Today is

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

respondents.

he Court of First Instance of Manila, dated November 23, 1966, authorizing the issuance of a writ of preliminary injunction to restrain the Petitioner and the Monetary Board, as well as its o
ent by Banco Filipino of "monthly" interest on savings deposits and "advance" interests on time deposits.

y organized and existing under the laws of the Philippines. It began its operations in July 1964. On December 15 of the same year, Pe

, except rural banks: —

s deposits of commercial banks shall be four per cent (4%) per annum, compounded quarterly.

e Development Bank of the Philippines), cooperative banks and the NACIDA Bank. — The maximum rate of interest on savings depo
han ninety (90) days.

time deposits shall be allowed, in accordance with the following schedule:

t Bank of the Philippines), cooperative banks, and the NACIDA Bank. — A maximum of five per cent (5%) annual interest on time dep

ermitted to be withdrawn before the maturity date fixed in the certificate of time deposit, the amount withdrawn shall be deemed a sav

lution No. 805 of the Monetary Board, dated May 20, 1966 — as follows:

he Developtment Bank of the Philippines), cooperative banks, rural banks and the NACIDA Bank. — The maximum rate of interest o

Interest on time deposits shall not be paid in advance, but only at maturity, or upon withdrawal of the deposit. When withdrawn before

, development banks (including the Development Bank of the Philippines), cooperative bank, rural banks and the NACIDA Bank. — A

d on its due date of withdrawal shall be deemed a savings deposit and the interest which may be paid thereon from said due date of
 mation that it is paying or will pay interest at rates higher than those prescribed herein or indicate the effective rates resulting from a

ed.2

eposits therein made were to earn interest at the rate of four (4) per cent per annum, "compounded quarterly," and its savings passbo

ompounded quarterly. Said interest shall be computed once every month on the lowest monthly round peso balance of your deposit a
with the day your account was opened to the same date of the following month.

0.00 or more, interest at the rate of 4% per annum, compounded quarterly. Said interest shall be computed once a month on the low
opened to the same date of the following month. Such interest shall be credited to the depositor's account at the end of every three m
erest on savings deposits is subject to change when conditions warrant."3

and paying the interest on its savings deposits, at the maximum rate fixed by the Monetary Board, from the quarterly to the monthly

o Filipino to comply strictly with Central Bank Circular No. 222. Said Resolution was communicated to the Banco Filipino in a letter da
eted as Civil Case No. 67181 of said court — against Petitioner herein and the Monetary Board, to annul Central Bank Circulars Nos.
praying that a writ of preliminary injunction be issued ex parte to restrain the Petitioner, its officials and/or agents from enforcing the af
that a preliminary restraining order to the same effect be issued pending such hearing."

parte the restraining order prayed for and set the application for a writ of preliminary injunction for hearing on October 29, 1966. On O
parties of their respective memoranda, Judge Cloribel granted said application for a writ of preliminary injunction in an order dated No
e ground that, in issuing said order, Judge Cloribel had committed a grave abuse of discretion amounting to excess of jurisdiction.

: 1) that said petition should be dismissed, because "petitioner has not exhausted all remedies in the Court of First Instance of Manila
eded his jurisdiction, in acting as he did; and 3) that the contested resolutions and circulars are null and void for (a) they were issued w
any other obligations" does "not include the regulation of the manner of computing and paying interest, since this function is not expre

, as a general rule, a petition for certiorari will not be entertained unless the respondent has had, through a motion for reconsideration
public interest is involved; and 3) in case of urgency.4These circumstances are present in the case at bar. Moreover, Petitioner herein
ame questions'raised in the Petition herein. In other words, Judge Cloribel has already had an opportunity to considered and pass up
ise in futility.5

es not necessarily follow that Judge Cloribel had not committed a grave abuse of discretion and exceeded his jurisdiction in issuing th
certiorari and prohibition may be proper. This particular question will be taken up later.

but has no legal obligation to notify and hear anybody, before exercising its power to fix the maximum rates of interest that banks may
of liberty, when its limitation or loss takes place in consequence of a judicial or quasi-judicial proceeding, generally dependent upon
erprises, unless the law provides otherwise, and there is no statutory requirement to this effect, insofar as the fixing of maximum state

dy is legislative, notice or hearing is not required by due process of law. See Oppenheimer, Administrative Law, 2 Md. L.R. 185, 204,
ure action which affects a group, if vested rights of liberty or property are not involved, is not determined according to the same rules
453: "Aside from statute, the necessity of notice and hearing in an administrative proceeding depends on the character of the proceed
e and hearing are not essential to the validity of administrative action where the administrative body acts in the exercise of executive,
than general and prospective, the person whose rights or property may be affected by the action is entitled to notice and hearing.6
ance of general rules and regulation as distinguished from the rendering of determinations and decisions in adjudicatory proceedings

the confines of the granting statute, as required by the constitution and its doctrine of nondelegability and separability of powers. Willa
hat apply to named persons or to specific situations, the latter being adjudicatory in nature. Administrative Rule-Making, Fuchs, 52 H

as rule-making on the one hand, or judicial or quasi-judicial on the other, no such difficulty is presented in this case. The rules and re
use the language of the Administrative Procedure Act, 60 State 237, sec. 2(c), 5 U.S.C.A. sec. 1001 (c), agency statements of "gene

e the promulgation of such rules and regulations. Spokane Hotel Co. v. Younger, 113 Wash. 359, 194 P. 595; Bi-Metallic Investment
& Gas Co. v. State, 162 Okl. 89, 19 P. 2d 347, 86 A.L.R. 421.7

es of interest conformably to law, and courts will not interfere with the policy of the Board thereon — unless it acted without or in exce

ed with by courts of justice in the absence of a grave abuse of discretion on the part of said bodies or unless the aforementioned findin
0282, May 19, 1965; West Leyte Trans. Co. vs. Salazar, G.R. No. L-15418, September 30, 1963; Pangasinan Trans. Co. vs. Felician
bas Bus Co. vs. Begamore, G.R. No. L-9445, April 29, 1957; Pangasinan Trans. Co. vs. De la Cruz, 95 Phil. 278; Manila Yellow Taxic

um rates of interest fixed in the contested resolutions and circulars. It merely assails the authority of the Board to fix or regulate the "m

sly unfounded, for the said resolutions and circulars operate prospectively, and affect only deposits made and/or interests accruing s

nding operations of the banks shall apply only to future operations and not to those made prior to the date on which the modification b

y 1, 1965," whereas Circular No. 222, dated June 14, 1966, specifies that it "shall take effect immediately," and, hence, beginning from

e of sovereignty, such power is deemed incorporated into the laws of the land, which are part of all contracts, thereby qualifying the ob

viduals only, there enter conditions which arise, not out of the literal terms of the contract itself; they are superinduced by the preexist
and recognized by all, are binding upon all, and need never therefore be carried into express stipulation for this could add nothing to t
hall occur. 11

ecome part of the contract. Its obligation is to be measured, and performance is to be regulated, by the terms and rules which they pre

nd place of making a contract enter into, and form a part of, it as if they were expressly referred to, or incorporated in, its terms, the ob
scribe. 13

y power of the state, of which the regulatory authority of the Central Bank may be regarded as a mere extension. 14 Far from being an

Manila is whether or not the authority of the Monetary Board to "fix the maximum rates of interest which banks may pay on deposits a
r to Us that the answer cannot be other than the affirmative. Pertinent parts of Sections 14 and 109 of Republic Act No. 265, read:

nder this Act, the Monetary Board shall:

 e effective discharge of the responsibilities and exercise of the powers assigned to the Monetary Board and to the Central Bank unde

d prepare such rules and regulations as it may deem necessary or convenient for this purpose;

fix the maximum rates of interest which banks may pay on deposits and on any other obligations.

2655, as amended), fix the maximum rates of interest which banks may charge for different types of loans and for any other credit ope
mers if the respective credit documents are not to lose their eligibility for rediscount or advances in the Central Bank.

Board, the Board may also fix the maximum rates that banks may pay to or collect from their customers in the form of commissions,

rest which banks may pay on deposits and on any other obligations." It, also, expressly empowers the Board — "(i)n order to avoid po
eed, the authority to establish maximum rates of interest carries with it, necessarily, the power to determine the maximum rates payab
rerogative to regulate (a) the manner of computing said rates and (b) the manner or time of payment of interest, insofar as these fact
nsistently regulated the time or manner of payment of interest on bank deposits. What is more, it would seem that the validity of such

prescribe the time or manner of payment thereof springs, (a) not only from the implied grant of all powers necessary to carry out thos
anks may pay to their customers in any other "form," but, also, (c) from the reasons underlying the grant of authority to fix said maxim

He may erect an imposing building whose entrance is flanked by marble pillars, symbols of strength. Where legally permitted he may
o his customers. He may advertise, in a restrained and dignified manner, on billboards and in newspapers. He may organize a "new b
f directors, in order that all or part of the deposits the executive's firm may be captured. Finally, he may compete with other bankers f
d by the interest payments and respond favorable to offers of higher returns. Therefore, when one bank offers higher interest to depo
gree, banking is exposed to the danger of cutthroat competition. There exists a powerful temptation to try toattract added deposits by
erative loans and investments. If all bankers could be trusted to refuse to make unsafe loans under the stress of competition and prof
rgin would tend to fix the limit on interest payments to depositors.

ut into profits without taking some unwise action to prevent it. There seem always to be some potential borrowers who will promise to
urn to these more speculative loans and investments. But, because of circumstances or short-sightednes he is unlikely to increase his
ssion reveals them. Experience has repeatedly shown the fatal results of such competition. To guard against excessive competition f
harges made by banks for services rendered to customers the payment of interest on deposits. The Banking Acts of 1933 and 1935
ng of maximum rates of interest paid on time deposits. 17

time and savings deposits are the result of the competition for deposits in which banks engaged in the past. This competition was so
slation provided these restrictions. Inordinately high interest rates would tend to lead to "overreaching" on yields and returns on loans

to establish a uniform ceiling applicable to all banks, in order to avoid that a competition among the same, in the form of higher rates
g to risky ventures, or "less conservative and more remunerative loans and investments," which could impair the stability of the banki
k, within the period for which the rate has been fixed. The manner of computing such rate and the time or manner of payment of inter

est at other than quarterly intervals provided that the aggregate amount of such interest so compounded does not exceed the aggreg
d that the maximum effective rate of interest by compounding other than the quarterly method will not be in the aggregate amount ex
in Petitioner's Circular No. 222, for savings deposits, in fact represents 5.875%, at the end of the year. When compounded monthly,

rate fixed by the Monetary Board, such excess were sanctioned, so should 0.03% be. As a consequence, banks could avail of devis
ss of said maximum. In other words, we would thus open the door to the cut-throat competition and other evils sought to be avoided b

y compounding and payment of the maximum rate of interest is either substantial or not. If it is not, then the aforementioned advertise
pirit of the contested resolutions and circulars would be manifest.

ting interest due to bank depositors because, while expressly vested with the power to fix maximum rates of interest, the law is silent
m their borrowers; (2) that Petitioner has adopted in this case a posture different from that which it had taken in the court of first instan
apital and earns interest as such capital, not as interest; and (4) that the contested circulars and resolutions are arbitrary and discrim

s prescribed the time or manner of payment of the maximum rates of interest fixed by the Monetary Board. Furthermore, the power to
ould be ridiculous to fix the maximum rate of interest, at say 5%, without stating how it shall be computed and paid, whether monthly,
es permit. In other words, the time and manner of computation and payment of the maximum rates fixed are essential elements there
h argument.

ent one in this case. Private respondent's argument to the contrary is based upon a passage in Petitioner's letter to Banco Filipino, d
information." Respondent Bank maintains that such position is different from that taken by herein Petitioner in its memorandum befo

at other than quarterly intervals provided that the aggregate amount of such interest so compounded does not exceed the aggregated

ression that Petitioner had prohibited the monthly payment of interest, whatever its rate may be. Such, however, is not the general im

June 17, 1965

ch is in the Manila Times dated June 16, 1965 and in the bank premises regarding the interest rates on savings and time deposits of

nterest paid monthly.

st paid in advance.

k Circular No. 185, as amended, the pertinent provisions of which read thus:

eposits of these banks shall be four and one-half per cent (4-1/2%) per annum, compounded quarterly.
nterest on time deposits shall be allowed, in accordance with the following schedule:

ents of the effective rates of interest on savings and time deposits in the newspapers, bank premises or any media of information. Th
quarterly for savings deposits and a maximum interest rate of 5% per annum on time deposits in accordance with the following sche

nthly; likewise, it shall not pay nor advertise that it pays interest on time deposits in advance.

on taken by the bank to comply therewith.

y truly yours,

SE IGNACIO

Banks 21

n view of the foregoing," which is the advertisement of the Banco Filipino to the effect that savings and time deposits therein shall ear

nterest paid monthly.

st paid in advance.

. 185, as amended." What is more, it says that respondent Bank "may advertise only the rates of interest stated" in the aforementione
ertise that it shall pay on said deposits any rate of interest, compounded or paid yearly, quarterly, monthly, weekly or daily, provided t

becomes part of the capitaland earns interest as such part of the capital not as interest, and that, in paying monthly interest at the ra
mplies precisely that the interest for a given period — one (1) month in the case of respondent Bank — becomes, at the end of said p
terest, when compounded quarterly, under which the interest does not become part of the capital, and, accordingly, does not earn int

the contested circulars and resolutions.

t that the disputed restrictions to banks as debtors are not applied to banks as creditors. This pretense is untenable, for settled is the
y, permits a classification of the object or subject of the law, provided that the classification is reasonable or based upon real or substa

payable by banks on savings deposits and prohibiting the payment in advance of interest on time deposits, is to protect the stability o
m the interest that banks may collect in advance from its borrowers or from high rates of interest the former may charge from the latte

mpare it with the effect of the payment in advance of the interest thereon. As correctly set forth in the petition herein:

a one-year time deposit at 6-1/2% (6.5%) per annum, and at the same time stipulates that "interest on time deposit shall not be paid in
P6,500.00 interest at the end of the year. However, if a bank pays interest in advance on time deposits, it is actually paying interest m
k the use of only P93,500.00 (P100,000.00 less P6,500.00 interest paid in advance). But at the end of one year, the bank will pay bac
st in advance) will earn interest of P6,500.00 after one year. This interest of P6,500.00 on the amount of P93,500.00 means an effec

erest fixed for savings deposits and pays in advance the maximum rate of interest prescribed for time deposits — Banco Filipino pay
legally authorized to demand strict compliance therewith and to restrain and forbid the Banco Filipino from compounding monthly sa

s deposits may be considered as a requirement on banks that the interest stipulated on savings deposits must be deemed due and p
erest on savings deposits ... shall be four and one-half per cent (4-1/2%) ..., compounded quarterly." This means that a bank may pay
onetary Board, compounded quarterly.

drawn by its depositor at the end of each month, the aggregate amount paid to him by said respondent at the end of a year would not
his deposit were computed and paid quarterly, as ordained by said Board, he would collect, within a year, less than the aggregate su
depositor, before the end of the quarter, would have to be taken, not from the interest — which would not be due as yet — but from h
rest fixed by the Board. In short, in either case, said rate would be violated by Banco Filipino.

rein fixed were to be compounded quarterly and that, having failed to answer the letters of said respondent seeking a clarification of
in its reports to Petitioner herein. We find no merit in this pretense.

oregoing are hereby amended or revoked." In other words, previous circulars were maintained insofar as not inconsistent with Circula
1, 1960), and 112 (dated October 26, 1960) — uniformly providedthat the maximum rates of interest therein fixed shall be compounde
d limitation.

15, 1964, and June 14, 1966, for savings deposits, are qualified therein by the phrase "compounded quarterly." Circular No. 222, mor
mpounding monthly the maximum rates of interest fixed by the Monetary Board for savings deposits, and of paying in advance the ma

urt of First Instance of Manila that Banco Filipino had no cause of action against Petitioner herein to restrain the same from demandin
d to the relief demanded," which consists in restraining "the commission or continuance of the acts complained of," and (2) that the co
o was clearly not entitled to the relief sought in said Civil Case No. 67181 and no "injustice" to said institution would, accordingly, res
its aforementioned order of November 23, 1966, in said case. 24

ereby declared null and void, and the enforcement of both, accordingly, restrained permanently, with costs against respondent Banco
mber 15, 1964 and June 14, 1966, respectively, (Circular No. 222 having been issued by virtue of Monetary Board Resolution No. 80
tions governing rates of interest, on demand, savings and time deposits." Respondent court's writ of preliminary injunction enjoining p
ndent bank is assailed in this action of certiorari and prohibition.

espondent court's preliminary injunction writ against it, pending this action, was heard by the Court on January 11, 1967, but the Cou

er section 109 of its Charter (Republic Act No. 265) to "fix the maximum rates of interestwhich banks may pay on deposits and on any
I)n order to avoid possible evasion of maximum interest rates set by the Monetary Board, the Board may also fix the maximum rates

rate of interestwhich banks may pay on deposits under section 109 of the Central Bank Act "carries with it the power to regulate or p
payments of interests on time deposits ... would in truth and in fact give to the depositor a higher rate of interest than what has been f
ng month."2

to fixing the maximum rates of interest and does not extend to regulating the manner of paying interest on savings and time deposits

the time, the Central Bank regulation governing interest rates for savings and time deposits was Circular No. 149 dated March 27, 19
eposits, of 4-1/2% for both commercial and savings banks. The circular did not specify that the maximum rates of interest were to be
al banks, and 3-1/2% on time deposits, (Circular No. 74 dated September 2, 1957), increased to 3-1/2% on savings deposits for savin

of interest, compounded quarterly, per its rules and regulations printed on its savings passbook, but subsequently in the same year 1
mum rates of interest on time deposits with it.

effect on January 1, 1965 was subsequently promulgated by petitioner fixing an increased maximum annual rate of interest for saving
mmercial and savings banks was correspondingly increased to 5%.

e immediately, for the first time providing a uniform increased maximum annual rate of 5-3/4%, compounded quarterly, for savings de

osit shall not be paid in advance, but only at maturity, or upon withdrawal of the deposit x"3 and that "(N)o bank or banking institution s
of the rates."4

equently by Circular No. 239, dated June 7, 1967, effective July 1, 1967, whereby the maximum annual rate of interest on time depos
of the Government"; by Circular No. 272 dated April 14, 1969, effective immediately, whereby the maximum annual rate of interest on
and lastly by Circular No. 292 dated February 20, 1970, effective immediately, whereby the maximum annual rate of interest on time

ment of interest in implementation of its conceded power to fix the maximum rateof interest, it should be noted that the power specifica
st payments, by concept and by accepted usage, has generally taken the form of fixing the maximum rate of interestpayable and doe
ed interest within the maximum allowable rate is generally left to lender-borrower agreement.

orrowers, and generally collect interest in advance upon the loans granted by them, save in overdraft agreements, where interest is c
uted on a daily basis until the principal, as compounded, is paid in full.

Act for the express purpose of "avoiding possible evasion of maximum interest rates set by the Monetary Board", expressly empowers
xpress enumeration of rates on payments of any sort payable to or collectible from the bank's customers clearly ruled out regulating th

al Bank as to the manner or time of collecting interest from their borrowers, as above stated, the principle that regulation of interest p
ner or time of payment of such interest — is shown by two other factors. First is that no contrary authority has been cited by petitioner
em is effected "by prohibiting ... payment of interests on demand deposits and by providing that the maximum rate of interest paid on
he members" (Encyclopedia of Banking & Finance). Second is the very change in position of petitioner here before this Court in its m

% per annum compounded quarterly, the board is in effect setting up a maximum effective rate of 5.875%per annum.5

t at other than quarterly intervals provided that the aggregate amount of such interest so compounded does not exceed the aggregat

oined respondent bank "to stop immediately advertisements of the effective rates of interest on savings and time deposits in the new
ny information ... indicating the effective rates (of interest) resulting from a compounding of the rates."

y or monthly and the Central Bank will not prevent it from doing so, provided that the maximum effective rate of interest by compound
netary Board."8 So, it perforce has abandoned its strictures or restrictions on the manner of payment of the interest, on condition that i
memorandum a complicated mathematical formula, with a solution that "(S)o that a bank will not exceed the maximum effective rate o
stifiable basis that questioned portion of its Circular No. 222 enjoining all banks from "indicating the effective rates resulting from a co

of "effective rate" to only one set of conditions, i.e. where a deposit is made and nothing is withdrawn over a period of one year, wher
nd the "effective rate" of interest would fluctuate and vary accordingly. In practice, none of the banks would ever consider the abstract
e to bring this out.9 It has never been banking practice or usage for banks to work out and make use of complicated mathematical form
oner — for the Central Bank prescribes no such maximum "effective rate" but only the maximum rate as evidenced by its own circula

a. is to be "compounded quarterly", which if the deposit is kept intact for one year results in its so-called maximum "effective rate" of
h earns new interest and is not to be taken into account in the computation or determination of the interest earned by the original prin
exceeds the limit prescribed by the Usury Law. 11

r capitalized, but simply funds as new principal, which together with the original principal, would of course earn and draw the stipulate
mum rate of interest set and no more.

" as a requirement on banks to pay interest at least quarterly and to compound or capitalize the interest due and unpaid, would const
nded must not exceed its so-called maximum "effective rate" of 5.875% which it has set only now in its memorandum at bar. As can
pay the interest oftener than quarterly nor to compound the interest oftener than quarterly should the interest be due and unpaid soon
Central Bank provision of compounding quarterly as a convenient expedient so as to uniformly pay and/or compound interest quarter
ms express it to be and in accordance with the statutory grant of authority, based on accepted usage and practice practical considera
uch interest. Otherwise there would be no justification for the imposition of such limitation solely on savings deposits, and the absolut
ance and compounded daily after maturity while paying the prescribed interest on savings deposits on the basis of the lowest balance

savings deposits (instead of quarterly, which is an "effective rate" of 5.875% p.a. on the prescribed maximum rate of 5.75% p. a.) is e
nt, when actually it should not. The prescribed interest is generally computed on the basis of the original principal, without or regardles
were paid out, it would not make any difference if interest were paid monthly (at P50.00) or quarterly (at P150.00) — the prescribed m
ayment at year's end would be the same amount of P600.00.

t in advance of the prescribed 6.5% p.a. interest ceiling set by it, as in the illustration of a P100,000.00-time deposit given by it, would
P100,000.00 is paid interest of P6,500.00 in advance, the depositor, in effect, is allowing the bank the use of only P93,500.00 (P100,0
earn interest of P6,500.00 after one year", 13 or an "effective rate" of 6.952% p.a. The fallacy is that just as compounded interest is no
he P6,500.00-interest paid by the bank is an interest expense, and it cannot be gainsaid that the principal of the deposit is P100,000.0
terest paid in advance were compounded or deposited likewise immediately by the depositor, there would be no question that such n
00). The net amount which the depositor has allowed the bank to use in such case would be the original intact principal of P100,000.

e net amount remaining with the banks after deducting the interest expense paid in advance is made patent, if the same mode of com
e Usury Law on loans not secured by mortgage on registered real estate 14 and of 12% p.a. on loans so secured. 15 Under petitioner's
 d or deducted in advance) or only P88,000.00 in 12% interest loans (P100,000.00 less P12,000.00 paid or deducted in advance) bu
.00 and P12,000.00 after one year, or an "effective rate," in apparent violation of the Usury Law ceilings, of 16.28% and 13.636%, res
e basis of the principal loan (in deposits, the amount deposited is the principal loaned by the depositor to the bank) and the interest ex
d in advance for one year by the borrower is not recoverable, in the absence of express agreement, even should the buyer repay the

ity to petitioner to fix the maximum rates of interest payable to and by banks may be deemed to include as an incident the power to li
rterly) and time deposits (enjoining any payment of interest in advance) violate due process in that they are manifestly arbitrary and u
y petitioner on the time and manner of payment of interest by borrowers of the banks.

o the entire context of the circular since all banks already pay or credit the depositors with their corresponding interest either every m

ead as it actually leads to a situation where depositors receive no interest even after they have kept their savings with their depository

o no one; 18

earnings with the general public; 19 and

interest rates in advanceand compute delinquent interest on a daily basis until the principal is paid.

g the asserted power of fixing "the manner of compounding and payment" is based on the guiding principle in section 108 of Central
e of arbitrariness and discrimination. Respondent points out that assuming that the total savings deposits with all Philippine banks am
epresents a total interest payment of P290,000.00 p.a. on P1 billion deposits (or P29.00 per P100,000 of savings deposit) which coul
ected in the given illustration by the rates at which the banks lend the total P1 billion deposit in their lending operations: — the differe
ld amount to over P60 million, and if we were to apply the "effective rate" computation of petitioner on interest paid in advance (an "e

rimination in that the restriction of no payment of interest in advance on timedeposits or other than on the quarterly compounding bas
s of the funds deposited, whereas petitioner makes no such restriction where the banks are the lenders of the very same funds and p

of money such as availability of credit, rediscounting facilities and rates with the Central Bank, inflationary or deflationary condition, n
(sic) a single case of injury to the Philippine economy brought about by this practice." 23 Furthermore, if the challenged restriction wer
maximum annual interest rates on savings and time deposits from 3% and 4%, respectively, in 1957 by 100% to 6% and 8%, respec

cretion as the agency entrusted with the duty and responsibility of implementing the provisions of sec. 109, is the sole judge in determ
confused the issue. The maximum interest rates fixed by it are not here questioned at all and are concededly within its statutory auth
rterly period and proscribing payment of interest in advance, while imposing no similar restriction on the time and manner of payment
ed it by the Central Bank Act for the purpose of protecting public interest must not constitute arbitrary interference with the banking bu
f the purpose and not unduly oppressive so as to violate due process — which forbids governmental action that is unreasonable or ar
easonable and necessary to its avowed duty of attuning the cost of money to the needs of the country's economy.

e is to prohibit the use of interest as a competitive device for causing the shifting of bank deposits from one bank to another" 25 and th
petitioner's banning an insignificant leeway of 0.029% resulting from respondent bank's monthly compounding of interest rather than
ly interest earned not on the original principal, but on interest due and unpaid which becomes added or new principal which properly e
ositors select their depositary banks, not merely on the basis of this small margin of "effective rate" of interest, but more on the basis o
 to deposit their savings with it have served in their own way to promote the Central Bank's campaign to encourage thrift and to attra
motional device that is indeed more subdued in tone than the Madison Avenue-style promotional plugs and claims, including jingles, p

ssued in pursuance thereof enjoining petitioner from enforcing the questioned circulars, "insofar as they restrict the payment of mont

mber 15, 1964 and June 14, 1966, respectively, (Circular No. 222 having been issued by virtue of Monetary Board Resolution No. 80
tions governing rates of interest, on demand, savings and time deposits." Respondent court's writ of preliminary injunction enjoining p
ndent bank is assailed in this action of certiorari and prohibition.

espondent court's preliminary injunction writ against it, pending this action, was heard by the Court on January 11, 1967, but the Cou

er section 109 of its Charter (Republic Act No. 265) to "fix the maximum rates of interestwhich banks may pay on deposits and on any
I)n order to avoid possible evasion of maximum interest rates set by the Monetary Board, the Board may also fix the maximum rates

rate of interestwhich banks may pay on deposits under section 109 of the Central Bank Act "carries with it the power to regulate or p
payments of interests on time deposits ... would in truth and in fact give to the depositor a higher rate of interest than what has been f
ng month."2

to fixing the maximum rates of interest and does not extend to regulating the manner of paying interest on savings and time deposits

the time, the Central Bank regulation governing interest rates for savings and time deposits was Circular No. 149 dated March 27, 19
eposits, of 4-1/2% for both commercial and savings banks. The circular did not specify that the maximum rates of interest were to be
al banks, and 3-1/2% on time deposits, (Circular No. 74 dated September 2, 1957), increased to 3-1/2% on savings deposits for savin

of interest, compounded quarterly, per its rules and regulations printed on its savings passbook, but subsequently in the same year 1
mum rates of interest on time deposits with it.

effect on January 1, 1965 was subsequently promulgated by petitioner fixing an increased maximum annual rate of interest for saving
mmercial and savings banks was correspondingly increased to 5%.

e immediately, for the first time providing a uniform increased maximum annual rate of 5-3/4%, compounded quarterly, for savings de

osit shall not be paid in advance, but only at maturity, or upon withdrawal of the deposit x"3 and that "(N)o bank or banking institution s
of the rates."4
 equently by Circular No. 239, dated June 7, 1967, effective July 1, 1967, whereby the maximum annual rate of interest on time depo
of the Government"; by Circular No. 272 dated April 14, 1969, effective immediately, whereby the maximum annual rate of interest on
and lastly by Circular No. 292 dated February 20, 1970, effective immediately, whereby the maximum annual rate of interest on time

ment of interest in implementation of its conceded power to fix the maximum rateof interest, it should be noted that the power specifica
st payments, by concept and by accepted usage, has generally taken the form of fixing the maximum rate of interestpayable and doe
ed interest within the maximum allowable rate is generally left to lender-borrower agreement.

orrowers, and generally collect interest in advance upon the loans granted by them, save in overdraft agreements, where interest is c
uted on a daily basis until the principal, as compounded, is paid in full.

Act for the express purpose of "avoiding possible evasion of maximum interest rates set by the Monetary Board", expressly empowers
xpress enumeration of rates on payments of any sort payable to or collectible from the bank's customers clearly ruled out regulating th

al Bank as to the manner or time of collecting interest from their borrowers, as above stated, the principle that regulation of interest p
ner or time of payment of such interest — is shown by two other factors. First is that no contrary authority has been cited by petitioner
em is effected "by prohibiting ... payment of interests on demand deposits and by providing that the maximum rate of interest paid on
he members" (Encyclopedia of Banking & Finance). Second is the very change in position of petitioner here before this Court in its m

% per annum compounded quarterly, the board is in effect setting up a maximum effective rate of 5.875%per annum.5

t at other than quarterly intervals provided that the aggregate amount of such interest so compounded does not exceed the aggregat

oined respondent bank "to stop immediately advertisements of the effective rates of interest on savings and time deposits in the new
ny information ... indicating the effective rates (of interest) resulting from a compounding of the rates."

y or monthly and the Central Bank will not prevent it from doing so, provided that the maximum effective rate of interest by compound
netary Board."8 So, it perforce has abandoned its strictures or restrictions on the manner of payment of the interest, on condition that i
memorandum a complicated mathematical formula, with a solution that "(S)o that a bank will not exceed the maximum effective rate o
stifiable basis that questioned portion of its Circular No. 222 enjoining all banks from "indicating the effective rates resulting from a co

of "effective rate" to only one set of conditions, i.e. where a deposit is made and nothing is withdrawn over a period of one year, wher
nd the "effective rate" of interest would fluctuate and vary accordingly. In practice, none of the banks would ever consider the abstract
e to bring this out.9 It has never been banking practice or usage for banks to work out and make use of complicated mathematical form
oner — for the Central Bank prescribes no such maximum "effective rate" but only the maximum rate as evidenced by its own circula

a. is to be "compounded quarterly", which if the deposit is kept intact for one year results in its so-called maximum "effective rate" of
h earns new interest and is not to be taken into account in the computation or determination of the interest earned by the original prin
exceeds the limit prescribed by the Usury Law. 11

r capitalized, but simply funds as new principal, which together with the original principal, would of course earn and draw the stipulate
mum rate of interest set and no more.

" as a requirement on banks to pay interest at least quarterly and to compound or capitalize the interest due and unpaid, would const
nded must not exceed its so-called maximum "effective rate" of 5.875% which it has set only now in its memorandum at bar. As can
pay the interest oftener than quarterly nor to compound the interest oftener than quarterly should the interest be due and unpaid soon
Central Bank provision of compounding quarterly as a convenient expedient so as to uniformly pay and/or compound interest quarter
ms express it to be and in accordance with the statutory grant of authority, based on accepted usage and practice practical considera
uch interest. Otherwise there would be no justification for the imposition of such limitation solely on savings deposits, and the absolut
ance and compounded daily after maturity while paying the prescribed interest on savings deposits on the basis of the lowest balance

savings deposits (instead of quarterly, which is an "effective rate" of 5.875% p.a. on the prescribed maximum rate of 5.75% p. a.) is e
nt, when actually it should not. The prescribed interest is generally computed on the basis of the original principal, without or regardles
were paid out, it would not make any difference if interest were paid monthly (at P50.00) or quarterly (at P150.00) — the prescribed m
ayment at year's end would be the same amount of P600.00.

t in advance of the prescribed 6.5% p.a. interest ceiling set by it, as in the illustration of a P100,000.00-time deposit given by it, would
P100,000.00 is paid interest of P6,500.00 in advance, the depositor, in effect, is allowing the bank the use of only P93,500.00 (P100,0
earn interest of P6,500.00 after one year", 13 or an "effective rate" of 6.952% p.a. The fallacy is that just as compounded interest is no
he P6,500.00-interest paid by the bank is an interest expense, and it cannot be gainsaid that the principal of the deposit is P100,000.0
terest paid in advance were compounded or deposited likewise immediately by the depositor, there would be no question that such n
00). The net amount which the depositor has allowed the bank to use in such case would be the original intact principal of P100,000.

e net amount remaining with the banks after deducting the interest expense paid in advance is made patent, if the same mode of com
e Usury Law on loans not secured by mortgage on registered real estate 14 and of 12% p.a. on loans so secured. 15 Under petitioner's
d or deducted in advance) or only P88,000.00 in 12% interest loans (P100,000.00 less P12,000.00 paid or deducted in advance) but
.00 and P12,000.00 after one year, or an "effective rate," in apparent violation of the Usury Law ceilings, of 16.28% and 13.636%, res
e basis of the principal loan (in deposits, the amount deposited is the principal loaned by the depositor to the bank) and the interest ex
d in advance for one year by the borrower is not recoverable, in the absence of express agreement, even should the buyer repay the

II

ity to petitioner to fix the maximum rates of interest payable to and by banks may be deemed to include as an incident the power to li
rterly) and time deposits (enjoining any payment of interest in advance) violate due process in that they are manifestly arbitrary and u
y petitioner on the time and manner of payment of interest by borrowers of the banks.

o the entire context of the circular since all banks already pay or credit the depositors with their corresponding interest either every m

ead as it actually leads to a situation where depositors receive no interest even after they have kept their savings with their depository

o no one; 18

earnings with the general public; 19 and

interest rates in advanceand compute delinquent interest on a daily basis until the principal is paid.

g the asserted power of fixing "the manner of compounding and payment" is based on the guiding principle in section 108 of Central
e of arbitrariness and discrimination. Respondent points out that assuming that the total savings deposits with all Philippine banks am
epresents a total interest payment of P290,000.00 p.a. on P1 billion deposits (or P29.00 per P100,000 of savings deposit) which coul
ected in the given illustration by the rates at which the banks lend the total P1 billion deposit in their lending operations: — the differe
ld amount to over P60 million, and if we were to apply the "effective rate" computation of petitioner on interest paid in advance (an "e
crimination in that the restriction of no payment of interest in advance on timedeposits or other than on the quarterly compounding ba
s of the funds deposited, whereas petitioner makes no such restriction where the banks are the lenders of the very same funds and p

of money such as availability of credit, rediscounting facilities and rates with the Central Bank, inflationary or deflationary condition, n
(sic) a single case of injury to the Philippine economy brought about by this practice." 23 Furthermore, if the challenged restriction wer
maximum annual interest rates on savings and time deposits from 3% and 4%, respectively, in 1957 by 100% to 6% and 8%, respec

cretion as the agency entrusted with the duty and responsibility of implementing the provisions of sec. 109, is the sole judge in determ
confused the issue. The maximum interest rates fixed by it are not here questioned at all and are concededly within its statutory auth
rterly period and proscribing payment of interest in advance, while imposing no similar restriction on the time and manner of payment
ed it by the Central Bank Act for the purpose of protecting public interest must not constitute arbitrary interference with the banking bu
f the purpose and not unduly oppressive so as to violate due process — which forbids governmental action that is unreasonable or ar
easonable and necessary to its avowed duty of attuning the cost of money to the needs of the country's economy.

e is to prohibit the use of interest as a competitive device for causing the shifting of bank deposits from one bank to another" 25 and th
petitioner's banning an insignificant leeway of 0.029% resulting from respondent bank's monthly compounding of interest rather than
y interest earned not on the original principal, but on interest due and unpaid which becomes added or new principal which properly e
ositors select their depositary banks, not merely on the basis of this small margin of "effective rate" of interest, but more on the basis o
to deposit their savings with it have served in their own way to promote the Central Bank's campaign to encourage thrift and to attrac
motional device that is indeed more subdued in tone than the Madison Avenue-style promotional plugs and claims, including jingles, p

ssued in pursuance thereof enjoining petitioner from enforcing the questioned circulars, "insofar as they restrict the payment of mont

. 734; Socco v. Leary, L-19461, Oct. 31, 1964; Malayang Manggagawa v. Esso, L-24224, July 30, 1965; Republic v. Reyes, L-20602

Pajo v. Ago, L-15414, June 30, 1960; Gonzales v. Court of Appeals, L-18255, Nov. 21, 1961; Fortich-Celdran v. Celdran, L-22677, F

Emphasis ours.

o, Commissioner of Customs v. Valencia, 100 Phil. 165, 173; Manabat v. de la Cruz, 103 Phil. 1127; Pindañgan Agricultural Co. v. Da
,
68.

Water Supply Co. v. Brooklyn, 166 U.S. 685,. Emphasis ours.

hasis ours.

een the parties, but the reservation of essential attributes of sovereign power is also read into contracts as a postulate of the legal ord
ment which retains adequate authority to secure the peace and good order of society.

115-116. Emphasis ours.

Antamok Goldfields v. Court of Industrial Relations, 70 Phil. 340 (1940); Int'l. Hardwood and Veneer Co. v. Pañgil Fed. of Labor, 70 P
s Employees' Assn., 79 Phil. 409 (1947); People vs. Isnain, 85 Phil. 648 (1950); Tolentino v. Board of Accountancy, 90 Phil, 83 (1951
962; Felwa v. Salas, L-26511, Oct. 29, 1966; Rafael v. Embroidery and Apparel Control & Inspection Board, L-19978, September 29,

L-19597, July 31, 1962; Board of Commissioners v. Domingo, L-21274, July 31, 1963; Vivo v. Arca, L-21728, Dec. 27, 1963; Vivo v. C

a Estate v. Court of First Instance, L-27084, July 31, 1968; Sibal v. Lantin, L-20920, Dec. 18, 1968.
,000.00, this money has to remain in the bank up to December 31, 1966 without any movement in order to arrive at the theoretical ef
0.00 was made on January 10, 1966, under the grace period system observed today this deposit would earn interest from January 1,

ely 6.46% per annum;

fectively 6.13% per annum;

r 6.05% effective rate;

effectively 6.04%.

the abstract effective rate of 5.875% per annum would continue to be exceeded.

deposit would earn on March 31, 1966, P14.38. Suppose, the depositor withdraws on April 1, 1966 P500.00 this would leave in the b
nother example of the fact that in practice all over the banks in the Philippines the abstract effective rate of 5.875% is never considere

. 714; Gov't. vs. Vaca, 64 Phil. 6.

er instrument or contract, compound interest shall not be recioned, except by agreement, or, in default thereof, whenever the debt is
n one year."

s, 36 0.G., 898; Pando vs. Kette, 52 Phil. 150; Lopez vs. El Hogar Filipino, 47 Phil. 249; Lerma vs. Reyes, 103 Phil. 1027.
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