No borrower would like to go on a default, much more a borrower-bank.

And, from my understanding, a bank's equity acquisition on a borrower-bank that went on default is nowhere an infringement of the prior approval regulation of the Bangko Sentral ng Pilipinas (BSP), simply because it’s not the fault of the bank-lender.

As promised, I yield my space to the lengthy explanation of a muted source, adept in both issues. He enlightened and widened my perspective on law and banking.

According to him, the law, as mentioned, does not restrict the type of business of the borrowing entity for its shares to be acceptable as collaterals.

“To hold otherwise would also therefore unduly restrict the lending function of banks.

There are basic distinctions between the acquisition by a bank of equity for investment purposes, on one hand, and the resulting acquisition by a bank of equity in satisfaction of debt, on the other.

In the first mode, the purpose obviously is for control, participation and/or profitability in the enterprise; whereas, in the second mode, it is resorted only for the purpose of enabling the bank to recover on its loan.

Shares of stock are eligible collaterals for loans under the General Banking Law and the foreclosure of the pledge thereon or its dacion in favor of the bank are but incidental to the power of the bank to grant loans on the security thereof.

The law does not also set any limitation on the type of business the borrower should be in, meaning, that as long as the corporation is engaged in lawful business, its shares should be eligible for pledge.

 The rules on regulatory approval are believed to be non-applicable because such acquisition of equity is not in the nature of an equity investment but as mentioned, principally for debt recovery.

Such acquisition of title is also temporary in nature since it is subject to disposition as an acquired asset.

To hold that such regulatory approval is required is also believed to be absurd.

First, it would mean that banks cannot accept shares as collateral unless they pertain to those of allied undertakings.

The law, as mentioned, does not restrict the type of business of the borrowing entity for its shares to be acceptable as collaterals. To hold otherwise would also therefore unduly restrict the lending function of banks.

The next question is whether the acquisition by the bank of title over the foreclosed shares as in dacion requires regulatory approval. My personal opinion is that it is not required.

To hold otherwise would further mean that before loans can be granted on these shares, prior regulatory approval should be obtained to avoid being cited for a violation in the event the bank acquires title on the shares by virtue of default. It would mean that the regulator would practically and effectively be participating in the lending business of the bank by approving or denying the offered collaterals.

That could not have been the purpose and intention of the law. As has been commonly said, the law is meant to be reasonable; it is not meant to be foolish and absurd.”

That said, the bank-lender is not at fault in owning the title of the shares of the bank-borrower that defaulted on its obligation. It was by force of circumstance.

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