utilized in the export of goods. Of course, the bank gets minimal commission for opening a credit line from the bank and additional commission on the remittances (in case the credit line involves importation of goods). A trust receipt is a requirement in the importation of goods. In the export of goods, the bank may agree on a simple loan agreement with a letter of credit.
4. Collaterals, which may involve bank deposits, chattels or real property;
5. An authority given by the borrower/client to the bank to debit all notes unpaid at maturity from the client’s current account with the bank;
6. The term of the credit line and the interest to be charged for opening a credit line;
7. An authority in favor of the bank to sell properties which were utilized as collaterals, to apply the proceeds thereof to the due and demandable principal loan amount, interest and charges;
8. List of subsidiaries and affiliates of the client which will benefit from the credit line, with an additional stipulation that all the subsidiaries and affiliates will also be solidarily liable with the client;
9. Effectivity of service of correspondences to the client/borrower;
10. A stipulation that the books of the bank concerning the principal amount and computation of the interest shall be conclusive;
11. Attorney’s fees, penalty charges and costs of the suit, in case the bank is compelled to hire the services of counsel to litigate the collection of the principal amount; and
12. Venue in case of litigation.
III. Real Estate Mortgage:
1. The parties in the real estate mortgage;
2. Principal amount of the credit accommodation;
3. Description and list of the real properties subject of the mortgage;
4. A stipulation that the mortgage will also bind the successors in interest of the mortgagor/borrower;
5. A voluntary undertaking that the real property would stand as a security to pay the principal amount of the loan;
6. Payment of expenses in connection with the mortgage, such as the documentary stamp tax, cancellation of the mortgage, notarial fee and taxes assessed on the real property;
7. While the property is in the possession of the mortgagor, an undertaking that all expenses in the repair of the improvements shall be borne by the mortgagor;
8. In case of insolvency by the mortgagor/borrower, an automatic appointment of the bank as receiver to take charge of the property subject of the mortgage;
9. In case of breach of any of the conditions of the mortgage, an automatic appointment of the bank as Attorney-in-Fact to do acts of administration and acts of strict dominion over the mortgaged property;
10. An authority given by the borrower/client to the bank to debit all notes unpaid at maturity from the client’s current account with the bank;
11. Penalty interests, attorney’s fees, and other expenses relative to the foreclosure of the real property;
12. A prohibition that the mortgaged property will not be encumbered, leased and mortgaged without the written consent of the mortgagor;
13. Possibility of changes in the interest rates and bank charges with advance notice to the mortgagor/borrower;
14. A stipulation of the mortgagor’s waiver under Article 13 of Rule 39 of the Rules of Court;
15. A stipulation that the mortgaged property is clean from all prior liens and encumbrances;
16. Signature of the parties and their respective witnesses to the mortgaged contract;
17. The mortgage must be notarized and annotated in the Registry where the real property is located.
III. Chattel Mortgage:
1. Same Stipulations as in the real estate mortgage
2. Affidavit of Good faith - It is an oath wherein the parties “severally swear that the mortgage is made for the purpose of securing the obligations specified in the conditions thereof and for no other purposes and that the same is just and valid obligation and one not entered into for the purpose of fraud.”
IV. Surety Agreement:
It is customary in the banking institution that at least 51% of the stockholders acquiring a controlling interest in the corporation must sign the surety agreement. In the surety agreement, the signatories will be solidarily liable with the corporation with respect to the credit line granted in favor of the corporation. It is a common banking practice to require the JSS (“Joint and Solidary Signature”) of a major stockholder or corporate officer, as an additional security for loans granted to corporations. There are at least two reasons for this: (1) In case of default, the creditor’s recourse, which is normally limited to the corporate properties under the veil of separate corporate personality, would extend to the personal assets of the surety; (2) Such surety would be compelled to ensure that the loan would be used for the purpose agreed upon, and that it would be paid by the corporation.
Some banks will grant a continuing suretyship agreement with Corporations whom the bank considers as a valued client. The criteria for the grant of the continuing suretyship agreement will be based on the following:
1. Number of years in the business
2. Status in the industry
3. Satisfactory credit.
The continuing surety agreement credit line program will allow corporations to avail of the credit line even before the 6-month waiting period.
V. Trust Receipt:
1. The description of the merchandise with reference to the bill of lading
2. The term of the trust receipt
3. An undertaking of the entrustee that he merely holds the merchandise subject of the trust receipt in trust from the entrustor (bank) and that the entrustee is authorized to sell the goods and apply the proceeds for the full payment of his liability with the bank.
VI. Letter of Credit:
1. A notice that the bank has granted a credit line in favor of the corporation/borrower.
2. Percentage commission for opening a credit line plus commission for the remittances, if any. In the banking sector, this is called the compensating business with the client.
Friday, November 5, 2010
Commercial documents necessary for loan availment by companies
First, let us define some of the terms in line with the commercial documents which are necessary in the processing of loan availments:
Loan – it is a transaction wherein the owner of the property, called the LENDER, allows another party, the BORROWER, to use the property. The borrower customarily promises to return the property after a specified period with payment for its use, called INTEREST. The documentation of the promise is called a PROMISSORY NOTE when the property is cash.
Collateral -- ASSET pledged to a lender until the loan is repaid. If the borrower defaults, the lender has the legal right to seize the collateral and sell it to pay off the loan.
Letter of credit – (L/C) An instrument or document issued by a bank guaranteeing the payment of a customer’s draft up to a stated amount for a specified period. It substitutes the bank’s credit for the buyer and eliminates the seller’s risk. A “confirmed letter of credit” is provided by a correspondent bank and guaranteed by the issuing bank. A “commercial letter of credit” is normally drawn in favor of a third party, called the beneficiary.
Trust Receipt – A commercial document whereby the bank releases the goods in the possession of the entrustee but retains ownership thereof while the entrustee shall sell the goods and apply the proceeds for the full payment of his liability with the bank. It is a security arrangement to which a bank acquired ownership of the imported personal property . It is a security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except through utilization, as collateral, of the merchandise imported or purchased.
The failure of the entrustee to return the goods covered by the trust receipt or of the proceeds from the sale thereof shall constitute the crime of estafa.
Promissory note – It is a written promise committing the maker to pay the payee a specified sum of money either on demand or at a fixed or determinable future date, with or without interest.
Mortgage – A debt instrument by which the borrower (mortgagor) gives the lender (mortgagee) a lien on the property as security for the repayment of a loan. The borrower has use of the property, and the lien is removed when the obligation is fully paid. A mortgage normally involves real estate which is called Real Estate Mortgage. For personal property, such as machines, equipment, or tools, the lien is called a chattel mortgage.
Credit – that which is extended to a buyer or borrower on the seller or lender’s belief that that which is given will be repaid. The document evidencing the credit line given to a borrower is called Credit line agreement.
Surety – one who undertakes to pay money or perform other acts in the event the principal fails to do so; A surety is directly and immediately liable for the debt. The document evidencing such is called a surety agreement.
Deposits- Cash, checks or drafts placed with a financial institution for credit to a customer’s account.
The following are the commercial documents which are usually necessary and required in the processing of loan availment in favor of the borrower (corporation):
1. Promissory Note --
2. Credit Line Agreement
3. Real Estate Mortgage
4. Chattel Mortgage
5. Surety Agreement
6. Letter of Credit
7. Trust Receipt
As part of the regulation of the government, the bank (a person extending “credit” must give the debtor (borrower) in writing, a recital of the following upon extending a loan:
1. Cash price;
2. Amount credited if on installment price;
3. Difference between cash and installment price; and
4. Recital of finance charges and what these charges bear to the amount to be financed in percentage.
There are additional charges imposed for the application of loan such as notarial fees, insurance fees, documentary stamp tax, and handling fees. Non-compliance would authorize the debtor to recover any interest payment made.
Loan – it is a transaction wherein the owner of the property, called the LENDER, allows another party, the BORROWER, to use the property. The borrower customarily promises to return the property after a specified period with payment for its use, called INTEREST. The documentation of the promise is called a PROMISSORY NOTE when the property is cash.
Collateral -- ASSET pledged to a lender until the loan is repaid. If the borrower defaults, the lender has the legal right to seize the collateral and sell it to pay off the loan.
Letter of credit – (L/C) An instrument or document issued by a bank guaranteeing the payment of a customer’s draft up to a stated amount for a specified period. It substitutes the bank’s credit for the buyer and eliminates the seller’s risk. A “confirmed letter of credit” is provided by a correspondent bank and guaranteed by the issuing bank. A “commercial letter of credit” is normally drawn in favor of a third party, called the beneficiary.
Trust Receipt – A commercial document whereby the bank releases the goods in the possession of the entrustee but retains ownership thereof while the entrustee shall sell the goods and apply the proceeds for the full payment of his liability with the bank. It is a security arrangement to which a bank acquired ownership of the imported personal property . It is a security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except through utilization, as collateral, of the merchandise imported or purchased.
The failure of the entrustee to return the goods covered by the trust receipt or of the proceeds from the sale thereof shall constitute the crime of estafa.
Promissory note – It is a written promise committing the maker to pay the payee a specified sum of money either on demand or at a fixed or determinable future date, with or without interest.
Mortgage – A debt instrument by which the borrower (mortgagor) gives the lender (mortgagee) a lien on the property as security for the repayment of a loan. The borrower has use of the property, and the lien is removed when the obligation is fully paid. A mortgage normally involves real estate which is called Real Estate Mortgage. For personal property, such as machines, equipment, or tools, the lien is called a chattel mortgage.
Credit – that which is extended to a buyer or borrower on the seller or lender’s belief that that which is given will be repaid. The document evidencing the credit line given to a borrower is called Credit line agreement.
Surety – one who undertakes to pay money or perform other acts in the event the principal fails to do so; A surety is directly and immediately liable for the debt. The document evidencing such is called a surety agreement.
Deposits- Cash, checks or drafts placed with a financial institution for credit to a customer’s account.
The following are the commercial documents which are usually necessary and required in the processing of loan availment in favor of the borrower (corporation):
1. Promissory Note --
2. Credit Line Agreement
3. Real Estate Mortgage
4. Chattel Mortgage
5. Surety Agreement
6. Letter of Credit
7. Trust Receipt
As part of the regulation of the government, the bank (a person extending “credit” must give the debtor (borrower) in writing, a recital of the following upon extending a loan:
1. Cash price;
2. Amount credited if on installment price;
3. Difference between cash and installment price; and
4. Recital of finance charges and what these charges bear to the amount to be financed in percentage.
There are additional charges imposed for the application of loan such as notarial fees, insurance fees, documentary stamp tax, and handling fees. Non-compliance would authorize the debtor to recover any interest payment made.
Requirements of banks for loan accommodation
Generally, the loan accommodation given to entities are based on the latter’s needs in business. In this regard, the needs will be based on the nature of the business as assessed by the bank. In the usual banking practice, the following are the pre-qualifying documents which are required by the bank before a loan will be extended:
I. Collateral – Accepted collaterals may be in the form of real property, chattels (machineries or fixtures), placements and deposits of the bank.
a) Real property – this is the most secured interest which is regularly accepted by banks as collateral. In case the loan will be approved on the basis of the real property as collateral, the bank will usually grant loan which is equivalent to 60% of the value of the property as assessed by an internal appraiser of the bank. In case the property has improvements, such as building, the real property must be insured against fire.
Except as the Monetary Board may otherwise prescribe, loans and other credit accommodations against real estate shall not exceed 75% of the appraised value of the respective real estate security, plus 60% of the appraised value of the insured improvements, and such loans may be made to the owner of the real estate or to his assignees.
b) Chattels – this is also considered as an accepted secured interest. However, corporations are discouraged to offer chattels as collaterals as these do not have long-term value, unlike real property which increases in value every year. In case the loan will be approved on the basis of the chattel as collateral, the bank will usually grant loan which is equivalent to 50% of the value of the property as assessed by an internal appraiser of the bank.
Except as the Monetary Board may otherwise prescribe, loans and other credit accommodations on security of chattels and intangible properties such as, but not limited to, patents, trademarks, trade names, and copyrights shall not exceed 75% of the appraised value of the security, and such loans and other credit accommodations may be made to the title-holder of the chattels and intangible properties or his assignees.
c) Deposits – this is the most convenient collateral which can be offered by the borrower to the lender. In case the loan will be approved on the basis of the existing deposits as collateral, the bank will grant the loan which is equivalent to 90%-100% of the deposit.
II. Articles of the Incorporation, By-laws, SEC Certificate of Incorporation - This will inform the bank of the borrower’s background, including the company history, nature of its business, products being offered, and the company’s ownership/management.
III. Financial statements for the past two (2) to three (3) years – These documents determine the financial standing of the entity. Cash flows will be reviewed to determine whether the entity is able to cover short term and long term debts. This is based on Section 40 of the General Banking Law of 2000 wherein the bank may demand from its credit applicants a statement of their assets and liabilities and of their income and expenditures and such information as may be prescribed by law or by rules and regulations of the Monetary Board to enable the bank to properly evaluate the credit application which includes the corresponding financial statements submitted for taxation purposes to the Bureau of Internal Revenue. The bank will usually request the applicant to wait for six (6) months to determine whether the applicant is qualified for the loan accommodation or not. The six-month period will provide time for the bank to make an appraisal of the property being offered as collateral and provide a credit investigation of the company through plant visits and research.
It is customary in all banking institutions to execute a credit investigation report wherein it will provide the bank with facts to determine whether the applicant is financially qualified to be given a loan accommodation. The credit investigation report is considered an internal confidential document which must not be furnished to the client.
Nevertheless, the loan accommodation will be based on the value of the collaterals as appraised by the bank (lender).
I. Collateral – Accepted collaterals may be in the form of real property, chattels (machineries or fixtures), placements and deposits of the bank.
a) Real property – this is the most secured interest which is regularly accepted by banks as collateral. In case the loan will be approved on the basis of the real property as collateral, the bank will usually grant loan which is equivalent to 60% of the value of the property as assessed by an internal appraiser of the bank. In case the property has improvements, such as building, the real property must be insured against fire.
Except as the Monetary Board may otherwise prescribe, loans and other credit accommodations against real estate shall not exceed 75% of the appraised value of the respective real estate security, plus 60% of the appraised value of the insured improvements, and such loans may be made to the owner of the real estate or to his assignees.
b) Chattels – this is also considered as an accepted secured interest. However, corporations are discouraged to offer chattels as collaterals as these do not have long-term value, unlike real property which increases in value every year. In case the loan will be approved on the basis of the chattel as collateral, the bank will usually grant loan which is equivalent to 50% of the value of the property as assessed by an internal appraiser of the bank.
Except as the Monetary Board may otherwise prescribe, loans and other credit accommodations on security of chattels and intangible properties such as, but not limited to, patents, trademarks, trade names, and copyrights shall not exceed 75% of the appraised value of the security, and such loans and other credit accommodations may be made to the title-holder of the chattels and intangible properties or his assignees.
c) Deposits – this is the most convenient collateral which can be offered by the borrower to the lender. In case the loan will be approved on the basis of the existing deposits as collateral, the bank will grant the loan which is equivalent to 90%-100% of the deposit.
II. Articles of the Incorporation, By-laws, SEC Certificate of Incorporation - This will inform the bank of the borrower’s background, including the company history, nature of its business, products being offered, and the company’s ownership/management.
III. Financial statements for the past two (2) to three (3) years – These documents determine the financial standing of the entity. Cash flows will be reviewed to determine whether the entity is able to cover short term and long term debts. This is based on Section 40 of the General Banking Law of 2000 wherein the bank may demand from its credit applicants a statement of their assets and liabilities and of their income and expenditures and such information as may be prescribed by law or by rules and regulations of the Monetary Board to enable the bank to properly evaluate the credit application which includes the corresponding financial statements submitted for taxation purposes to the Bureau of Internal Revenue. The bank will usually request the applicant to wait for six (6) months to determine whether the applicant is qualified for the loan accommodation or not. The six-month period will provide time for the bank to make an appraisal of the property being offered as collateral and provide a credit investigation of the company through plant visits and research.
It is customary in all banking institutions to execute a credit investigation report wherein it will provide the bank with facts to determine whether the applicant is financially qualified to be given a loan accommodation. The credit investigation report is considered an internal confidential document which must not be furnished to the client.
Nevertheless, the loan accommodation will be based on the value of the collaterals as appraised by the bank (lender).
Role of Banks in Financing
The General Banking Law of 2000 (Republic Act 8791) was enacted based on the following State Policy:
“The State recognizes:
"1. The vital role of banks in providing an environment conducive to the sustained development of the national economy; and
"2. The fiduciary nature of banks that requires high standards of integrity and performance;
“In furtherance thereof, the State shall promote and maintain a stable and efficient banking and financial system that is globally competitive, dynamic and responsive to the demands of a developing economy.
The term “bank” generally is a corporation formed for the purposes of maintaining savings account and checking accounts, issuing loans and credit, and dealing in negotiable securities issued by governmental entities and corporations. Banks earn money by investing their customers’ deposits. In order to protect the customers against loss, banks are strictly regulated by the Bangko Sentral ng Pilipinas.
Loan stipulations between entities and banks are regulated by the General Banking Law of 2000. However, the parties are free to stipulate additional clauses, terms and provisions as they may seem convenient, provided these stipulations are not contrary to law (i.e. General Banking Law of 2000), morals, good customs, public order and public policy.
The diligence required in banks before granting loans to prospective applicants has been enunciated by the Supreme Court in the following cases:
a) Citibank N.A. vs. Spouses Cabamongan, et al, G.R. 146918, May 2, 2006. “x x x since the banking business is impressed with public interest, of paramount importance thereto is the trust and confidence of the public in general. Consequently, the highest degree of diligence, [Bank of the Philippine Islands vs. Court of Appeals, 383 Phil. 538, 554 (2000); Philippine Bank of Commerce v. Court of Appeals, 336 Phil. 667, 681 (1997)] is expected, and high standards of integrity and performance are even required of it. [Sec. 2 of Republic Act 8791, otherwise known as “The General Banking Law of 2000”] By the nature of its functions, a bank is ‘under obligation to treat the accounts of its depositors with meticulous care, [Westmont Bank vs. Ong, G.R. No. 132560, January 30, 2002, 375 SCRA 212,221; Citytrust Banking Corp. v. Intermediate Appellate Court, May 27, 1994, 232 SCRA 559, 564.] always having in mind the fiduciary nature of their relationship. [Simex International (Manila), Inc. Court of Appeals, March 19, 1990, 183 SCRA 360, 367].
b) Development Bank vs. Court of Appeals, 331 SCRA 267 (2000). “While an innocent mortgagee is not expected to conduct an exhaustive investigation on the history of the mortgagor’s title, in the case of a banking institution, it must exercise due diligence before entering into said contract, and cannot rely upon what is or is not annotated on the title. Judicial notice is taken of the standards practiced for banks, before approving a loan, to send representatives to the premises of the land offered as collateral and to investigate who are the real owners thereof.
c) Ibaan Rural Bank vs. Court of Appeals, 321 SCRA 88 (2000). “Banks, being greatly affected with public interest, are expected to exercise a degree of diligence in the handling of its affairs higher than expected of an ordinary business firm.”
Before granting a loan or other credit accommodation, a bank must ascertain that the debtor is capable of fulfilling his commitments to the bank.
More of these on my next blog where I will give you insights on the different loan stipulations and agreements being done by banks in the Philippines.
“The State recognizes:
"1. The vital role of banks in providing an environment conducive to the sustained development of the national economy; and
"2. The fiduciary nature of banks that requires high standards of integrity and performance;
“In furtherance thereof, the State shall promote and maintain a stable and efficient banking and financial system that is globally competitive, dynamic and responsive to the demands of a developing economy.
The term “bank” generally is a corporation formed for the purposes of maintaining savings account and checking accounts, issuing loans and credit, and dealing in negotiable securities issued by governmental entities and corporations. Banks earn money by investing their customers’ deposits. In order to protect the customers against loss, banks are strictly regulated by the Bangko Sentral ng Pilipinas.
Loan stipulations between entities and banks are regulated by the General Banking Law of 2000. However, the parties are free to stipulate additional clauses, terms and provisions as they may seem convenient, provided these stipulations are not contrary to law (i.e. General Banking Law of 2000), morals, good customs, public order and public policy.
The diligence required in banks before granting loans to prospective applicants has been enunciated by the Supreme Court in the following cases:
a) Citibank N.A. vs. Spouses Cabamongan, et al, G.R. 146918, May 2, 2006. “x x x since the banking business is impressed with public interest, of paramount importance thereto is the trust and confidence of the public in general. Consequently, the highest degree of diligence, [Bank of the Philippine Islands vs. Court of Appeals, 383 Phil. 538, 554 (2000); Philippine Bank of Commerce v. Court of Appeals, 336 Phil. 667, 681 (1997)] is expected, and high standards of integrity and performance are even required of it. [Sec. 2 of Republic Act 8791, otherwise known as “The General Banking Law of 2000”] By the nature of its functions, a bank is ‘under obligation to treat the accounts of its depositors with meticulous care, [Westmont Bank vs. Ong, G.R. No. 132560, January 30, 2002, 375 SCRA 212,221; Citytrust Banking Corp. v. Intermediate Appellate Court, May 27, 1994, 232 SCRA 559, 564.] always having in mind the fiduciary nature of their relationship. [Simex International (Manila), Inc. Court of Appeals, March 19, 1990, 183 SCRA 360, 367].
b) Development Bank vs. Court of Appeals, 331 SCRA 267 (2000). “While an innocent mortgagee is not expected to conduct an exhaustive investigation on the history of the mortgagor’s title, in the case of a banking institution, it must exercise due diligence before entering into said contract, and cannot rely upon what is or is not annotated on the title. Judicial notice is taken of the standards practiced for banks, before approving a loan, to send representatives to the premises of the land offered as collateral and to investigate who are the real owners thereof.
c) Ibaan Rural Bank vs. Court of Appeals, 321 SCRA 88 (2000). “Banks, being greatly affected with public interest, are expected to exercise a degree of diligence in the handling of its affairs higher than expected of an ordinary business firm.”
Before granting a loan or other credit accommodation, a bank must ascertain that the debtor is capable of fulfilling his commitments to the bank.
More of these on my next blog where I will give you insights on the different loan stipulations and agreements being done by banks in the Philippines.
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