Rural Banks' Creation and Operation Act

Policy and purpose

RA 720 declares Congress’s policy to promote and expand the rural economy in an orderly and effective manner.
RA 720 provides rural communities with means to facilitate and improve productive activities through accessible credit and to encourage cooperatives.
RA 720 directs Government encouragement and assistance for a system of rural banks to provide credit on reasonable terms within easy reach.
RA 720 mandates cooperation in advice on business or farm management and proper use of credit for production and marketing through the Department of Agriculture and Natural Resources, the Department of Commerce and Industry, and other appropriate government agencies with the Rural Bank.

Monetary Board rulemaking and supervision

Section 3 requires the Monetary Board of the Central Bank of the Philippines to formulate rules and regulations governing the establishment and operation of rural banks.
Section 3 directs the rules to provide adequate credit facilities to small farmers and merchants and to cooperatives of such farmers or merchants.
Section 3 authorizes the Monetary Board to supervise the operations of rural banks.

Corporate form, authorization, and ownership

Section 4 prohibits operation of any Rural Bank without a Certificate of Authority issued by the Monetary Board of the Central Bank.
Section 4 requires rural banks to be organized as stock corporations.
Section 4 allows duly established cooperatives to organize rural banks and/or subscribe to rural bank stock.
Section 4 requires that at least sixty per cent (60%) of a rural bank’s capital stock must be owned and held by citizens of the Philippines.
Section 4 provides that if private shareholders’ subscription cannot be secured or is not available, the Rehabilitation Finance Corporation, upon representation of the private shareholders and approval of the Monetary Board, must subscribe to the capital stock of the rural bank.
Section 4 requires that Rehabilitation Finance Corporation subscribed capital under that mechanism be paid in full at the time of subscription in an amount equal to the fully paid subscribed capital of the private shareholders.
Section 4 allows Rehabilitation Finance Corporation shares to be sold at any time at par to private citizens of the Philippines.
Section 4 requires registered stockholders to be given at least six months option to purchase the shares proportionate to holdings.
Section 4 provides that if no buyer is found, preference is given to residents of the locality or province where the Rural Bank is located.
Section 4 mandates that all members of the Board of Directors of rural banks must be citizens of the Philippines.

Who can borrow and what loans must do

Section 5 requires rural banks to extend loans or advances primarily to meet the normal credit needs of a small farmer or farm family owning or cultivating, in the aggregate, not more than fifty hectares dedicated to agricultural production.
Section 5 also covers the normal credit needs of cooperatives and small merchants.
Section 5 defines small merchant as one whose capital investment does not exceed twenty-five thousand pesos (PHP 25,000).
Section 5 requires rural banks, in granting loans, to give preference to applications of farmers whose cash requirements are small.
Section 5 provides that for loans secured by real estate, no Torrens title is required.

Permitted uses of loanable funds

Section 6 authorizes rural banks to devote a portion of their loanable funds to credit needs of:
- small business enterprises with capital investment not exceeding PHP 25,000, and
- essential rural enterprises or industries other than those strictly agricultural in nature.
Section 6 limits these additional allocations to limits and conditions fixed by the Monetary Board.
Section 6 ties the authorization to achieving balanced rural economic growth and expansion.

Rehabilitation Finance Corporation capital support

Section 7 authorizes the Rehabilitation Finance Corporation to subscribe to rural bank capital stock until the rural bank accumulates enough capital of its own or to stimulate private investments, upon certification by the Monetary Board of such need.
Section 7 limits Rehabilitation Finance Corporation subscriptions to an amount equal to but not exceeding the total equity investment of the private shareholders.
Section 7 allows shares issued to Rehabilitation Finance Corporation to be paid off at par and retired in whole or in part if the Monetary Board finds the rural bank has accumulated enough capital strength for retirement.
Section 7 allows retirement if an offer from private sources is received to replace Rehabilitation Finance Corporation equity with an equivalent investment or more in common stock.
Section 7 grants registered private shareholders a right of preemption in proportion to their holdings upon retirement or replacement of Rehabilitation Finance Corporation equity.
Section 7 requires Rehabilitation Finance Corporation-held stock to be preferred only as to assets upon liquidation and to have no power to vote, while still sharing in dividends without preference.
Section 7 provides that if Rehabilitation Finance Corporation stock is sold to private shareholders, it becomes voteable upon sale.

Counterpart Fund financing cap and revolving use

Section 8 authorizes the Rehabilitation Finance Corporation to obtain from the “Counterpart Fund” and “Special Account” amounts it requires for:
- subscribing to rural bank shares, and
- granting loans to rural banks as provided in Section 12.
Section 8 imposes a cap that the amounts obtained under the authorization must be not more than ten million pesos (PHP 10,000,000).
Section 8 makes all such obtained funds constitute a revolving fund together with accruing interest.
Section 8 requires the revolving fund and interest to be used solely for the purposes stated in Section 8.

Types of stock and Monetary Board control

Section 9 provides that stock preferred as to assets upon liquidation is issued only to represent Government contributions to capital stock of the rural bank through the Rehabilitation Finance Corporation.
Section 9 directs that if there are no such public investments, only one class of stock shall be issued by any rural bank.
Section 9 empowers the Monetary Board to prescribe the amount, value, and class of stock issued by any rural bank organized under the Act.

Monetary Board supervision powers

Section 10 defines supervision as the Monetary Board’s power to:
- set limits on the maximum credit allowed any individual borrower;
- prescribe interest rate;
- determine loan period and loan procedures;
- indicate the manner in which technical assistance must be extended to rural banks;
- impose a uniform accounting system and manner of keeping accounts and records;
- conduct regular credit examination;
- conduct periodic surveys of loan and lending procedures;
- conduct audits and test check of cash and other transactions; and
- conduct training courses for rural bank personnel.
Section 10 includes general authority to supervise the rural bank’s business operation.

Restricted bank powers subject to permission

Section 11 requires written permission of the Monetary Board before a rural bank may:
- accept savings and time deposits;
- open current or checking accounts (with authority on when rural banks may open such accounts determined by the Monetary Board);
- act as a correspondent for other financial institutions;
- act as a collection agent; and
- rediscount paper with the Philippine National Bank or the Rehabilitation Finance Corporation or other banks and their branches and agencies.
Section 11 requires the Central Bank to specify:
- the nature of paper acceptable for rediscount, and
- the rediscount rate to be charged by those institutions.

Rehabilitation Finance Corporation loans to rural banks

Section 12 obligates the Rehabilitation Finance Corporation, upon request of the Monetary Board, to extend rural bank loans repayable in not more than ten years.
Section 12 requires the interest rate to be two per cent per annum (2%).
Section 12 provides that loans are secured against securities offered by any stockholder(s) of the rural bank and considered adequate by the Monetary Board.
Section 12 conditions the lending on the Monetary Board being convinced that:
- the rural bank’s resources are inadequate to meet legitimate credit requirements of the locality;
- there is a dearth of private capital in the locality; and
- it is not possible for the rural bank’s stockholders to increase paid-up capital.

Emergency Central Bank lending

Section 13 authorizes the Central Bank to give a loan to any rural bank in an emergency or when a financial crisis is imminent.
Section 13 requires the loan to be against assets of the rural bank deemed acceptable.
Section 13 requires a concurrent vote of at least five (5) members of the Monetary Board.

Tax and filing exemption thresholds

Section 14 exempts rural banks with assets not exceeding five hundred thousand pesos (PHP 500,000) from all taxes of whatever nature.
Section 14 also exempts those rural banks from charges and fees required in filing articles of incorporation.

Central Bank technical assistance

Section 15 requires the Central Bank to extend technical assistance to rural banks during organization or operations when requested or when the Monetary Board deems it necessary to preserve, protect, and promote the objectives of the Act.
Section 15 provides that such technical assistance is without cost or obligation on the part of the rural bank.

Free notarial and registry services for small loans

Section 16 authorizes any justice of the peace, acting as notary ex officio, to render service free of charge for loan documents for loans not exceeding two thousand pesos (PHP 2,000).
Section 17 requires any register of deeds to accept for registration, free of charge, any instrument relative to a loan not exceeding PHP 2,000 made by a rural bank.

Exemption from Department of Supervision and Examination contribution

Section 18 exempts rural banks organized under the Act from the obligation of contributing for the maintenance of the Department of Supervision and Examination under Section 28 of Republic Act No. 265.

Bonding requirement for rural bank personnel

Section 19 requires every individual acting as officer or employee of a rural bank who handles funds or securities amounting to one thousand pesos or more (PHP 1,000) in any one year to be covered by an adequate bond as determined by the Monetary Board.
Section 19 allows rural banks’ bylaws to provide for bonding of other officers or employees.

Government assistance through Central Bank power

Section 20 authorizes the Central Bank to require the services and facilities of any government department or instrumentality, or any officer or employee thereof, to carry out the objectives of the Act.

Rural banks as agents

Section 21 requires rural banks to act as agents of the Philippine National Bank and the Rehabilitation Finance Corporation in places where those entities have no branch or agency.

Criminal offenses and penalties (bank officers, agents, applicants, examiners)

Section 22 imposes a penalty of a fine of not more than two thousand pesos (PHP 2,000) or imprisonment for not more than one year, or both, at the court’s discretion, on specified persons and conduct.
Section 22 penalizes any officer, employee, or agent of a rural bank who:
- makes false entries in any bank report or statement thereby affecting the bank’s financial interest or causing damage to the bank or any person;
- without court order, discloses information relating to bank funds or properties belonging to private individuals, corporations, or any other entity;
- accepts gifts, fees, commissions, or any remuneration connected with approval of a loan;
- overvalues or aids in overvaluing any security to influence the bank’s action on a loan; or
- appears and signs as guarantor, indorser, or surety for loans granted by the bank.
Section 22 penalizes any applicant for a loan from, or borrower of, a rural bank who:
- misuses, misapplies, or diverts loan proceeds from their declared purpose;
- fraudulently overvalues property offered as security;
- gives false or willful misrepresentation of material facts to obtain, renew, increase, or extend a loan period;
- attempts to defraud the bank in the event of court action to recover a loan;
- offers rural bank personnel a gift, fee, commission, or other compensation to influence approval; or
- disposes or encumbers the property or crops offered as security.
Section 22 also penalizes any examiner, or any Central Bank officer/employee or government department/bureau/office/branch/agency employee assigned to examine, supervise, assist, or render technical service to rural banks who commits any act enumerated for bank officers/agents in Section 22, or who connives or aids in such commission.

Penalties for public officers demanding compensation

Section 23 imposes a penalty of a fine of not more than one thousand pesos (PHP 1,000) or imprisonment for not more than one year, or both, at the court’s discretion.
Section 23 applies to any justice of the peace or register of deeds who demands or accepts, directly or indirectly, any gift, fee, commission, or other form of compensation connected with services required under Section 17 (register of deeds) and Section 16 (justice of the peace).

Unauthorized use of “Rural Bank”

Section 24 punishes any bank not organized under the Act and any person, association, or corporation doing banking business not authorized under the Act that uses the words “Rural Bank” as part of the name or title.
Section 24 imposes a fine of not less than fifty pesos (PHP 50) for each day during which the words are used.

Annual reporting to Congress

Section 25 requires the Monetary Board of the Central Bank to submit to Congress, on or before the end of each calendar year, a report of:
- all rules and regulations promulgated in accordance with the Act; and
- its other actions related to rural banks,
  together with an explanation of reasons.

Separability and incorporation of related provisions

Section 26 provides that if any provision or section of the Act, or its application, is held invalid, the remaining provisions and their applications are not affected.
Section 27 incorporates the provisions of Republic Acts Numbered 265 and 337 insofar as applicable and not in conflict with the Act.