Foreign Equity in Rural Banks Act

Coverage and legal basis

Republic Act No. 10574 amends Republic Act No. 7353 (the Rural Bank Act of 1992, as amended) by revising Sections 4, 5, 6, and 8.
The amendments specifically allow foreign equity infusion in rural banks by changing the rules on ownership limits, board participation, capital subscriptions by government financial institutions, and related credit and loan/foreclosure mechanics (Sections 1 to 4).
The monetary regulator for rural bank authority and oversight remains the Monetary Board of the Bangko Sentral ng Pilipinas under Republic Act No. 7353 as amended (Section 1).

Certificate of Authority and foreign ownership limits

A rural bank must be operated only with a Certificate of Authority from the Monetary Board of the Bangko Sentral ng Pilipinas (Section 4, as amended).
Rural banks must be organized in the form of stock corporations (Section 4, as amended).
At least forty percent (40%) of the voting stocks of a rural bank must be owned by Philippine citizens, or by Philippine corporations/associations organized under Philippine laws with at least sixty percent (60%) of their capital owned by such citizens (Section 4, as amended).
Non-Filipino citizens may own, acquire or purchase up to sixty percent (60%) of the voting stocks of a rural bank (Section 4, as amended).
The percentage of foreign-owned voting stocks is determined by the citizenship of the individual or corporate stockholders (Section 4, as amended).
If private shareholders’ subscription cannot be secured or is insufficient for normal credit needs, Land Bank of the Philippines, Development Bank of the Philippines, or any government-owned or -controlled bank or financial institution may subscribe to the rural bank’s capital stock, subject to:
- representation by private shareholders,
- investment guidelines, policies and procedures of the bank/financial institution, and
- approval of the Monetary Board (Section 4, as amended).
Subscriptions by these institutions must be paid in full at the time of subscription in an amount equal to the private shareholders’ fully paid subscribed and unimpaired capital, or in an amount as the Monetary Board may prescribe to promote and expand rural economic development (Section 4, as amended).
Shares subscribed by Land Bank, DBP, or other government-owned or -controlled banks/financial institutions may be sold at any time at adjusted book value (Section 4, as amended).
Registered stockholders have preemption within one (1) year from the date of offer in proportion to their respective holdings; if there is no buyer, preference is given to residents of the locality or province where the rural bank is located (Section 4, as amended).
Cooperatives/corporations primarily organized to hold equities in rural banks may organize or subscribe to the shares of a rural bank upon consultation with the rural banks in the area, duly established cooperatives and such corporations may do so (Section 4, as amended).
A cooperative or corporation that owns or controls the whole or majority of the voting stock of a rural bank is subject to special examination and to rules and regulations the Monetary Board may prescribe (Section 4, as amended).

Board membership and insider lending prohibitions

Non-Filipino citizens may become members of the Board of Directors of a rural bank, but their participation is limited to their proportionate share in the equity of the rural bank (Section 5, as amended).
At least one (1) independent director must be elected to the Board of Directors (Section 5, as amended).
No director or officer of a rural bank may, directly or indirectly:
- borrow any deposits or funds of the rural bank, or
- become a guarantor, indorser, or surety for loans from such bank to others, or
- become an obligor for money borrowed from the bank or loaned by it,
  except with written approval of the majority of the directors, excluding the director concerned (Section 5, as amended).
Any such approval must be entered upon the corporation’s records, and a copy must be transmitted forthwith to the appropriate supervising department (Section 5, as amended).
A director/officer who violates these provisions must be immediately dismissed and penalized in accordance with Section 26 of the Rural Bank Act of 1992 (Section 5, as amended).
The Monetary Board may regulate the amount of credit accommodations that rural banks may extend directly to directors, officers, or stockholders (Section 5, as amended).
Outstanding credit accommodations extended to each stockholder owning two percent (2%) or more of the subscribed capital stock, or to the bank’s directors or officers, must be limited to an amount equivalent to the respective outstanding deposits and the book value of the paid-in capital contribution in the bank (Section 5, as amended).

Purposes of rural bank loans

Loans and advances by rural banks must be primarily for meeting the normal credit needs of:
- farmers, fishermen, or farm families owning or cultivating land dedicated to agricultural production, and
- the normal credit needs of cooperatives and merchants (Section 6, as amended).
Rural banks may grant loans on security of lands without Torrens Title when the owner shows five (5) years or more of peaceful, continuous and uninterrupted possession in concept of owner (Section 6, as amended).
Rural banks may grant loans on portions of friar land estates or other Bureau of Lands-administered lands covered by sales contracts when purchasers have paid at least five (5) years installment thereon, without needing prior approval/consent by the Director of Lands (Section 6, as amended).
Rural banks may grant loans on portions of lands under the administration of the Department of Agrarian Reform or other government agency covered by sales contracts when purchasers have paid at least five (5) years installment thereon, without needing prior approval/consent of the Department of Agrarian Reform or corresponding agency (Section 6, as amended).
Rural banks may grant loans on homesteads or free patent lands pending the issuance of titles, notwithstanding contrary provisions of any law or regulations (Section 6, as amended).
When corresponding titles are issued, they must be delivered to the Register of Deeds of the province where the lands are situated for annotation of encumbrances (Section 6, as amended).
For lands pending homestead or free patent titles, copies of notices for presentation of final proof must be furnished the creditor rural bank, and if borrower applicants fail to present final proof within thirty (30) days from notice, the creditor rural bank may do so at the borrower applicants’ expense (Section 6, as amended).
Loans for homestead/free patent matters require that the applicant has already made improvements and that the loan is used for further development of the same or for other productive economic activities (Section 6, as amended).
Appraisal and verification of land status are the full responsibility of the rural bank, and any loan later found to be within the forest zone is for the sole account of the rural bank (Section 6, as amended).
Borrowers, especially tenants, need only to secure loans with the produce corresponding to their share (Section 6, as amended).

Foreclosure publications, redemption, and constraints

The foreclosure of mortgages and executions of judgment involving real properties levied upon by a sheriff are exempt from newspaper publications required by law when the total loan amount (excluding interest due and unpaid) does not exceed PHP 100,000, or such other amount as the Monetary Board prescribes based on prevailing economic conditions (Section 6, as amended).
In such exempt cases, publication is satisfied by posting notices of foreclosure and execution of judgment in the most conspicuous area of the municipal building, barangay hall, and barangay public market (if any) where the mortgaged land is situated during the sixty (60) days immediately preceding the public auction or execution of judgment (Section 6, as amended).
Proof of publication must be accomplished by an affidavit of the sheriff or officer conducting the foreclosure sale or execution of judgment and must be attached to the case records (Section 6, as amended).
When a homestead or free patent is foreclosed, the homesteader/free patent holder and heirs have the right to redeem within:
- one (1) year from the date of foreclosure if the land is not covered by a Torrens Title, or
- one (1) year from the date of the registration of the foreclosure if the land is covered by a Torrens Title (Section 6, as amended).
A rural bank is allowed to foreclose lands mortgaged to it, including lands covered by Republic Act No. 6657 (Comprehensive Agrarian Reform Law of 1988), as amended, subject to the retention limits provided under Republic Act No. 6657 (Section 6, as amended).
Rural banks not qualified to acquire or hold land may bid, take part in foreclosure sales, and use enforcement proceedings, and may take possession of the mortgaged property for not exceeding five (5) years from actual possession, but title shall not be transferred to the rural bank (Section 6, as amended).
If the rural bank is the winning bidder, during the five (5)-year period it must transfer its rights to a qualified Philippine national, without prejudice to a borrower’s rights under applicable laws (Section 6, as amended).
If the rural bank is unable to transfer the property within the five (5) years, the rural bank must be penalized one-half (1/2) of one percent (1%) per annum of the foreclosed property’s price until it transfers to a qualified Philippine national (Section 6, as amended).

Capital infusion through government banks

To provide supplemental capital to a rural bank until it accumulates enough of its own capital or to stimulate private investments, Land Bank of the Philippines, Development Bank of the Philippines, or any government-owned or -controlled bank/financial institution must subscribe within thirty (30) days to the rural bank’s capital stock from time to time in an amount equal to the private shareholders’ total equity investment, paid in full at subscription time, or an amount necessary to promote and expand rural economic development (Section 8, as amended).
Shares issued to these government institutions may be bought at any time at adjusted book value under Section 8 (Section 8, as amended).
Stocks held by Land Bank, DBP, or any government-owned or -controlled bank/financial institution under Section 8 are:
- preferred only as to assets upon liquidation,
- without the power to vote, and
- entitled to share in dividend distributions from the date of issuance in an amount based on the lending benchmark approved by the Bangko Sentral ng Pilipinas plus the prevailing non-prime spread of the government financial institution (Section 8, as amended).
If such preferred stock is sold to private shareholders, it may be converted into common stock of the class provided for in Section 10 of the Rural Bank Act (Section 8, as amended).
Pending amendments to the rural bank’s Articles of Incorporation needed for the conversion, if necessary, the transfer is recorded by the rural bank in its stock and transfer book, and the shareholders thereafter enjoy all rights and privileges of common stockholders; the preferred stocks are surrendered and cancelled and the corresponding common stocks are issued (Section 8, as amended).

Rules and implementation timeline

The Bangko Sentral ng Pilipinas must prescribe necessary rules and regulations on the amendments to the Rural Banks Act of 1992 in consultation with various stakeholders, and must disseminate information to allow entry of foreign equity into the rural banking system to revitalize the rural banking industry and improve access of banking services to rural areas (Section 5).
The implementing rules and regulations must be published within ninety (90) days from the publication of this Act in two (2) newspapers of general circulation in the Philippines (Section 5).

Separability, repealing, and effectivity

Section 6 provides separability: if any provision is declared unconstitutional, the remaining provisions continue in force and effect.
Section 7 provides repeal/modification: all laws, decrees, executive orders, proclamations, rules and regulations, and other issuances, or parts thereof, inconsistent with the Act are repealed or modified accordingly.
Section 8 sets effectivity: the Act takes effect fifteen (15) days after complete publication in the Official Gazette or in at least two (2) newspapers of general circulation, whichever is earlier.