THE enactment in 2014 of Republic Act (RA) 10641 now allows the full entry of foreign banks in the Philippines. Since the passage of the said law, we have been receiving queries from interested parties. Hence, it may be timely to reiterate the changes brought by this new law.
Previously, foreign banks were authorized to operate in the Philippine banking system through the acquisition, purchase or ownership of up to 60 percent of the voting stock of an existing bank, or investment in up to 60 percent of the voting stock of a new banking subsidiary incorporated under the laws of the Philippines, or through the establishment of a Philippine branch with full banking authority. Foreign ownership was limited to 60 percent ownership, except in cases of the establishment of a branch. Subsequent laws allowed 100 percent foreign ownership with certain limits.
RA 10641 now allows foreign banks to operate within the Philippine banking system by (1) acquiring, purchasing, or owning up to 100 percent of the voting stock of an existing bank, (2) by investing in up to 100 percent of the voting stock of a new banking subsidiary incorporated under Philippine laws, or (3) by establishing branches with full banking authority. But foreign banks can operate in the Philippines only through any one of these three modes of entry. Still, foreign banks can now operate in the country either as branch or a 100-percent owned foreign subsidiary. Aside from the increase in the allowed foreign ownership, RA 10641 also amends the capital requirement for foreign branches. The law requires that the minimum capital amount should not be less than the minimum capital required for domestic banks of the same category. A foreign bank branch is now allowed to open up to five sub-branches.
In addition to the above-mentioned changes, the new law includes a new provision on participation in foreclosure proceedings of a foreign bank. Foreign banks that are authorized to do banking business in the Philippines through any of the three modes of entry shall be allowed to bid and take part in foreclosure sales of real property mortgaged to them, as well as to avail of enforcement and other proceedings, and accordingly take possession of the mortgaged property, for a period not exceeding five years from actual possession. However, title to the property shall not be transferred to such foreign bank. If the said bank is the winning bidder, it shall, during the said 5-year period, transfer its rights to a qualified Philippine national, without prejudice to a borrower’s rights under applicable laws. Should the bank fail to transfer such property within the 5-year period, it shall be penalized one half of 1 percent per annum of the price at which the property was foreclosed until it is able to transfer the property to a qualified Philippine national.
Proponents of the law justify the opening of the banking industry to more established foreign banks on various reasons, but collectively the economic benefits it will bring and the strengthening of the financial system in the country. Regulators also see this as a vehicle for foreign direct investments in the country.
It is interesting to observe the effects of this full liberalization of the banking industry as some sectors have also voiced their concerns on its possible adverse impact. We just hope that we gain more with the influx of bigger players.
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The author is a senior associate of Du-Baladad and Associates Law Offices (BDB Law), a member firm of World Tax Services (WTS) Alliance.
The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported therefore by a professional study or advice. If you have any comments or questions concerning the article, you may e-mail the author at julie.aranda@bdblaw.com.ph or call 403-2001 local 312.