Creation of Agricultural and Industrial Bank

Corporate powers and business scope

Section 3 establishes the Bank as a body corporate with power to carry out the Bank’s purposes.
Section 3 authorizes the Bank to grant agricultural loans, industrial loans, and real estate loans.
Section 3 authorizes the Bank to establish and operate bonded warehouses.
Section 3 authorizes the Bank to subscribe for, underwrite, purchase or guarantee bonds issued by agricultural or industrial concerns, or bonds secured by real estate used for commercial purposes.
Section 3 authorizes the Bank to do trust business and to manage and administer funds and properties entrusted to the National Investment Board, subject to the transfer rules in Sections 10–11.
Section 3 authorizes the Bank to issue bonds, accept savings and time deposits, adopt by-laws, use a corporate seal, acquire and dispose of real property and securities for business purposes, execute and foreclose mortgages, and sue and be sued with perpetual succession.
Section 3 authorizes the Bank to appoint and dismiss officers and employees unless otherwise provided by the Act, and to fix adequate compensation.

Capital stock and government subscription

Section 4 fixes the Bank’s capital stock at one hundred fifty million pesos (Philippine currency), exclusively and fully subscribed by the Government of the Philippines.
Section 4 divides the capital into one hundred fifty thousand shares, each with a par value of one thousand pesos.
Section 5 vests voting power of all shares held by the Government in the President of the Philippines or his designated representatives.
Section 6 appropriates one hundred fifty million pesos from the proceeds of the excise tax on oil that are not otherwise appropriated.
Section 6 requires payment of the government subscription as follows:
- twenty-five million pesos upon subscription; and
- the remainder upon call of the Board of Directors and certification by the Secretary of Finance, with the approval of the President, that funds are available in the Treasury.
Section 6 limits annual calls for payment of subscription to not exceed fifteen million pesos in any year.

Loans, security limits, and loan use

Section 7 authorizes agricultural loans secured by real estate mortgages, capped at sixty per centum of the appraised value of the securities.
Section 7 requires the appraisal base to include the value of all improvements and other assets acquired with the loan proceeds.
Section 7 sets agricultural loan maturity limits: no less than one year and no more than thirty years from date of the loan.
Section 7 allows agricultural loans to be payable either at one time or in installments.
Section 8 authorizes industrial loans secured by mortgage or deed of trust on assets of an industrial establishment, capped at sixty per centum of the market value of the securities.
Section 8 requires the securities base to include improvements and other assets acquired with loan proceeds.
Section 8 sets industrial loan maturity: not less than one year; loans may be payable at one time or in installments.
Section 9 requires loan applications for agricultural and industrial loans to be in writing and under oath, and to contain:
- a detailed description of the real estate or industrial assets;
- an appraisal at reasonable market value; and
- a full statement of the purposes for the loan.
Section 9 makes it unlawful to use loan proceeds (or any part) for any purpose other than those set out in the application.
Section 9 mandates that any unlawful use triggers criminal liability, and is sufficient cause for rescission of the contract and foreclosure of the mortgage.

Transfer of National Investment Board functions

Section 10 transfers to the Bank the powers vested in the National Investment Board under Commonwealth Act No. 7 (as amended) and other laws, including transferred funds, properties, assets, accounts, contracts, and choses in action previously administered by that Board.
Section 10 requires the Bank to exercise those powers and duties in accordance with Commonwealth Act No. 7 and the related laws, subject to provisions “hereinafter provided.”
Section 10 provides that the Bank shall administer, dispose of, handle, or execute the transferred funds, properties, assets, accounts, contracts or agreements, and choses in action in the manner the Bank determines in the interest of the funds concerned.
Section 10 makes the Bank responsible for the liabilities of the National Investment Board “in behalf” of the transferred functions, as trustee of the funds.
Section 11 abolishes the National Investment Board on the date when the Bank begins operations.

Trust, bond issuance, and investor protections

Section 12 authorizes the Bank to act as trustee on any mortgage or bond issued by any municipality, body politic, or corporation, and to accept and execute municipal or corporate trusts not inconsistent with law.
Section 13 authorizes the Bank to issue real estate bonds with:
- face value not less than twenty-five pesos, and
- total amount not to exceed ninety per centum of the amount of real estate loans held under Section 7.
Section 14 requires that real estate securities securing the bonds be deposited with the Treasurer of the Philippines, and that each bond’s face includes a Treasurer’s certificate in specified form.
Section 15 protects outstanding real estate bonds by stating that changes in the Act or in other Philippine laws shall not affect outstanding bonds or holders’ rights.
Section 16 authorizes, with Presidential approval, the issuance of debenture bonds:
- face value not less than twenty-five pesos; and
- total amount not to exceed the full amount of its capital.
Section 16 permits principal and interest of debenture bonds to be guaranteed by the Government of the Philippines.
Section 17 requires bonds to be engraved, signed by the General Manager, and authenticated by the Auditor-General, and provides that they obligate the Bank to pay the bearer principal and semi-annual interest at the rate fixed by the Bank, payable in Manila unless otherwise provided.
Section 18 requires bonds issued under the Act to be accepted by the Insurance Commissioner as securities for insurance companies under the Insurance Act, and as security in customs and internal-revenue transactions where security is required, and in other government-security cases where statutes require security.
Section 19 exempts the bonds from all taxes levied or assessed by the Government of the Philippines or any subdivision thereof.
Section 20 requires bonds to be issued in amounts, forms, times, and periods set by a Board of Directors resolution approved by the President, and provides redemption mechanics:
- redeemable at par on or before maturity;
- subject to redemption by lot as designated by the Bank;
- bonds chosen by lot that have not been outstanding for at least three-fourths of the period of issuance are retired with a premium of five per centum of par value;
- bonds chosen for redemption stop bearing interest beginning on the withdrawal date;
- selection by lot occurs at least one hundred days before withdrawal;
- serial numbers chosen must be published once a week for not less than three months in two daily newspapers of general circulation in the Philippines.
Section 21 authorizes the Board, at the request of a bondholder, to authorize payment of interest at Bank branches/agencies in municipalities in the Philippines or in the United States.
Section 22 authorizes the Bank to guarantee, as to principal and interest (or either), bonds issued by duly incorporated companies for agricultural, industrial, or commercial purposes, but requires Presidential approval for the guarantee to be lawful.
Section 23 authorizes underwriting and agency activities for other banks and for raising loans, including disbursing principal and interest/dividends and underwriting bonds of other companies.

Savings deposits and permitted investments

Section 24 authorizes the Bank to receive savings and time deposits.
Section 24 limits deposit use (loaning/investing) to the following categories:
- Section 24(a): loans secured by mortgage or deed of trust to the Bank of unencumbered improved real estate in cities and municipalities, or mortgage/deed of trust to the Bank of actually cultivated and improved agricultural lands, capped at sixty per centum of appraised value including insured improvements; the amount must consider surrounding property sale prices, assessed value, and revenue-producing capacity.
- Section 24(b): bonds/evidences of debt of the Government of the United States or of the Philippines, or bonds/evidences of debt of authorized provinces/cities/municipalities in the Philippines, and bonds/evidences of debt of any person/firm/company/corporation/entity guaranteed by the Government of the United States, with loans capped at the smaller of face value or market value.
- Section 24(c): loans with first mortgages transferred to the Bank as collateral on improved, otherwise unencumbered real estate in cities and municipalities; mortgages capped at sixty per centum of appraised value and insured improvements.
- Section 24(d): collateral trust bonds/notes/obligations secured by such bonds/notes and a first mortgage or a participating interest in a first mortgage upon improved urban real estate in cities/municipalities in the Philippines, with conditions:
  - bonds/notes must have been outstanding at least three years prior to purchase;
  - during the period, earnings available for paying interest must equal at least two hundred per centum of annual interest payable on all first mortgage obligations outstanding;
  - purchases are barred if the aggregate of first mortgage obligations outstanding against the property exceeds sixty per centum of the appraised value.

Special securities, attachment immunity, and liability limits

Section 25 authorizes receipt of real property without Torrens title as security if the Bank is satisfied that:
- the debtor is the person in possession as owner;
- possession by the debtor and predecessors has been continuous and uninterrupted during the last ten years;
- the debtor has cleared, bettered, or improved the land during that time; and
- real estate tax has been paid by the debtor and predecessors during that time.
Section 26 states that securities for loans granted by the Bank are not subject to attachment and cannot be included in insolvent persons/institutions’ property unless all debts and obligations to the Bank have been previously paid, including accrued interest, collection expenses, and other charges.
Section 27 limits the total liabilities to the Bank of any person/company/corporation/firm for borrowed money to not exceed fifteen per centum of the Bank’s unimpaired capital and surplus, except for government instrumentalities of the Government of the Philippines.

Additional security, acceleration, and sale rules

Section 28 permits the Bank to demand additional securities if, for any cause:
- securities or collateral specified/accepted decline or depreciate in market value;
- securities are insufficient;
- loans become unsecured or promises securing the loan are not performed.
Section 28 authorizes acceleration and enforcement if the debtor fails to submit additional securities:
- the Bank may declare the obligation due and payable forthwith; and
- the Bank may, on three days’ notice, demand, sell, assign, transfer, and deliver the whole (or part) of securities, substitutes, additions, or other securities/property given or left in the Bank’s possession or any government-controlled bank/corporation, or in any branch/agency, at a broker’s board or at public/private sale at the Bank’s option.
Section 28 requires mortgage sale to follow judicial foreclosure if the securities consist of a real estate mortgage, or to follow the procedure under Act No. 3135, as amended.
Section 29 authorizes the Bank to apply sale proceeds (after deducting costs of collection/sale/delivery) to pay one or more or any liabilities as the General Manager deems proper, with proper rebate for interest on liabilities not then due.
Section 29 allows the Bank to proceed against the debtor for the difference if proceeds do not cover the full loan plus interest and other charges.
Section 29 requires delivery of any amount exceeding the full indebtedness to the debtor.
Section 30 authorizes extrajudicial foreclosure rules for real estate mortgages per Act No. 3135, as amended, including:
- no newspaper publication of notice of sale if assessed property value does not exceed one thousand pesos;
- publication in the Official Gazette if it exceeds one thousand pesos;
- in any case, notice by registered mail to the debtor and the city/municipality treasurer.
Section 30 allows the official conducting sale to charge a commission at the sheriff’s rate if the highest bidder is not the creditor.

Redemption, real estate holding limits, and reserves

Section 31 grants a redemption right to the mortgagor/debtor whose real property has been sold for Bank obligations at public auction or judicially or extrajudicially.
Section 31 requires redemption within one year from the auction sale date by paying to the Bank the amount owed on the date of sale plus interest on the total indebtedness at the agreed rate from the sale date.
Section 31 bars interest compensation if the bidder has taken material possession or the property has been delivered to the bidder; in that case, the property proceeds compensate the interest.
Section 31 requires the Bank, when it was not the highest bidder, to return to the bidder the auction amount received with corresponding interest paid by the debtor.
Section 32 authorizes the Bank to purchase and own real estate necessary for carrying on its business up to ten per centum of its paid-up capital.
Section 32 authorizes holding real estate acquired in debt collection, but requires sale of such acquired real estate within five years from the date ownership vests in the Bank.
Section 33 requires the Bank to keep on deposit at all times the reserve required by existing laws.

Capital protection, dividend limits, and profit allocation

Section 34 prohibits the Bank, while it continues banking operations, from withdrawing any portion of its capital through dividends or otherwise.
Section 34 forbids declaring dividends if losses sustained equal to or exceed the undivided profits on hand.
Section 34 limits dividends to no more than the Bank’s net profits on hand after deducting losses and bad debts.
Section 34 treats as bad debts debts due to the Bank with interest past due and unpaid for six months, unless the debts are well secured and in process of collection.
Section 35 requires that after deducting administrative expenses and making provisions for bad and doubtful debts, depreciation in assets, pension funds, or retiring allowance, net profits be apportioned semi-annually:
- Section 35(a): fifty per centum to create and maintain a reserve; and
- Section 35(b): remaining fifty per centum paid to the Government of the Philippines as dividends.
Section 35(b) caps dividends paid in any calendar year at twelve per centum of paid-up capital.
Section 35(b) directs that surplus after the reserve and the dividend provisions be transferred to undivided profits.

Board, officers, employment rules, and insurance

Section 36 directs that the Bank’s affairs and business be managed by a Board of Directors of seven members appointed by the President with the consent of the Commission on Appointments of the National Assembly.
Section 36 provides compensation:
- directors not officers/employees of government with fixed compensation/salary from public funds are paid per diem not exceeding twenty-five pesos for each Board session attended.
Section 37 bars eligibility of any director or employee of a private bank as a Board member.
Section 38 requires appointments:
- within the first twenty days after approval of the Act, and
- annually on the first Tuesday after the first Monday of March starting in the year nineteen hundred and forty.
Section 38 requires Directors, after appointment, to organize and elect a Chairman and Vice-Chairman, with the Vice-Chairman acting in the Chairman’s absence or incapacity.
Section 39 gives the Board powers/duties, including:
- fixing interest rates and publishing them in the central office;
- fixing different interest rates based on security classes;
- establishing branches/agencies in provincial capitals and in municipalities where industrial/agricultural needs require it;
- providing adequate personnel to determine validity and sufficiency of securities at the least expense to borrowers.
Section 40 authorizes branches/agencies to exercise Board-conferred powers and requires detailed reports of operations as required by the central office at Manila.
Section 41 requires branch/agency officers and employees to be appointed and removed in accordance with Sections 47 and 48.
Section 42 authorizes the appointment of provincial or municipal treasurers as agents/cashiers/tellers with authorization of the proper Department Secretary, with additional compensation fixed by the Bank, and removability as agents and treasurers by the President for violation of the Act, the by-laws, or instructions received.
Section 43 establishes the General Manager as chief executive and one or more Assistant General Managers.
Section 43 requires Board carry-out of Board orders/resolutions through the General Manager/Assistant General Managers, fixes their salaries by the Board with Presidential approval, and provides that the Board designates an Assistant to replace the General Manager in absence/incapacity.
Section 43 requires appointment of General Manager and Assistant General Managers by the Board with Presidential approval and allows removal in like manner.
Section 44 requires the General Manager to:
- grant long-term agricultural or industrial loans for periods not exceeding five years and sums not exceeding fifty thousand pesos to any one person/company/corporation/firm, while reporting each loan to the Board at its next succeeding session;
- contract for the Bank with Board advice and consent;
- report weekly to the Board on operations and suggest rate/policy changes; and
- furnish information upon request of the President or the Secretary of Finance.
Section 45 makes the Auditor-General ex-officio Auditor, with an auditor representative appointed/fixed in salary by the Auditor-General; it requires quarterly reports on the Bank’s condition to specified officials and requires the report to include resources/liabilities, capital stock, dividends, surplus/reserve/undivided profits, losses/bad debts, and suspended and overdue paper.
Section 46 makes the Secretary of Justice ex-officio attorney for the Bank and authorizes delegation to specified officers; it empowers the Board, with Secretary of Justice approval, to employ additional attorneys.
Section 47 provides that other officers and employees are appointed and removed by the Board on recommendation of the General Manager.
Section 48 states that officers/employees are not subject to the Civil Service Law, and fixes that their duties and compensation are fixed by the General Manager with Board approval.
Section 49 requires bonding and fidelity insurance under the Public Bonding Law for officers/employees whose duties involve custody of funds/property requiring accountability.
Section 50 requires that regular and permanent officers and employees in the Philippines be regular members of the Government Insurance System.
Section 51 vests the Bank Commissioner with supervisory powers in accordance with the Administrative Code.
Section 52 prohibits the Auditor-General and other designated officers from revealing inspection/investigation details to persons other than the President, the Secretary of Finance, and the Board of Directors, and prohibits disclosure of information about private funds/property in custody except by order of a court of competent jurisdiction.

Conflicts, kickbacks, false statements, and criminal penalties

Section 53 prohibits any officer/employee of the Bank and any government official with executive or supervisory authority over the Bank from borrowing money from the Bank, becoming guarantor/indorser/surety for Bank loans to others, or becoming an obligor for moneys borrowed from the Bank or loaned by it.
Section 53 mandates that a knowing violator be immediately removed by competent authority and be punished by:
- imprisonment not exceeding five years, and
- a fine of not less than one thousand nor more than five thousand pesos.
Section 54 prohibits the Bank from granting any loan to a corporation/partnership/company in which any member of the Board is a shareholder, agent, or employee, except by unanimous vote of Board members excluding the interested member.
Section 54 caps total liabilities to the Bank of any corporation in which any Board member is a shareholder/agent/employee at not more than five per centum of the Bank’s paid-up capital at all times.
Section 54 requires that a director who knowingly violates these rules be immediately removed by the President of the Philippines and punished under Section 53.
Section 55 prohibits any officer/employee/agent from exacting, demanding, or receiving any fee, commission, gift, or charge for obtaining loans from the Bank.
Section 55 provides that violators are punished by:
- a fine of not less than one hundred nor more than six thousand pesos, or
- imprisonment for not less than one month nor more than three years, or both, at the court’s discretion.
Section 56 penalizes anyone who, to obtain, renew, or increase a loan or extend its period for himself or another, gives false information about identity, situation, production, or value of security or any point affecting granting/denial, whether or not the loan is consummated.
Section 56 penalizes any Bank officer/employee who, through connivance or negligence, allows such false information to pass unnoticed, thereby causing damage to the Bank or exposing it to the danger of damage.
Section 56 provides that offenders under these rules are punished with:
- imprisonment not less than three months nor more than three years, and
- a fine not less than the amount of the loan obtained or desired nor more than three times that amount.
Section 57 punishes:
- Bank officers/employees who knowingly violate, or permit others to violate, provisions not specially punished in prior sections; and
- persons violating or aiding and abetting violations.
Section 57 provides penalties of:
- a fine not exceeding ten thousand pesos, or
- imprisonment not exceeding five years, or both, at the court’s discretion.

Effectivity, date, and governance instruments

Section 58 provides that the Act takes effect upon its approval.
The Act is approved on June 9, 1939.

Transitory evolution of the Bank’s name

The Agricultural and Industrial Bank subsequently became the Rehabilitation Finance Corporation (R.A. No. 85, as amended) and is now known as the Development Bank of the Philippines.