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.