RURAL BANKS

Rural banking system was introduced in the early 1950’s to serve the credit needs of the

poor consumers and small producers, mostly farmers and fishermen. It was organized to attain

the goal of the national government to improve the social and economic conditions of the rural

areas. Through the rural banks, the government has channeled many of its various financial

assistance programs to the countryside development.

Nature of Rural Banking

A rural bank is a banking institution organized and operating under the provisions of

Republic Act No. 720, amended otherwise known as The Rural Banks Act and the rules and

regulations promulgated by the Monetary Board of the Banko Sentral.

Rural banking has been designed to supply the credit needs of the rural areas. It has been

used as an instrument for rural development which is not a top priority in our national

development objectives. Basically, a rural bank is a unit-type, community-oriented banking

structure. To make it competitive in a rapidly changing financial system, mergers, consolidations

and affiliations through equity in investments appear to be the better options.

Organization

A rural bank is organized in the form of a stock corporation with no less than five nor

more than fifteen incorporators. If more that fifteen persons are interested in organizing and

investing in a rural bank, the rest may be included as subscribers.

All the incorporators and subscribers must have the following qualifications: Filipino

citizenship, of good moral character and integrity, the financial capacity in their own rights to
meet their commitments, a good credit standing and not convicted of any crime involving moral

turpitude. Majority of the incorporators and subscribers must be residents of the place where the

rural bank will operate and must own at least majority or controlling voting shares of the rural

bank.

The rural bank shall have a paid-up capital of not less than P500, 000, the initial amount

of P300, 000 to be put up at the start of operations and the remaining P200, 000 to be paid within

a period of three years from the start of operation. The authorized capital of the rural bank shall

be not less than P1 million and shall be divided into common and preferred stock, both with a par

value of from P10 to P100 per share. In no case, the subscribed capital be less than P500, 000

and the initial paid-up capital be less than P300, 000.

Directors and Officers

In organizing a rural bank, the organizers are required to accomplish and submit to the

Bangko Sentral the articles of incorporation and by-laws; the bio-data of each of the

incorporators, subscribers and officers and a list of the principal officers who will manage the

rural bank.

The president and at least the majority of the key executive officers of the bank must be

actual residents of the locality where the rural bank is operating. The key executive officers of

the rural bank such as the president, vice-president, manager, treasurer, cashier and accountant

must not be related to one another within the second degree of consanguinity (blood relationship)

or affinity (marriage relationship). No officer of director of a rural bank can be an officer or

director of another rural bank. Persons who are connected with the government, whether by

election or appointment, cannot serve as officers of the rural bank.

1. Grant loans and make investments in accordance with existing rules and regulation

2. Accept savings and time deposits

3. Sell domestic drafts

4. Act as correspondent for other financial institutions

5. Receive in custody funds, documents and other valuable objects and rent safety deposit

boxes for the safeguarding of such objects.

6. Act as financial agent, buy and sell, by order of and for the account of its customers,

shares, evidences of indebtedness and all types of securities.

7. Make collections and payments for the account of others.

Services

Upon prior approval of the Monetary Board, the rural bank performs any or all of the

following services:

1. Open current, demand or checking accounts

2. Act as trustee over estates or properties of farmers and merchants

3. Act as official depository of municipal, city or provincial funds in the municipality, city

or province where the bank is located.

4. Rediscount paper with the Philippine National Bank or the Development Bank of the

Philippines, or other banks and their branches and agencies subject to such rules and

regulation governing discounting.

5. Invest in allied undertakings.

A rural bank shall extend loans to as many qualifies borrowers as possible. Loans may be

granted to conduct, develop or improve agricultural, commercial or industrial operations. Loans

also extended to meet the health, educational and subsistence needs. Moreover, loans may also

be granted to provide the everyday credit needs of farmers who own or cultivate the land, of

merchants who buy and sell goods, or of the cooperative of such farmers and merchants as well

as other residents within their service areas. Loans may also be granted for personal or household

financing, home building and home development.

Credit investigations shall be conducted on all loan applications. Such investigation

includes the verification of the existence of the project sought to be financed, the property

offered as security, the actual credit needs and the repayment capacity of the borrower. The

board of directors shall have the final action on all loan applications. All loans granted under

such delegated authority must be confirmed subsequently by the board of directors.

Types of Loans

1. Agricultural Loans – these are granted for the following purposes:

a. Farm expenses, like cost of labor, in connection with the preparation, planting and

cultivation of the farm and harvesting, transportation, storage and marketing of

products.

b. Purchase of seeds, fertilizers, work animals, implements and equipment necessary for

the operation of the farm.

c. Purchase of animals, poultry, or fish for breeding purposes.

d. Minor repairs, construction or improvements in the farm or fishpond

2. Commercial Loans – these are granted for the purpose of conducting or carrying on,

developing or improving commercial operations as well as purchasing commodities for

resale which are considered necessities or semi-necessities by consumers or end-users.

3. Industrial Loans – these are granted for the following purposes:

a. Expenses for labor in connection with the manufacturer of goods which are in

demand and readily salable or have quick turnover, considered necessities or semi-

necessities, essentials or semi-essentials

b. Purchase of raw materials for the manufacturer and processing of the goods

mentioned in item a

c. Marketing of the goods which have been manufactured or processed

4. Term Loans – these are granted for the following purposes:

a. Purchase of farm land, improved or unimproved to be devoted to agricultural

production

b. Improvement of agricultural, commercial, industrial or residential real estate for the

borrowers own use and not for speculation

c. Acquisition of agricultural or industrial machinery, tools and other equipment needed

in the farm or for expansion of an industry already in operation.

d. Purchase of equipment and materials for livestock and poultry raising, fish culture
 e. Production and harvesting of agricultural crops which have production cycle of more

than one year.

5. Loans to Cooperatives – these consists of the following:

a. Agricultural loans for meeting the credit needs of members of farmers cooperatives in

accordance with the purposes for which agricultural loans may be granted

b. Commercial loans for the purchase of commodities for resale to members of the

cooperative

c. Industrial loans to meet the credit needs of the members of the cooperatives or

artisans, and manufacturers according to the purpose for which industrial loans may

be granted

Terms of Loans

1. Agricultural loans shall be granted for a period not exceeding 350 days, which may be

renewed for not more than two ties.

2. Commercial loans shall be granted for a maximum period of 180 days which may be

renewed for a period not exceeding 90 days

3. Industrial loans may be granted for a period of not more than 360 days, renewable for

another period not exceeding 180 days.

4. Term loans

a. A medium-term loans is one with maturities of more than one year but not exceeding

five years.

b. A long-term loan is one with maturity period of more than five years.
Supervised Credit

This is a system of lending which combines adequate and timely credit with farm and

home management guidance under a trained technician.

There are steps involved in supervised credit:

1. Analysis of the project to be financed to determine the resources of the farm project.

2. Preparation of a farm plan and budget which shall include a modern farm schedule.

3. Periodic inspection and follow-up of the project by the technician of the rural bank and/or

of the government technician assigned to the bank

4. Evaluation of the farm project at the end of the crop season

Special Financing Programs

Rural banks have been allowed to participate in special financing programs of the

government for agricultural production except those covered by agreements with foreign

countries and/or international financial institutions. The funds established for the special

financing programs are placed under the administration of the Bangko Sentral.

Among the special financing programs wherein rural banks are allowed to participate are

the following:

1. Bangko Sentral-International Bank for Reconstruction and Development (CB-IBRD).

This provides financing for machinery and equipment for small farmers, including

facilities for irrigation, storage, refrigeration and processing.

participating in the development of the nation’s fishing industry.

3. Coconut Financing Program. This provides a credit line to the coconut farmer/worker

families to finance economically-feasible projects to increase their income by

maximizing the use of available farm resources.

4. Industrial and Guarantee Loan Fund Program. This provides credit to eligible

borrowing firms in their respective areas of operation for the establishment, expansion

and/or refinancing of small-sized, export-oriented industries. The loan proceeds may be

utilized for any or a combination of the following purposes:

a. Working capital requirements; and

b. Fixed assed costs, such as acquisition of a factory site which shall be strictly

on a case to case basis

5. Livestock and Poultry Financing. This provides credit for the increased production of

poultry and livestock to meet the effective demand on such products.

6. Rice Production Program. This is intended to finance increased rice production through

the use of high-yielding varieties and proper water management practices.

7. Masaganang Maisan and Maisagana Programs. These are intended to increase

production of yellow corn, sorghum and soybeans to satisfy the feed requirements of

poultry and livestock industries.

8. Gulayan sa Kalusugan. This emphasizes the growing of selected vegetables crops that

are nutritious and profitable as an essential part of the governments intensified food

production campaign.
 9. Financing Program for Fisheries Production and Development. This governs the

operations of short-term financing for fisheries production and development under the

Bangko Sentral supervised credit system.

Deposits Operations

1. Demand deposit. This is also knows as current or checking account. It does not earn

interest. It is withdrawable by check.

2. Savings deposit. This is evidenced by a passbook in the name of the depositor.

Withdrawal is affected through the simultaneous presentation of the passbook and a duly

accomplished withdrawal slip. It earns interest.

3. Time deposit. This is evidence by a certificate issued by the rural bank in the name of the

depositor. It earns interest on the basis of maturity period.

4. NOW account. This is a special type of savings deposits which is evidenced by a

certificate issued only to natural persons. It earns interest.

Interest on Deposits

As mentioned earlier only savings and time deposits earn interest. In the computation of

interest on savings deposits where interests are computed daily, monthly or quarterly, the basis of

computation shall be 360 days which is considered as the number of days comprising a year. In

the computation of interest on time deposits, the number of days comprising a year shall be

based on the following:

1. When the term is one year or more, a year shall mean 365 days; and
 2. When the term is less than one year, the interest shall be computed on the basis of 360

days a year.

Reserves against Deposit Liabilities

A rural bank is required to put up reserves against its deposit liabilities (demand, time and

saving deposits). These reserves constitute an instrument of action of the Bangko Sentral in

regulating money supply. The form or composition of reserves required against deposit liabilities

which a rural bank shall hold is a follows:

1. Deposits with the Central Bank. At least 25% of the required reserves shall be in the form

of deposits with the Central Bank.

2. Government Securities and Cash in Vault. The remaining portion of the required reserves

may be held by the rural bank in the form of cash in the vault of the bank and government

securities

Borrowing Operations

The two types of borrowing available to a rural bank are the following:

a. rediscounting

b. direct borrowing

A. Rediscounting

It is a privilege of a rural bank to negotiate with the Bangko Sentral the eligible

papers of the rural banks customers, by transferring the ownership of said papers to the
Bangko Sentral. Rediscounting is also known as the process of securing advances from the

BS on the security of the rural banks eligible papers.

Eligible papers for purposes of rediscounting is a promissory note, draft or a bill of

exchange with the following characteristics:

1. It arises out of agricultural, commercial or industrial transactions and the proceeds

of such papers are used for production, purchase, transportation or marketing of

goods

2. It has a maturity period of not more than 360 days on the date of rediscount,

discount or acquisition by the Bangko Sentral in the case of agricultural, industrial

or production credits

B. Direct Borrowing

A rural bank may from time to time obtain a loan from the Development Bank of

the Philippines, which is repayable in ten years with interest rate of 2% per annum,

against the security which may be offered by the stockholders of the rural bank, provided:

1. The monetary Board in convinced that the assets of the rural bank are not enough to

meet the legitimate credit needs of the locality where the rural bank is operating.

2. That the private capital account be raised in said locality

3. That it is not possible for the stockholders of the rural bank to increase its paid-up

capital.