Guidelines issued in the implementation of the pertinent provisions of the Rural Banks Act of 1992

CBP CIRCULAR NO. 1369 Series of 1992

Pursuant to Republic Act No. 7353, otherwise known as the Rural Banks Act of 1992, the Monetary Board Resolution No. 991 dated October 23, 1992, the following guidelines are hereby issued in the implementation of the pertinent provisions thereof.

A. EXEMPTION FROM OWNERSHIP CEILING (SECTION 4)

Stockholdings in a rural bank shall be exempt from any ownership ceiling for a period of ten (10) years effective as of April 2, 1992, the date of Approval of R.A No. 7353 (Rural Banks Act of 1992), subject to the following:

1. The rural bank shall submit to the Monetary Board for approval, through the appropriate supervising and examining department of the Central Bank, any stock transfer and/or new subscription that will exceed the previous prescribed ceilings under Section 12-D of R.A. 337, as amended, on individual/family group/corporate stockholdings in accordance with the required report on stock transactions (format attached).

2. Stockholdings in excess of the ceilings prescribed by law may be retained by the stockholders concerned after the lapse of the ten (10) year period, provided, however, that the same shall not further increase, and once reduced, may not be increased beyond the limits prescribed, except as may otherwise be approved by the Monetary Board. In cases where shares of the unsubscribed capital stock are sold to any person other than the existing stockholders, the bank's corporate secretary shall execute a certificate under oath that all the pertinent requirements of the Corporation Code on a valid stock transfer/subscriptions have been complied with.

3. Stockholders of rural banks availing themselves of the provisions of Section 8 of R.A. No. 7353, particularly the conversion scheme of arrearages into Government equity which has to be matched with private equity within a period of fifteen (15) years, shall be exempt from the equity ceiling for fifteen (15) years counted from conversion of arrearages. Whenever applicable rural banks availing of the conversion scheme shall file their application to amend the Bank's Articles of Incorporation and/or By-Laws to reflect such conversion. Furthermore, stockholders of rural banks which have availed themselves of previous Central Bank circulars allowing the settlement of arrearages into LBP equity, or a combination of both, shall also be exempt from the equity ceiling for fifteen (15) years counted from the date of availment.

B. SETTLEMENT OR LIQUIDATION OF ARREARAGES WITH THE CENTRAL BANK THROUGH A CONVERSION SCHEME AND/OR PLAN OF PAYMENT (SECTION 8)

1. Statement of Policy/Objectives

This program aims to strengthen the rural banking system and afford rural banks ample opportunity to provide banking services to the rural sector through a conversion scheme and/or plan of payment for rural banks experiencing financial difficulty.

2. Definition of Terms

As used in this Circular:

2.1 Arrearages — shall refer to the principal amount and the corresponding accrued interest of all rediscounting obligations, emergency loans and CB-IBRD loans of the rural bank with the Central Bank of the Philippines which are past due and unpaid as of December 31, 1986, including restructured loans.

2.2 Plan of Payment — shall refer to the arrangement between a rural bank and the Central Bank of the Philippines for the repayment by installments of the past due loans within a period not exceeding fifteen (15) years.

2.3 Conversion — shall refer to the conversion into preferred stock of a rural bank issued in favor of the Land Bank of the Philippines (LBP), Development Bank of the Philippines (DBP), or any government-owned or controlled bank or financial institutions of:

(a) Part or all of supervised past due and restructured supervised past due loans, including accrued interest due thereon and those covered under existing rehabilitation programs of the Central Bank of the Philippines; and

(b) Up to fifty percent (50%) of non-supervised past due loans and restructured non-supervised past due loans.

3. Qualification Requirements

All rural banks that have arrearages as defined herein are eligible to participate, except those under receivership/liquidation.

4. Application to Participate in the Program

A rural bank desiring to participate in this program shall file an application with the Central Bank of the Philippines thru the Department of Loans and Credit, in the case of rediscounting obligations, and thru SES Department III in the case of CB-IBRD loans, in the prescribed form duly supported by the following:

a) Resolution of the Board of Directors authorizing the bank to participate in the program.

b) If part or all of the arrearages are to be converted into equity of government banks —

1) amount of arrearages to be converted;

2) where the matching thereof will require an increase in the bank's authorized capital, a resolution which has been adopted in a stockholders' meeting by stockholders holding at least two-thirds (2/3) of the outstanding voting capital stock authorizing such increase;

3) List of stockholders' subscriptions to the bank's capital stock sufficient for matching purposes, payable in equal annual installments over a period of fifteen (15) years to begin three (3) years after the conversion date;

4) The government bank to which the converted stock will be issued.

c) Proposed Plan of Payment to cover the arrearages not included in the conversion scheme.

d) Projected Balance Sheet and Profit and Loss Statement for the next two (2) years.

e) Such other papers and documents as may be required by the Central Bank of the Philippines.

5. Conversion Scheme

5.1 The application for conversion shall be granted only when accompanied by a program for matching government equity duly subscribed by the stockholders. Upon approval of the application, the arrearages shall be converted into preferred shares of stock in the name of the government bank of the rural bank's choice.

5.2 Said shares shall be preferred only as to assets upon liquidation, without power to vote, and shall share in dividend distribution from the date of issuance at the rate provided under Section 8 of R.A. No. 7353 which dividend shall be cumulative.

5.3 The stockholders of the rural bank shall match these preferred shares with private equity in equal annual installments over a period of fifteen (15) years, to begin three (3) years after the conversion date. The stock subscription by which this matching shall be effected shall represent a personal obligation of the stockholders and any sale of the shares of stock of the said stockholder to other parties shall not be allowed unless the purchasers assume said obligations

5.4 The receivables from the rural bank which were converted into preferred stock shall be replaced by a promissory note of the government bank to which such stocks were issued. The said promissory note shall have the following terms among others:

a) secured by the preferred shares issued under this Circular;

b) payable when the said shares of stock are sold; and

c) no interest, instead, all dividends accruing to the preferred shares issued under this Circular shall be remitted to the Central Bank.

6. Plan of Payment

6.1 The participating rural bank may enter into a plan of payment with the Central Bank covering all or part of its past due loans.

6.2 The past due loans shall be payable by means of equal monthly amortization, plus the corresponding accrued interest, over a period not exceeding fifteen (15) years.

6.3 A bank which already has an operational plan of payment approved under a previous rehabilitation program may either continue such plan of payment or enter into a new plan of payment under this provision. A plan of payment entered into pursuant to this provision shall then supersede and take the place of the previously approved plan of payment.

7. Condonation of Liquidated Damages and/or Penalties

Liquidated damages and/or penalties on arrearages subject of the conversion scheme and/or plan of payment under Sections 5 and 6 hereof shall be condoned in the following manner:

a) Liquidated damages/penalties corresponding to the amount of arrearages converted under Section 6 hereof, shall be deemed condoned as of the date of issuance of shares of stock in favor of the Land Bank of the Philippines, Development Bank of the Philippines or any government owned or controlled bank or financial institution;

b) Liquidated damages/penalties corresponding to the amount of arrearages covered by the Plan of Payment, with or without the conversion scheme, shall be deemed condoned as payments are made by the rural bank pursuant to the amortization schedules (in the plan of payment);

Provided, That the equivalent penalties due from corresponding farmers are likewise waived by the participating rural bank.

8. Rediscounting Privilege

The participating rural bank may continue to rediscount its eligible papers with the Central Bank and other government owned/controlled banks in accordance with applicable guidelines;

Provided, That in the computation of networth for determining the rural bank's credit ceiling, the additional equity of the Land Bank of the Philippines, Development Bank of the Philippines or any government owned or controlled bank or financial institution, arising from the conversion scheme under this program shall not be included.

9. Rights of LBP/DBP/Government Owned or Controlled Bank/Financial Institution

Pursuant to the conversion scheme provided under Section 5 hereof, the Land Bank of the Philippines, Development Bank of the Philippines or any government owned or controlled bank or financial institution shall have all the rights provided by law as a stockholder and subject to the conditions/limitations provided under Section 5.2 hereof.

10. Past Due Accounts Excluded from the Computation of Past Due Ratio

Complementary to this program, all past due loan accounts of the participating rural bank to the extent of arrearages covered by this program shall be excluded from the computation of the past due ratio for the purpose of rediscounting, so long as such participating bank complies with its approved plan of payment with the Central Bank of the Philippines and/or matching of preferred stocks with private equity pursuant to Section 5 hereof.

11. Proceeding Required by Law

It is understood that this Circular is intended solely to assist financially-distressed rural banks and, therefore, nothing herein shall be construed as stopping the Central Bank of the Philippines from proceeding in accordance with law in the event that circumstances should exist as would warrant proceedings under Section 29 of the Central Bank Act, as amended, or other pertinent provisions in said Act and the Rural Banks Act of 1992.

Rural banks qualified to participate under this program shall file their application not later than sixty (60) days from date of this Circular otherwise it shall be presumed that they do not intend to participate therein and the Central Bank may thereafter take measures as provided under Sec. 29 of R.A. 265, as amended, as may become necessary.

12. Repealing Clause

The provisions of any Central Bank Circular which may be inconsistent with the foregoing conversion scheme and/or plan of payment are hereby deemed superseded.

However, existing conversion schemes and/or plans of payment entered into under previous Central Bank Circulars shall continue to be governed by the provisions of said Circulars.

C. ACCEPTANCE OF DEMAND DEPOSITS (SECTION 12(b))

1. Authority to Accept or Create Demand Deposits

A rural bank desiring to accept or create demand deposits shall submit its application to the Central Bank through the appropriate supervising and examining Department.

Rural banks with net assets of at least P5 million may offer demand deposit facilities to all types of depositors: Provided, That rural banks which have been authorized to accept or create demand deposits prior to the approval of R.A. No. 7353 (Rural Banks Act of 1992) shall be allowed to continue servicing such deposits.

The net assets shall include private paid-in capital, paid-in surplus, earned surplus and undivided profits, net of (a) such unbooked valuation reserves and other capital adjustments as may be required by the Central Bank and (b) total outstanding unsecured credit accommodation, both direct and indirect to directors, officers, stockholders and their related interests (DOSRI). Any appraisal surplus and appreciation or an increase in book value of the bank assets as well as government equity arising from conversion of arrearages, shall be excluded.

2. Prerequisites to Accept or Create Demand Deposits

A rural bank applying for authority to accept or create demand deposits shall meet the following:

a. It must not have incurred any capital deficiency on any day computed under Section 30. of R.A. No. 337, as amended, during the six (6) months period immediately preceding the filing of its application, and any capital deficiency from the date of grant of authority to the day before checking account services are offered or extended to the public;

b. It must not have incurred any chronic deficiency in reserves against deposit liabilities during the six (6) months period immediately prior to the filing of its application and any net reserve deficiency from the grant of authority to the day before checking account services are offered or extended to the public;

c. It must not have any past due obligation with the Central Bank or with any government financial institution;

d. Its past due loan ratio, as of latest examination, does not exceed fifteen percent (15%), provided that a rural bank with past due ratio of over 15% may still qualify to accept demand deposits if such excess is due to merger with other banks, provided further that such excess shall be eliminated within a period not exceeding one year after the authority to accept demand deposits is exercised;

e. It must have had profitable operations after capital adjustments as may be required by the Central Bank during the last three (3) years immediately preceding the filing of its application and must have been managed efficiently in accordance with law and rules and regulations governing rural banks;

f. It must not have engaged in unsound and unsafe banking practices and/or committed any serious irregularities in its operation such as, but not limited to, the following:

(1) granting indirect loans to directors, officers and stockholders through the use of other persons' names or of non-existent persons.

(2) granting DOSRI loans in excess of ceiling.

(3) granting loans in excess of the single borrower's limit; and

g. It must be a member of the Philippine Deposit Insurance Corporation (PDIC) in good standing. It is understood that compliance with above prerequisites shall be continuous after the authority to accept demand deposits had been granted by the M.B. and that any violation thereof may be a basis for sanctions against the bank and/or its directors/officers, including revocation of the authority to accept demand deposits.

3. Permit to Accept or Create Demand Deposits

A rural bank may accept demand deposits after a permit therefor shall have been issued by the Central Bank upon the recommendation of the appropriate supervising and examining department.

The permit shall be issued only after the bank shall have shown satisfactory proof:

a. That its personnel who may handle demand deposits possess the necessary training or experience;

b. That its facilities are adequate to service demand deposits;

c. That it has adopted appropriate and adequate systems, procedures and control systems;

d. That it has complied with all other conditions herein imposed; and

e. That it has appointed a commercial bank thru which it shall participate in the check clearing system.

For purposes of the required training and/or experience, attendance at appropriate seminars, on-the-job training and/or experience of an officer/employee designated to handle the demand deposit operations for at least six (6) months may be considered.

4. Bonding of Officers and Employees

Officers and employees who have direct and immediate responsibility in handling of transactions and/or records pertaining to demand deposits shall be adequately bonded and/or covered by an adequate blanket insurance.

5. Number of Accounts

A depositor may have only one (1) current and one (1) savings deposit account in his own name in one rural bank (in the same capacity) although he may have various deposits in different capacities as guardian, agent or trustee for others.

6. Interest on Demand Deposits

No interest shall be paid on demand deposits.

7. Reserves Against Demand Deposits

The required reserves against demand deposit liabilities of rural banks shall be twenty-three percent (23%) of such deposit liabilities or such rate as may be prescribed by the Monetary Board from time to time.

8. Temporary Overdrawings; Drawings Against Uncollected Deposits

The following regulations shall govern temporary overdrawings and drawings against uncollected deposits:

a. Temporary Overdrawing

Temporary overdrawings against current accounts shall not be allowed, unless caused by normal bank charges and other fees incidental to handling such accounts, which in no case shall exceed Two Hundred Pesos (P200.00). Any violation shall be subject to a fine of one tenth (1/10) of one percent (1%) per day of violation, computed on the basis of the amount of overdrawing, without prejudice to the provisions of Section 34 and 34-A of R.A. No. 265, as amended.

b. Drawings Against Uncollected Deposits (DAUDS)

As a matter of policy, drawings against uncollected deposits shall be prohibited except when the drawings are made against uncollected deposits representing manager's/cashier's/treasurer's checks, treasury warrants, postal money orders and duly funded "on us" checks which may be permitted at the discretion of each bank.

c. Checks Without Sufficient Funds

The following regulations shall complement the provisions of Batas Pambansa Blg. 22 (Bouncing Checks Law);

(1) The drawee shall stamp, write or print on a dishonored check or on a paper attached thereto the date the check is presented for payment and the reason for the refusal to pay the same to the holder thereof,

(2) Where there as on for the dishonor of a check is stamped, written or printed on a paper attached to the check, the drawee bank shall indicate the pertinent details, such as the names of the drawer, the payee and the drawee bank, the date and amount of the check, the check number and the date of dishonor;

(3) The drawee bank shall use only the remark or notation "Drawn Against Insufficient Funds", "No Sufficient Funds", or "Insufficient Funds" stamped, written or printed on, or attached to the check dishonored, or returned by reason of insufficiency of funds or credit;

(4) Notwithstanding receipt of an order to stop payment, the drawee bank shall likewise stamp, write, or print on, or attach to the check any of the remarks or notations mentioned in item (3) above, indicating that there were no sufficient funds in/or credit with such bank for the payment in full of such check, if such be the fact. The bank shall also indicate receipt of stop payment order;

(5) For local exchanges, a check dishonored by reason of insufficiency of funds or credit shall be returned by the drawee bank to the negotiating bank not later than the next regular clearing. For out-of-town exchanges, a check so dishonored shall be returned by the drawee bank to the negotiating bank within the period specified in the Central Bank Memorandum announcing the opening of clearing facilities in each of the authorized regional clearing centers.

A check dishonored by reason of insufficiency of funds or credit which was not coursed through the Central Bank clearing system shall be returned …