Rural Banks Creation, Organization, Operation

Policy, purpose, and regulated credit

The State recognizes the need to promote comprehensive rural development by attaining a more equitable distribution of opportunities, income and wealth.
The State commits to a sustained increase in the amount of goods and services produced for the benefit of the people.
The State aims to expand productivity to raise the quality of life, especially of the under-privileged.
The State encourages and assists the establishment of a rural banking system designed to make needed credit in rural areas available and readily accessible on reasonable terms.
Section 3 directs the Monetary Board of the Central Bank of the Philippines to formulate rules and regulations governing the establishment and operation of rural banks and to supervise their operations.
The rules and regulations must ensure adequate credit facilities for farmers and merchants, or for cooperatives of such farmers and merchants, and generally for rural communities.

Creation, organization, and Certificate of Authority

No rural bank shall be operated without a Certificate of Authority from the Monetary Board of the Central Bank of the Philippines.
Rural banks must be organized in the form of stock corporations.
Upon consultation with the rural banks in the area, duly established cooperatives and corporations primarily organized to hold equities in rural banks may organize a rural bank and/or subscribe to rural bank shares.
A cooperative or corporation owning or controlling the whole or majority of the voting stock of a rural bank is subject to special examination and rules the Monetary Board prescribes.
Except for shareholdings of corporations organized primarily to hold equities in rural banks under Section 12-C of Republic Act No. 337, as amended, and of Filipino-controlled domestic banks, the capital stock of any rural bank must be fully owned and held directly or indirectly by Philippine citizens or by qualified corporations, associations or cooperatives under Philippine laws.
Stockholdings in a rural bank are exempt from any ownership ceiling for ten (10) years from the approval of this Act.
The ownership ceiling exemption requires Monetary Board approval.
If private shareholders’ subscription cannot be secured, or is insufficient to meet the locality’s 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 upon representation by private shareholders, subject to the bank’s investment guidelines, policies and procedures, and subject to Monetary Board approval.
Such subscribed capital must be paid in full at the time of subscription, in an amount equal to the fully paid subscribed and unimpaired capital of the private shareholders, or such amount as the Monetary Board prescribes as necessary to promote and expand rural economic development.
Shares subscribed by the Land Bank of the Philippines, Development Bank of the Philippines, or any government-owned or controlled bank or financial institution may be sold at any time at market value to private individuals who are citizens of the Philippines.
In the sale of such shares, registered stockholders have the right of preemption within one (1) year from the date of offer, in proportion to holdings.
In the absence of such buyer, preference is given to residents of the locality or province where the rural bank is located.

Board, directors/officers, and insider lending bans

Section 5 requires every member of the Board of Directors to be a citizen of the Philippines at the time of assumption to office.
Nothing in the Act prohibits any appointive or elective public official from serving as director, officer, consultant, or in any capacity in the bank.
No director or officer may directly or indirectly borrow any deposits or funds of the rural bank for himself, or as a representative or agent of another.
No director or officer may become a guarantor, indorser, or surety for loans from such bank to others.
No director or officer may act as 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.
The approval must be entered on corporate records and a copy must be transmitted forthwith to the appropriate supervising department.
A director/officer who violates Section 5 is immediately dismissed and penalized under Section 26.
The Monetary Board may regulate the amount of credit accommodations extended directly to directors, officers, or stockholders.
The outstanding credit accommodations extended to each stockholder owning two percent (2%) or more of subscribed capital stock, and to directors or officers, must be limited to an amount equivalent to the respective outstanding deposits and the book value of the paid-in capital contributions in the bank.

Rural credit purposes and collateral rules

Section 6 requires rural banks’ loans and advances to be primarily for meeting normal credit needs of farmers, fishermen, or farm families owning or cultivating land dedicated to agricultural production.
Loans also cover normal credit needs of cooperatives and merchants.
In granting loans, rural banks must give preference to farmers and merchants whose cash requirements are small.
Rural banks may grant loans secured by lands without Torrens Title if the owner shows five (5) years or more of peaceful, continuous and uninterrupted possession in the concept of owner.
Rural banks may grant loans secured by portions of friar land estates under the Bureau of Lands covered by sales contracts when purchasers have paid at least five (5) years installment, without prior approval and consent of the Director of Lands.
Rural banks may grant loans secured by portions of other estates under the Department of Agrarian Reform or other governmental agency covered by sales contracts when purchasers have paid at least five (5) years installment, without prior approval and consent of the Department of Agrarian Reform or corresponding governmental agency.
Rural banks may grant loans secured by homesteads or free patent lands pending issuance of titles, notwithstanding contrary provisions of law or regulations.
When corresponding titles are issued, the titles must be delivered to the Register of Deeds of the province where the lands are situated for annotation of the encumbrance.
For lands pending homestead or free patent titles, loan proceeds require furnishing creditor rural banks with copies of notices for the presentation of the Final proof.
If borrower applicants fail to present final proof within thirty (30) days from date of notice, the creditor rural bank may present final proof for them at the bank’s expense.
For homestead or free patent, the applicant must have improvements on the land, and the loan applied for must be used for further development or other productive economic activities.
The appraisal and verification of the status of land is the rural bank’s full responsibility.
Any loan granted on land later found to be within the forest zone is for the sole account of the rural bank.
Foreclosure of mortgages and execution of judgment involving real properties levied upon by a sheriff is exempt from newspaper publication requirements when the total amount of loan excluding interests due and unpaid does not exceed PHP 100,000 or such amount as the Monetary Board may prescribe due to prevailing economic conditions.
In those cases, sufficient publication is achieved by posting notices of foreclosure and execution of judgment in the most conspicuous area of the municipal building, municipal public market, rural bank, barangay hall, and barangay public market (if any) where the mortgaged land is located during the sixty (60) days immediately preceding the public auction.
Proof of publication must be by affidavit of the sheriff or officer conducting the foreclosure sale or execution of judgment and must be attached to the case records.
If a homestead or free patent is foreclosed, the homesteader or free patent holder and heirs may redeem within one (1) year from date of foreclosure if land is not covered by Torrens Title, or within one (1) year from date of registration of foreclosure if land is covered by a Torrens Title.
Borrowers, especially mere tenants, need only to secure loans with the produce corresponding to their share.
A rural bank may foreclose lands mortgaged to it if those lands are covered under Republic Act No. 6057.

Small business allocations and limits

Rural banks may devote a portion of their loanable funds to meeting the normal credit needs of small business enterprises for balanced rural economic growth and expansion.
Such allocation must be within limits and conditions fixed by the Monetary Board.
Loans for this purpose may not exceed fifteen percent (15%) of the net worth of a rural bank or such amount as the Monetary Board prescribes due to prevailing economic conditions.
Loans must be for essential enterprises or industries other than those strictly agricultural in nature.

Capital support, preferred shares, and conversion

The Land Bank of the Philippines, Development Bank of the Philippines, or any government-owned or controlled bank or financial institution must subscribe within thirty (30) days to the capital stock of any rural bank in an amount equal to the total equity investment of private shareholders, paid in full at subscription time, or in such amount as necessary to promote and expand rural economic development.
Shares issued to these government institutions may be paid off at par and retired wholly or partly if the rural bank accumulates enough capital strength to permit retirement, or if private sources offer to replace the equity investment with an equivalent investment or more in rural bank equity.
Registered private shareholders have the right of preemption within one (1) year from the date of offer in proportion to holdings for retirement or replacement of the government institution’s equity.
Preferred shares held by Land Bank of the Philippines, Development Bank of the Philippines, or any government-owned or controlled bank or financial institution must be preferred only as to assets upon liquidation and must not have power to vote.
Such preferred shares share in dividend distributions from the date of issuance at 4% for the first and second years, 6% for the third and fourth years, 8% for the fifth and sixth years, 10% for the seventh and eighth years, and 12% for the ninth to the fifteenth years without preference.
If the preferred stock held by those government institutions is sold to private shareholders, it may be converted into common stock of the class provided in Section 10.
Until amendments to the articles of incorporation reflect any conversion, the transfer must be recorded in the rural bank’s stock and transfer book, and the transferee shareholders must enjoy common stock rights and privileges.
Converted preferred stocks must be surrendered and cancelled, and corresponding common stocks issued.
The rural bank’s corporate secretary must submit to the Central Bank and the Securities and Exchange Commission a report on every transfer of preferred stock to private shareholders.
When all preferred shares are sold to private shareholders, the rural bank must amend the articles to reflect conversion of preferred shares into common stock.
The President, corporate secretary, and a majority of the Board of Directors must issue a certificate that all preferred shares have been sold to private shareholders; the certificate plus a copy of amended articles duly certified must be filed with the Securities and Exchange Commission, which attaches them to the original articles on file.
The Securities and Exchange Commission must not register the amended articles unless accompanied by the Certificate of Authority required under Section 9 of Republic Act No. 337, as amended.
Supervised past due and restructured past due loans, including those covered under existing rehabilitation programs of the Central Bank, and 50% of non-supervised past due and restructured past due loans including accrued interest thereon of rural banks organized under Republic Act No. 720, as amended, as of December 31, 1986 must be converted into preferred stocks issued in favor of Land Bank of the Philippines, Development Bank of the Philippines, or any government-owned or controlled bank or financial institution.
Penalties on such converted loans are waived except accrued interest on arrearages.
The equivalent penalties due from corresponding farmers are likewise waived.
Rural banks may settle arrearages under a plan of payment or a combination plan of payment and conversion in accordance with existing regulations and provisions of the Act.
Rural banks must match these preferred stocks with private equity in equal annual installments over a period of fifteen (15) years, starting three (3) years after conversion.
The Central Bank, Land Bank of the Philippines, Development Bank of the Philippines, and any government-owned or controlled bank or financial institution must continue to rediscount, subject to their respective programs, policies and guidelines, against papers evidencing loans granted by a rural bank to achieve the Act’s declared policy and objectives.

Supervision powers; enforcement; examinations

Section 11 defines Monetary Board supervision powers as including limits on maximum credit allowed to individual borrowers.
The Monetary Board may prescribe interest rates, determine loan periods and loan procedures, and indicate how technical assistance must be extended.
The Monetary Board may require a uniform accounting system and the manner of keeping accounts and records.
The Monetary Board may conduct periodic surveys of loan and lending procedures, audits, and test-checks of cash and transactions.
The Monetary Board may conduct training courses for personnel of rural banks.
The Central Bank may enforce laws, orders, instructions, rules and regulations applicable to rural banks.
The Central Bank may require rural banks and their directors, officers and agents to conduct and manage affairs lawfully and orderly.
Upon proof that a rural bank or its Board of Directors or officers manage affairs contrary to such laws and regulations, or in a manner substantially prejudicial to the interest of the Government, depositors, or creditors, the Central Bank may take over management when specifically authorized by the Monetary Board after a due hearing process.
Management takeover by the Central Bank must be without expense to the rural bank except expenses actually necessary for operation, pending election and qualification of a new board and officers.
The directors and examiners of the Central Bank department charged with supervising rural banks are authorized to administer oaths and compel presentation of books, documents, papers, or records to ascertain facts about true condition of the rural bank or any loan.

Authorized activities; deposits; investments; services

In addition to authorized operations, any rural bank may:
- Accept savings and time deposits.
- Open current or checking accounts, provided the rural bank has net assets of at least PHP 5,000,000, subject to Monetary Board guidelines.
- Act as corresponding for other financial institutions.
- Act as a collection agent.
- Serve as official depositary of municipal, city, or provincial funds in the municipality, city, or province where it is located, subject to Monetary Board guidelines.
- Rediscount paper with the Philippine National Bank, Land Bank of the Philippines, Development Bank of the Philippines, or any other banking institution, including its branches and agencies, with the rediscounting institution specifying acceptable paper types and rediscount rates.
- Offer other banking services under Section 72 of Republic Act No. 337, as amended.
- Extend financial assistance to private and public employees under Section 5 of Republic Act No. 3778, as amended.
With written permission of the Monetary Board, any rural bank may act as trustee over estates or properties of farmers and merchants.
A rural bank may perform services authorized for savings and mortgage banks or commercial banks under Republic Act No. 337, as amended, or operate under an expanded banking authority under Section 21-B of the same Act, with prior approval of the Monetary Board.
Rural banks may invest in equities of allied undertakings subject to Monetary Board guidelines, with the following caps:
- Total equity investments must not exceed 25% of the net worth of the rural bank.
- Equity investment in any single enterprise must not exceed 15% of the net worth of the rural bank.
- Equity investment must not be permitted in non-related activities.
Allied undertakings include:
- Banks, financial institutions and non-bank financial intermediaries.
- Warehousing and other post-harvest facilities.
- Fertilizer and agricultural chemical and pesticides distribution.
- Farm equipment distribution.
- Trucking and transportation of agricultural products.
- Marketing of agricultural products.
- Leasing.
- Other undertakings determined by the Monetary Board.
Section 14 requires Land Bank of the Philippines, Development Bank of the Philippines, or any government-owned or controlled bank or financial institution to extend, within sixty (60) days of a final Monetary Board certification, loan or loans repayable in ten (10) years with concessional rates, against security offered by rural bank stockholders.
The Monetary Board certification requires conviction that: resources are inadequate to meet legitimate credit requirements of the locality, there is a dearth of private capital in the locality, and stockholders cannot increase paid-up capital.

Tax incentives; assistance; court/notarial and registration fees

Rural banks organized and operated under the Act are exempt from payment of all taxes, fees and charges of whatever nature except corporate income tax and local taxes, fees and charges, for five (5) years from the date of commencement of operations.
Rural banks in operation as of the approval date are exempt for five (5) years from the approval date, from all taxes, fees and charges of whatever nature except corporate income tax and local taxes, fees and charges.
In emergency or when a financial crisis is imminent, the Central Bank may give a loan to any rural bank against acceptable assets by a concurrent vote of at least four (4) members of the Monetary Board.
In normal times, the Central Bank may rediscount against paper evidencing a loan granted by a rural bank to customers that can be liquified within three hundred sixty (360) days.
For a nationwide program of agricultural and industrial development, rural banks may borrow on medium- or long-term basis funds that the Central Bank or any other government financing institution borrows from Development Bank of the Philippines or other international or foreign-lending institutions for the specific purpose of financing the program, under terms and conditions prescribed by the Central Bank.
Republic of the Philippines guarantees repayment of loans obtained by the Central Bank or other government financing institution from such foreign-lending institutions under this section.
Deposits of rural banks with government-owned or -controlled financial institutions like Land Bank of the Philippines, Development Bank of the Philippines, and Philippine National Bank are exempt from the Single Borrower’s Limit under the General Banking Act.
In areas without government banks, rural banks may deposit in private banks more than the Single Borrower’s Limit, subject to Monetary Board regulations.
Central Bank technical assistance must be extended to any rural bank in organization or during operations when requested or whenever the Monetary Board deems it necessary to preserve, protect and promote objectives of the Act, at no cost or obligation to the rural bank.
A city or municipal trial court judge in capacity as notary public ex officio must administer oaths or acknowledge instruments of any rural bank and its borrowers or mortgagors free from all charges, fees and documentary stamp tax for loans or transactions not exceeding PHP 50,000, or such amount as the Secretary of Finance may prescribe upon recommendation of the Monetary Board.
A Register of Deeds must accept from any rural bank and its borrowers and mortgagors for registration, free from all charges, fees and documentary stamp tax collectible under existing laws, instruments relating to loans or transactions not exceeding PHP 50,000.
Charges apply only on amounts in excess of PHP 50,000.
For instruments related to assignments of several mortgages consolidated in a single deed, charges (if any) must be divided only on the amount in excess of PHP 50,000 of consideration in the assignment of each mortgage, or such amount as the Secretary of Finance may prescribe upon recommendation of the Monetary Board.

Consolidation and mergers incentives; fees to Central Bank

Rural banks within a region may consolidate or merge.
If five (5) or more rural banks within a region merge or consolidate within three (3) years from enactment, the merged or consolidated entity receives incentives for seven (7) years.
For seven (7) years, the merged entity’s deposit liabilities are subjected to only one-third (1/3) of reserves normally required for rural banks.
For seven (7) years, reserve requirements can be maintained in interest-bearing government securities, kept unencumbered with government financial institutions or the Central Bank.
For seven (7) years, the merged entity has unrestricted branching rights within the region, free from any assessment or surcharges required in setting up a branch, but under Central Bank coordination that assesses qualified personnel, control, and procedures.
Rural banks may be required by regulations promulgated by the Monetary Board to contribute an annual fee to the Central Bank to defray the cost of maintaining appropriate supervising.
The fee is determined by the Monetary Board but must not exceed one-fortieth of one percent (1/40 of 1%) of average total assets during the preceding year, based on end-of-month balance sheets after deducting cash on hand and amounts due from banks, including the Central Bank.

Bonds for employees and Central Bank access

Every individual acting as officer or employee of a rural bank who handles funds or securities amounting to PHP 5,000 or more in any one (1) year must be covered by an adequate bond determined by the Monetary Board.
Rural bank by-laws may also provide for bonding of other employees or officers.
For purposes of carrying out the Act, the Central Bank is authorized to require the services and facilities of any government department or instrumentality or any officer or employee of any such department or government instrumentality.

Rural banks as agents

Rural banks organized and operated under the Act act as agent of the Philippine National Bank, Land Bank of the Philippines, and Development Bank of the Philippines in places where those banks have no offices, subject to accreditation guidelines.

Court and registration fee limits

Oaths and acknowledgments related to loans or transactions up to PHP 50,000 receive freedom from charges, fees, and documentary stamp tax collectible under existing laws.
Registrations of loan and transaction instruments up to PHP 50,000 receive freedom from charges, fees, and documentary stamp tax collectible under existing laws, with charges applying only to amounts exceeding PHP 50,000 under the Act’s allocation rules.

Criminal offenses and administrative consequences

Section 26 imposes a fine of not more than PHP 10,000, or imprisonment for not less than six (6) months but more than ten (10) years, or both, at the discretion of the court, for the following:
- Officers, employees, or agents who:
  - Make false entries in any bank report or statement thereby affecting the financial interest of, or causing damage to, the bank or any person; or
  - Without a court order, disclose information relative to the funds or properties in the custody of the bank belonging to private individuals, corporations, or any other entity; or
  - Accept gifts, fees or commission, or any other form of remuneration connected to approval of a loan; or
  - Overvalue or aid in overvaluing any security to influence any bank action on any loan; or
  - Appear and sign as guarantor, indorser, or surety for loans granted; or
  - Violate any provision of the Act.
- Loan applicants or borrowers who:
  - Misuse, misapply, or divert loan proceeds from their declared purpose; or
  - Fraudulently overvalue property offered as security; or
  - Give out or furnish or willfully misrepresent material facts to obtain, renew, increase a loan, or extend the period; or
  - Attempt to defraud the bank in the event of court action to recover a loan; or
  - Offer any officer, employee or agent of a rural bank as gift, fee, commission, or other compensation to influence loan approval; or
  - Dispose or encumber property or crops offered as security.
- Examiners or Central Bank officers or Government employees assigned to examine, supervise, assist or render technical service to rural banks who connive or aid in committing the same.
Section 27 punishes a municipal trial court judge or register of deeds who demands or accepts any gift, fee, commission, or other compensation in connection with the service, or who arbitrarily or without reasonable cause delays acknowledgment/administration of oaths or registration of documents required under Section 20 and Section 21, with a fine of not more than PHP 1,000, or imprisonment of not more than one (1) year, or both.
Section 28 punishes any bank not organized under the Act and any person, association, or corporation doing unauthorized banking business that uses the words “Rural Bank” as part of its name or title with a fine of not less than PHP 50 for each day during which the words are so used.

Reporting, separability, and repeals

The Monetary Board must submit a report to Congress at the end of each calendar year on all rules and regulations promulgated in accordance with the Act and on its other actions connected with rural banks, including explanations.
Section 30 provides separability: invalidity of any provision or section or its application does not affect the other provisions or applications.
Section 31 repeals Republic Act No. 720, as amended, and makes the provisions of Republic Act No. 265, as amended, and Republic Act No. 337, as amended a part of the Act insofar as applicable and not in conflict with any provision of the Act.