In May 1994, with the aim of “[enhancing]the country’s competitiveness in the international market,” Republic Act No. 7721 (“RA 7721”) otherwise known as “An Act Liberalizing the Entry and Scope of Operations of Foreign Banks in the Philippines and for other Purposes” was signed into law. Composed of fifteen sections, RA 7721 provided for the state policy in relation to the entry of foreign banks in the Philippines, the different modes of entry, the guidelines and requirements for the approval of such entry, and the head office guarantee, among other things. This law that was enacted to “create a more competitive environment and encourage greater foreign participation” seems to have helped increase in the number of foreign banks and subsidiaries in the Philippines. Within six years after its implementation, from the meager four (4) foreign bank branches before the law was enacted,  these foreign banks and subsidiaries rose to twenty three (23) foreign bank branches and seventy four (74) foreign bank subsidiaries.

Twenty years after its enactment, and in preparation for next year’s economic integration within the Association of South East Asian Nations, President Aquino signed into law Republic Act No. 10641 ( “RA 10641”) otherwise known as “An Act Allowing the Full Entry of Foreign Banks in the Philippines amending for the purpose Republic Act No. 7721.” This law was a product of Senate Bill No. 2159 and House Bill No. 3984 which were approved by their respective chambers a month before the second half of this year.

In a statement, Senate Banks Committee head and proponent of the bill, Sergio Osmeña III said that “[g]reater participation in the banking and financial sectors is expected to augment the financial resources to which the Philippine economy may have access.” Similarly, Bangko Sentral ng Pilipinas Governor Amando Tetangco also expressed his approval of the passage of the said law stating that “[t]he economic benefits that can be derived from a further opening of the Philippine banking system to foreign banks are clear: augmentation of financial resources through increased foreign direct investments that will be available to the domestic banking market, transfer of technology, enhancement of human resource skills.” He also sees this as a way to “strengthen the banking system, and make our make our banks better-positioned in the face of ABIF (ASEAN Banking Integration Framework).”

Amendments to RA 7721

Amending the more important provisions of RA 7721, RA 10641 may be considered to be providing for a revision of its predecessor. The latter law provided changes in the following reasons:

Modes of Entry;

Guidelines for Approval;

Capital Requirements;

Limitations on Entrants;

Equal Treatment; and

Participation in Foreclosure Proceedings.

In addition to the said substantial changes, RA 10641 also amended the provisions on the delegation of powers and applicability of banking laws to reflect the changes in the laws which became effective after the enactment of RA 7721 such as Republic Act No. 7653, otherwise known as the “New Central Bank Act,” and Republic Act No. 8791, otherwise known as “The General Banking Law.”

Modes of Entry

RA 10641 became big news in the business industry is because it amended Section 2 of RA 7721, which provided for the different modes of entry, by making the intention of the law to allow the full entry of foreign banks in the Philippines clear. RA 10641, while retaining the grant of authority to the Monetary Board (“MB”) to authorize foreign banks to operate in the Philippines under three different modes completely removed all the limitations which the former law provided.

Under RA 7721, there was a limitation on ownership and two provisos that effectively restricted the entry of foreign banks. First, the limitation on ownership provides that only sixty percent (60%) of the voting stock of an existing bank or new banking subsidiary may be owned or acquired by the foreign bank. Second, the proviso limited the mode of entry of a foreign bank to only one mode. Lastly, a proviso also dictated that a foreign bank may only own up to sixty percent (60%) of only one domestic bank or new banking subsidiary.

The aforementioned restrictions are all removed by RA 10641. As it stands right now, the law provided that the MB may authorize foreign banks to operate in the Philippines still under three modes of entry, i.e., 1) acquiring, purchasing or owning up to one hundred percent (100%) of the voting stock of an existing bank; 2) investing up to one hundred percent (100%) of the voting stock of a new banking subsidiary; or 3) by establishing branches with full banking authority.

Guidelines for Approval

The previous guidelines for approval under Section 3 of RA 7721 were also amended by RA 10641 by removing the following:

a. The clause which provided that only top foreign banks may be allowed to enter the Philippine banking industry; and

b. The clause which provided that the MB should adopt measures to prevent a dominant market position by one bank and to secure the listing in the Philippine Stock Exchange of the banking corporations established under RA 7721;

Further, the previous requirement that measures in relation to the control of the banking system was also amended. The amendment reduced the percentage of assets and resources that must be held by domestic banks which are at least majority-owned by Filipinos from seventy percent (70%) to sixty percent (60%).

With these changes, aside from the measures in relation to the control of the assets and resources previously mentioned, the only remaining guidelines for the approval of entry were the five factors enumerated under Section 3 and the additional requirements provided under the same, to wit:

Factors to be considered by the MB in approving entry applications:

Geographic representation and complementation;

Strategic trade and investment relationships between the Philippines and the country of incorporation of the foreign bank;

Demonstrated capacity, global reputation for financial innovations and stability in a competitive environment of the applicant;

Reciprocity rights enjoyed by Philippine banks in the applicant’s country; and

Willingness to fully share technology.

In addition to these factors, the foreign banks must also be established, reputable and financially-stable. Applicants must also be widely-owned and publicly-listed in its country of origin, unless such bank is owned and controlled by the government of its country of origin.

Capital Requirements

Unlike in the former law under Section 4 where it is provided that foreign banks shall permanently assign a capital, the U.S. Dollar equivalent of Thirty Five Million Pesos (PhP 35,000,000.00), RA 10641 does away with the fixed amount and instead fixes the capital requirement of the foreign banks to an amount not less than the minimum capital required for domestic banks of the same category. In addition to this, RA 10641 also provides that foreign bank branches may now open up to five (5) sub-branches—an improvement from the 3-branch limitation provided by the former law. Furthermore, Section 4 also provided that local incorporated subsidiaries of foreign banks shall have the same branching privileges as domestic banks.

Limitations on Entrants

Previously, entrants were limited by Section 6 of RA 7721 such that 1) entry under Section 2(iii) shall only be allowed within five  (5) years from the effectivity of RA 7721, and that 2) only six (6) new foreign banks shall be allowed entry. These limitations are expressly repealed by RA 10641.

Equal Treatment

The provision on the equal treatment of foreign banks under Section 8 was made concise by RA 10641. As such, it remains that foreign banks similar to Philippine banks shall:

Perform the same functions;

Enjoy the same privileges; and

Be subject to the same limitations.

The provision also emphasized that foreign banks shall guarantee the observance of the rights of the employees under the Constitution of the Philippines and that the single borrower’s limit of a foreign bank branch must be aligned with that of domestic banks.

Also, it is important to note that the clause in relation to shares of stock listed in the Philippine Stock Exchange as part of the requirements under RA 7721 was also removed. This complements the removal of such requirement under Section 3.

Participation in Foreclosure Proceedings

This is an additional provision inserted to replace the previously repealed Section 9 of RA 7721 which deals with the Development of Loan Incentives. Now, Section 9 provides for the authority of the foreign banks who were authorized to do banking business in the Philippines to do the following acts:

Bid and take part in the foreclosure sales of real property mortgaged to them;

Avail of enforcement and other proceedings in relation to the same; and

Take possession of the mortgaged property for a period not exceeding five (5) years from actual possession.

Note, however, that although the foreign banks may take part in such foreclosure proceedings and then, take possession of the real property, the provision provided for certain limitations. First, the title cannot be transferred to said foreign bank; and second, the foreign bank is required to transfer its rights to a qualified Philippine national during the five-year period provided, without prejudice to a borrower’s rights under the applicable laws. In order to enforce this limitation, RA 10641 provided for penalties in case of failure to transfer the property, i.e., the bank will be penalized one half (1/2) of one percent (1%) per annum of the price at which the property is foreclosed until it is able to transfer the property to a qualified Philippine national.

Unaffected Provisions

It is important, however, to note that although majority of the provisions of RA 7721 were amended by RA 10641, Sections 5 and 7 of the previous law remains unchanged.

Section 5 of RA 7721 provides for the Head Office Guarantee. This provision mandates that the head office of foreign bank branches shall guarantee the prompt payment of all liabilities of its Philippine branches. A provision similar to this can be found in Section 75 of the General Banking Law. “The head office guarantee is for the protection of the interest of the depositors and other creditors of the local branches of a foreign bank. Since the head of the bank is located in another country or state, such guarantee is necessary so as to bring the head office within the Philippine jurisdiction, and to hold the same answerable for the liabilities of its Philippine branches.”

On the other hand, Section 7 allows the election of non-Filipino citizens as members of the Board of Directors of a bank. This is however, limited to the extent of the foreign participation in the equity of the said bank.

Transitory Provision

For those who were already allowed entry in the Philippines under RA 7721, part of their concern will be the transitory provisions which provided for the status of the foreign banks who were already allowed entry. Section 7 of RA 10641 provides for three things: 1) Foreign banks already authorized to do banking are allowed to apply to change their original mode of entry; 2) Foreign banks operating through branches retain the original privilege upon entry to establish a limited number of sub-branches but the previous locations of the additional branches were lifted; and 3) Foreign banks are required to comply with the minimum capital requirement within one year, unless such period is extended by the MB.

Latest Updates

Presently, the Monetary Board has already approved the implementing rules and regulations of RA 10641. According to BSP Governor Tetangco as stated in the Media Release issued last November 14, 2014,  “[w]e are very appreciative of the efforts of our legislators to pass into law R.A. No. 10641 and the BSP is quite happy to now issue the IRR to execute this law.”

In fact, it seems that one of the effects of the amendments was already felt prior to the issuance of the implementing rules and regulations. Early this month, Maybank, Philippines, Inc., through its President and Chief Executive Officer Herminio M. Famatigan, Jr. told reporters at an informal media briefing that it will no longer list on the Philippine Stock Exchange, one of the requirements under RA 7721 and under Circular 775. It appears that given the changes introduced by RA 10641, the said bank decided not to be listed on the Philippine Stock Exchange anymore.

The full effects of the implementation, however, are yet to be seen. It is only in due time when we will know whether the purpose of the law will be reached through its implementation. We will also have to wait for its full implementation to be able determine whether the country is ready or whether the concern of the Philippine Chamber of Commerce and Industry  that “this move  will put the country’s banks, which are considered small, at the mercy of the giant banks of other Asean countries” will ring true.

Download the full text of RA 10641

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