Bank-Deposit Offset (Set-Off) in the Philippines

A comprehensive legal primer for practitioners, bankers and borrowers

1. What is “bank-deposit offset”?

“Bank-deposit offset” (often called set-off or compensation) is the act of a bank deducting money that a depositor keeps in any of her deposit accounts and applying the amount to her matured, unpaid obligations to the same bank. In civil-law terminology, it is a species of legal compensation under Articles 1278-1290 of the Civil Code, while in banking contracts it normally appears as an “offset clause.”

2. Primary sources of law

Source	Key points for set-off
Civil Code, Arts. 1278-1290	Lays down the five requisites of compensation (mutuality, due & demandable, same kind, etc.).
General Banking Law of 2000 (R.A. 8791)	Gives banks broad contractual freedom to manage credit risk; nothing in the Act prohibits set-off and Sec. 55 penalizes officers who misuse deposit information.
BSP regulations (MORB & circulars)	Require disclosure of offset clauses, fair-dealing, and notice under the Financial Consumer Protection Framework (BSP Circular 1048, 2019). (Bureau of the Treasury)
PDIC Charter (R.A. 3591, as amended)	Upon a bank’s closure, the receiver/PDIC must first offset any loan of the depositor before computing the insured balance. (eLibrary)
Special statutes	Labor Code Art. 1708 shields wages from attachment; BSP Circular 1164 (2023) exempts Basic Deposit Accounts from offset.

3. Supreme Court doctrine

Doctrine	Leading case(s)	Take-away
Offset is a recognized right of banks if the Civil Code requisites and a contractual clause are present.	Sps. Nisce v. Equitable PCI Bank (G.R. 167434, 22 Feb 2007)	Court affirmed that a stipulation allowing the bank to “charge to any deposit” is valid.
Mutuality / same parties	UPSUMCO v. PNB & APT (G.R. 126890, 17 Mar 2010)	PNB could not offset deposits held in trust for a different entity.
Bad-faith offset is actionable	Equitable PCI Bank v. Tan (G.R. 165339, 23 Aug 2010)	Bank liable for moral damages where it seized funds from a joint account without showing debtor’s exact share.
*No automatic offset of future* or contingent debts**	Citibank N.A. v. Spouses Cabamongan (G.R. 176697, 10 Sept 2014)	Credit-card bank may not debit ahead of maturity.

Practice point: Absent an express stipulation, the Civil Code’s “mutuality” rule bars a bank from touching a corporate depositor’s payroll or trust accounts because the beneficial owner is not the borrower.

4. Regulatory and contractual framing

BSP consumer rules. Circular 1048 obliges banks to craft clear, prominent offset clauses and to provide post-transaction notice. Failure is an unsafe practice sanctionable under Sec. 56, R.A. 8791. (Bureau of the Treasury)
Credit-card & digital lenders. Section X320.15 of the MORB (2022 edition) requires prior written consent before any set-off against a card-holder’s deposit.
Basic Deposit Account (BDA). Circular 1164 (2023) forbids offsetting BDAs to encourage financial inclusion.
Disclosure in loan papers. A modern Philippine promissory note usually states:

“The BANK may, without prior notice, debit any deposit, time deposit or investment account of the BORROWER now or hereafter maintained with the BANK…”

The clause is enforceable but still subject to BSP notice and good-faith rules.

5. Special contexts

Scenario	Rule
Bank closure / receivership	PDIC offsets the depositor’s loans first; only the net deposit (if any) is insured up to ₱1 million after 15 Mar 2025.
Payroll & wage accounts	Wages enjoy statutory protection from attachment; most banks treat pure payroll accounts as non-offsettable unless they become ordinary savings after transfer.
Joint accounts	Offset only to the extent of the debtor’s undivided share; bank must prove the debtor actually owns that share (see Equitable v. Tan).
Trust & fiduciary funds	Exempt under R.A. 8791 §92; beneficial ownership lies with the trustor/beneficiary, not the borrower-trustee.
Foreign-currency deposits	RA 6426 is silent on set-off; in practice banks offset only with depositor consent, mindful of secrecy penalties.
Garnishment vs. set-off	If a writ of garnishment arrives before the bank applies set-off, the garnishment prevails; if after, the deposit has already been extinguished by compensation.

6. Procedural checklist for banks

Confirm the five Civil-Code requisites (mutual, due, demandable, same kind, no retention/dispute).
Review ownership of the account – beware of joint, payroll, BDA or trust labels.
Issue an internal debit memo stating legal ground, amount, and supporting documents.
Send notice to the depositor immediately (even if the clause waives prior notice).
Retain records for BSP and potential civil litigation.

Failure in any step exposes the bank to: (a) restitution with legal interest, (b) damages for bad faith, (c) BSP administrative fines, and (d) possible estafa if funds were held in trust.

7. Remedies for depositors

Civil action for recovery of the amount plus damages (Art. 19, Civil Code).
BSP consumer-assistance complaint (Circular 1048) for abusive practice.
PDIC claim—where the bank has closed, file within two years, but expect the loan to be netted out first (PDIC Charter §16). (eLibrary)
Criminal complaint if the offset involved breach of trust or falsification.

8. Emerging issues

Digital-only banks must build automated set-off engines that still satisfy notice & audit-trail rules.
Open-finance APIs could allow third-party lenders to trigger cross-bank offsets—BSP is drafting safeguards (Concept Note, Jan 2025).
Data-privacy overlay. Offsetting involves “processing” personal data; banks must observe the legitimate-interest test under the Data Privacy Act of 2012.
Growing MDIC. With PDIC coverage now ₱1 million, small borrowers may see their entire balance netted out; expect policy debates on “offset ceilings.”

9. Key take-aways

Legality – Offsetting deposits against matured debts is valid in Philippine law, grounded on the Civil Code and reinforced by contract.
Limitations – Mutuality, good faith, consumer-protection rules, and special statutory shields (payroll, trust, BDA) restrain arbitrary use.
Receivership – Offsetting is mandatory before PDIC pays insurance; borrowers should anticipate automatic netting.
Best practice – Transparent drafting, prompt notice, and precise documentation are the surest defenses for banks—and the clearest warning signs for depositors.

Understanding these contours lets both banks and clients manage credit risk without trampling legal rights—an equilibrium the Supreme Court has repeatedly endorsed.

Prepared 25 May 2025 (UTC+08:00, Manila).