Section X336 (2015 - Sanctions) Supervisory Enforcement Actions.

The Bangko Sentral reserves the

right to deploy its range of supervisory tools to promote adherence to the requirements set forth in the
foregoing rules and bring about timely corrective actions and compliance with Bangko Sentral directives.
The Bangko Sentral considers abuses in credit to related parties (including credit to DOSRI, subsidiaries,
and affiliates) as serious offenses and shall be dealt with severely. In this regard, “abuse” shall be
interpreted to include extending credit to related parties without adopting appropriate internal policies.

For this purpose, the Bangko Sentral may among others, issue directives or sanctions on the Bank
and responsible persons, which may include restrictions or prohibitions of lending to related parties
or from certain authorities/activities, restrictions or prohibitions on dividend declarations; and
warning reprimand, suspension, removal and disqualification of concerned bank directors, officers,
and/or employees.

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(Sec. X336 (2015 - Sanctions) Supervisory Enforcement Actions )(Circular No. 914 dated 23 June 2016)

III.

Whether or not the loans granted to Taysan High School & Child Development Center, Inc. (formerly
Taysan High School) are considered as indirect borrowings to a “related interest” pursuant to Sub-
Section X326.1 (e), par. (4) of the MORB

The loans granted to Taysan High School & Child Development Center, Inc. (formerly Taysan
High School) are considered as indirect borrowings to a “related interest” pursuant to Sub-Section
X326.1 (e), par. (4) of the Manual of Regulations for the Banks (MORB).

Sub-Section X326.1 (e), par. (4) of the MORB states that:

“Section X326.1 e. Related interest shall refer to any of the following:

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(1) Corporation, association, or firm of which a director or officer of the bank, or his
spouse is also a director or officer of such corporation, association or firm, except
 (a) where the securities of such corporation, association or firm are listed and
traded in the big board or commercial and industrial board of domestic stock
exchanges and less than fifty percent (50%) of the voting stock thereof is owned by
any one (1) person or by persons related to each other within the first degree of
consanguinity or affinity; or

(b) where the director, officer or stockholder of the bank sits as a representative of
the bank in the board of directors of such corporation: Provided, That the bank
representative shall not have any equity interest in the borrower corporation except
for the minimum shares required by law, rules and regulations, or by the by-laws of
the corporation, or

(c) where the corporation is at least ninety-nine percent (99%) owned by a non-
stock corporation as defined in Section 87 of the Corporation Code of the
Philippines: Provided, That the purpose of the loan is to finance hospitals and other
medical services: Provided, further, That the loan is fully secured: Provided,
furthermore, That in the case of Items “(a)”, “(b)” and “(c)” above, the borrowing
corporation is not among those mentioned in Items “e(5)”, “e(6)”, “e(7)” and “e(8)”
of this Section (Emphasis supplied)

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A direct borrowing is one that is made in the name of the DOSRI himself or where DOSRI is a
named party, while indirect borrowing includes one that is made by a third party, but the DOSRI has a
stake in the transaction. (People v. Conception, 44 Phil 126 (1922) Indirect borrowing applies in this
case.

It is undisputed that Nicanor Gutierrez, the President of Taysan High School at the time of
transaction is the spouse of Belen Gutierrez, manager of Rural Bank of Taysan. Grace Buencamino, as
secretary and member of the Board of Rural Bank of Taysan, is the daughter of Spouses Nicanor and
Grace Gutierrez. Such facts were not refuted.

Respondents, Belen Gutierrez and Grace Buencamino, facilitated, granted and caused the approval of
the loan application of Taysan High School and Child Development Center Inc., (Formerly Taysan High
School)
Loans should be subject to restriction on bank exposure to directors, officers, stockholders and their
related interest (DOSRI).

Belen is also an incorporator and officer of Taysan High School where she served as Secretary, Treasurer
and Member of the Board.

Whether or not the respondents failed to comply with the approval, reporting and ceiling requirements
of indirect borrowings to a related interest or loans to DOSRI, violating Section X334 of the MORB in
relation to Section 36 of R.A. No. 8791 otherwise known as General Banking Law

Section X334 of the Manual of Regulations for Banks (MORB) provides for such restrictions. To wit:

Sec. X334 Procedural Requirements. The following provisions shall apply if the bank’s DOSRI are parties
to, or act as representative or agents of others in, any of the transactions enumerated under Sec. X327:

a. Approval of the board, when to obtain. Except with prior written approval of the majority of the
directors, excluding the director concerned, no loan, other credit accommodation and guarantee shall
be granted nor shall any of the transactions enumerated under Sec. X327 be entered into.

b. Approval by the board, how manifested. The approval shall be manifested in a resolution passed by
the board of directors during a meeting and made of record.

c. Determination of majority of the directors. The determination of the majority of the directors,
excluding the director concerned, shall be based on the total number of directors of the bank as
provided in its articles of incorporation and by-laws.

d. Contents of the resolution. The resolution of the board of directors shall contain the following
information: (1) Name of the director or officer concerned and his involvement as regards the credit
accommodation, such as principal, endorser, spouse of borrower, etc.; (2) Nature of the loan or other
credit accommodation, purpose, amount, credit basis for such loan or other credit accommodation,
security and appraisal thereof, maturity, interest rate, schedule of repayment and other terms of the
loan or other credit accommodation; (3) Date of resolution; (4) Names of the directors who participated
in the deliberations of the meeting; and (5) Names in print and signatures of the directors approving the
resolution: Provided, That in instances where a director who participated in the board meeting and who
approved such resolution failed to sign, the corporate secretary may issue a certification to this effect
indicating the reason for the failure of the said director to sign the resolution.

e. Transmittal of copy of board approval; contents thereof. A copy of the written approval of the
board of directors, as herein required, shall be submitted to the appropriate department of the SES
within twenty (20) banking days from the date of approval. The copy may be a duplicate of the
original, or a reproduction copy showing clearly the signatures of the approving directors: Provided,
That if a reproduction copy is to be submitted, it shall contain on its face or reverse side a signed
certification by the secretary that it is a reproduction of the original written approval: Provided,
further, That such written approval shall not be required for loans, other credit accommodations and
advances granted to officers under a fringe benefit plan approved by the Bangko Sentral. (Emphasis
supplied)

No proof that the loan were secured with the approval of the majority of the directors of the
bank or a copy of such approval submitted to the appropriate supervising and examining department of
BSP within twenty (20) banking days from the date of approval. Moreover, being a loan to DOSRI, it
must comply with individual and aggregate ceilings prescribed by the MORB.

Loans granted to Taysan High School & Child Development Center Inc., ( formerly Taysan High
School) were not reported as loan accommodations to DOSRI. As bank officers, they have the
responsibility to ensure compliance with the rules and regulations required to be followed by the bank.
Respondents indisputably violated the Manual of Regulations for Banks (MORB).

The General Banking Law of 2000 specifically deals with loans contracted by bank directors or officers,
thus:

Section 36. Restriction on Bank Exposure to Directors, Officers, Stockholders and Their Related
Interests. - No director or officer of any bank shall, directly or indirectly, for himself or as the
representative or agent of others, borrow from such bank nor shall he become a guarantor, endorser
or surety for loans from such bank to others, or in any manner be an obligor or incur any contractual
liability to the bank except with the written approval of the majority of all the directors of the bank,
excluding the director concerned: Provided, That such written approval shall not be required for loans,
other credit accommodations and advances granted to officers under a fringe benefit plan approved
by the Bangko Sentral. The required approval shall be entered upon the records of the bank and a copy
of such entry shall be transmitted forthwith to the appropriate supervising and examining department
of the Bangko Sentral. Dealings of a bank with any of its directors, officers or stockholders and their
related interests shall be upon terms not less favorable to the bank than those offered to others. After
due notice to the board of directors of the bank, the office of any bank director or officer who violates
the provisions of this Section may be declared vacant and the director or officer shall be subject to the
penal provisions of the New Central Bank Act. The Monetary Board may regulate the amount of loans,
credit accommodations and guarantees that may be extended, directly or indirectly, by a bank to its
directors, officers, stockholders and their related interests, as well as investments of such bank in
enterprises owned or controlled by said directors, officers, stockholders and their related interests.
However, the outstanding loans, credit accommodations and guarantees which a bank may extend to
each of its stockholders, directors, or officers and their related interests, shall be limited to an amount
equivalent to their respective unencumbered deposits and book value of their paid-in capital
contribution in the bank: Provided, however, That loans, credit accommodations and guarantees
secured by assets considered as non-risk by the Monetary Board shall be excluded from such limit:
Provided, further, That loans, credit accommodations and advances to officers in the form of fringe
benefits granted in accordance with rules as may be prescribed by the Monetary Board shall not be
subject to the individual limit. The Monetary Board shall define the term "related interests." The limit on
loans, credit accommodations and guarantees prescribed herein shall not apply to loans, credit
accommodations and guarantees extended by a cooperative bank to its cooperative shareholders. (83a)
(Emphasis Supplied)

The covered transactions are prohibited unless the approval, reportorial and ceiling requirements
under Section 36 are complied with. Otherwise, it is considered as DOSRI violation which subjects the
bank as well as its directors and officers to administrative liabilities.

A direct borrowing is one that is made in the name of the DOSRI himself or where DOSRI is a named
party, while indirect borrowing includes one that is made by a third party, but the DOSRI has a stake
in the transaction. (People v. Conception, 44 Phil 126 (1922) Indirect borrowing applies in this case.

Respondents denied having approved the loan. They set up the defense that it is the President or the
General Manager of the Rural Bank of Taysan (Batangas), Inc. who approves loans and the increases
thereto as well as the mortgages and amendments thereof. Also, they contend that they were the
ones who initiated the collection and the settlement of the loan. However, nowhere in their answer
that would show that they had no participation in the approval of the loan. Bereft of any evidence

Nicanor Gutierrez with fraud and misrepresentation obtained loan from Rural Bank of Taysan
(Batangas) Inc., on behalf of the Taysan High School by procuring falsified documents through
convincing Castillo and Zara to execute Special Power of Attorney (SPA) authorizing Ceres Alcantara to
borrow money to the Rural Bank of Taysan (Batangas) Inc., The records of the case revealed that
Alcantara was never authorized by the board of directors of Taysan High school to contract a loan on
its behalf. He was a mere consultant of the school and was misrepresented as its President and was
forced by the real President Gutierrez to sign the Special Power of Attorney as well as the real estate
mortgage and the amendments thereto without knowing the legal implications thereof. Alcantara
has never been elected as President to replace Nicanor Guttierez. Alcantara has no authority to
represent school as he was not an officer….

Same as to Filomina C. Zara and Lucita Castillo, who were made to appear as members of the board
but in reality they were not. Filomina C. Zara was a relative of Gutierrez. As disclosed in her verified
affidavit, Gutierrez requested her to sign the SPA and the Secretary Certificate when she was never
designated as the Secretary of the board and Edna Zuna never relinquished her position as the
Secretary of the board.

Lucita Castillo, principal of Taysan High School, admitted that she signed the REM upon request of
Gutierrez but disowned her signatures in SPA, Amendment of REM and secretary’s certificate which
she claimed as forgeries.

As to Nicanor Gutierrez, the case is dismissed. The very nature of this case is
administrative, and not criminal or civil case. This is an administrative case against director or
officer of the bank who have been charged with violation of X334 of the Manual Regulations for
Banks (MORB) in relation to Section 36 of R.A. No. 8791 (General Banking Law). Hence, the
office has no jurisdiction over him.

Whether or not Belen Gutierrez and Grace Buencamino could still be penalize considering the BSP-
SES’ Report of Examination (closed on 15 August 2011) which had already considered, passed upon,
evaluated and ruled on the liabilities of the bank as well as its officers and directors with respect to
the loan to Taysan High School.
Yes, Belen Gutierrez and Grace Buencamino could still be penalize considering the BSP- SES’ Report of
Examination (closed on 15 August 2011) which had already considered, passed upon, evaluated and
ruled on the liabilities of the bank as well as its officers and directors with respect to the loan to Taysan
High School.

The present administrative case against Belen Gutierrez and Grace Buencamino

Their own individual acts and not of the bank’s is subject to scrutiny. The first examination was for the
violations committed by the bank and not for administrative sanctions against the respondents as
directors or officers of the bank. The BSP-SES ruled that Rural Bank of Taysan (Batangas), Inc., failed to
comply with the requirements of DOSRI and recommended to be penalized with fine.

Dealings of bank with any of its directors, officers or stockholders and their related interests shall be
upon the terms no less favorable to the bank than those offered to others.

Banks are not created for the benefit of their directors and officers, who cannot therefore use the
assets of the bank for their own benefit, except as may be permitted by law. Congress has thus
deemed it essential to impose restrictions on borrowings by the bank directors and officers in order to
protect the public, especially the depositors. (Go v. Bangko Sentral ng Pilipinas, 604 SCRA 322 (2009))

Loans, other credit accommodations and guarantees to DOSRI shall be considered indirect borrowings if
in any of the covered transactions under the regulations, the borrower, guarantor, endorser or surety is
a related interest as defined under the regulations (MORB)