DOSRI transactions

By Atty. Jun de Zuñiga Those involved in bank operations are surely familiar with the term “DOSRI.” For bank outsiders, they may encounter the term from time to time in relation to the lending transactions of banks. "DOSRI' is an acronym of the phrase "directors, officers, stockholders and related interests" describing certain types of loans highly regulated by law and regulations. The business of banking can also be referred to as "other people's money" because by its license, a bank can get money from the public by way of deposits with which to increase its resources for lending.  For a simple example, a R100- million capitalized bank can get deposits at more than double, triple, quadruple or even much more than its capital, and then lend out these funds to generate income. In view of its fiduciary responsibility over these funds borrowed from the public, the DOSRI parties should not lend these funds, in an amount exceeding their capital, to themselves. To do so would be irregular as it would constitute self-dealing or an insider transaction. The law (Section 36, General Banking Law) does not however absolutely prohibit DOSRI borrowings, but subjects them to limits and to regulatory processes. There is recognition that related lending may have some credit efficiency. Bankers know more about related borrowers than unrelated ones. The bank's DOSRI should patronize their own company but it must be done in an arm's length manner. Being insiders does not mean that the DOSRI should get better terms when they borrow from the bank (Banking Laws of the Philippines, Vol.!!, BSP, p. 226). Regarding the limits, DOSRI loans cannot exceed the capital contribution and deposit of the borrowing party to make sure that he does not benefit from the funds coming from the public, although non-risk exposures and loans under a bank's fringe benefits program can be excluded from the ceilings under regulations promulgated by the Monetary Board. Moreover, the DOSRI loan has to be approved by the majority of all the directors of the board, excluding the director concerned.  The law requires “prior written approval” which means that the approving directors have to affix their signatures on the document. It may also be noted that the law requires the majority of "all the directors of the bank," and not just a majority of the directors present in the board meeting.  The law therefore refers to all the directors who were elected under the bank’s articles and bylaws.  A question has been raised on how the approval can be obtained if there is a joint borrowing by a majority of all the directors. The answer is simple – the legal requirement cannot be met and, thus, such DOSRI loan should not be granted by the bank. It is also required in the law that all DOSRI loans should be reported to the Bangko Sentral within the deadline prescribed by the Monetary Board. Violations of the law and regulations on DOSRI loans are subject to sanctions and these are quite severe. Section 36 provides that "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 above comments are the personal views of the writer. His email address is jzuniga@bsp.gov.ph