Banco Filipino v.

Navarro
Case Reference No., Date

FACTS:
On May 20, 1975, respondent Florante del Valle obtained a loan secured by a real estate
mortgage from petitioner Banco Filipino in the sum of P41,300.00, payable and to be amortized within
fifteen (15) years at twelve (12%) per cent interest annually. Hence, the LOAN still had more than 730
days to run by January 2, 1976, the date when CIRCULAR No. 494 was issued by the Central Bank.
Stamped on the promissory note evidencing the loan is an Escalation Clause, which read that
Valle authorized Banco Filipino to increase the interest rate stipulated without advance notice in the
event law should be enacted increasing the lawful rates of interest that may be charged on this
particular kind of loan.
The Escalation Clause is based upon Central Bank CIRCULAR No. 494 issued on January 2, 1976,
the pertinent portion of which reads:
3. The maximum rate of interest, including commissions, premiums, fees and
other charges on loans with maturity of more than seven hundred thirty (730) days, by banking
institutions, including thrift banks and rural banks, or by financial intermediaries authorized to
engage in quasi-banking functions shall be nineteen percent (19%) per annum.
x x x x x x x x x
7. Except as provided in this Circular and Circular No. 493, loans or renewals
thereof shall continue to be governed by the Usury Law, as amended."
On the strength of CIRCULAR No. 494, Banco Filipino gave notice to del Valle on June 30, 1976 of
the increase of interest rate on the LOAN from 12% to 17% per annum effective on March 1, 1976.
In a reply letter to del Valle, Central Bank Director Mercedes Paredes clarified that as a rule,
should a bank increase the interest rates on loans already existing as of January 2, 1976, pertinent loan
contracts/documents must contain escalation clauses expressly authorizing lending bank or non-bank
performing quasi-banking functions to increase the rate of interest stipulated in the contract, in the
event that any law OR Central Bank regulation is promulgated increasing the maximum interest rate for
loans.
Thus, del Valle file a suit against Banco Filipino for Declaratory Relief, contending that Circular
No. 494 is NOT THE LAW contemplated in the Escalation Clause of her promissory note since said
Circular is a Central Bank regulation.
In its judgment, respondent Court nullified the Escalation Clause and ordered BANCO FILIPINO
to desist from enforcing the increased rate of interest on the del Valles loan. It reasoned out that P.D.
No. 116 does not expressly grant the Central Bank authority to maximize interest rates with retroactive
effect and that BANCO FILIPINO cannot legally impose a higher rate of interest before the expiration of
the 15-year period in which the loan is to be paid other than the 12% per annum in force at the time of
the execution of the loan.

ISSUE:
WON BANCO FILIPINO can increase the interest rate on the LOAN from 12% to 17% per annum
under the Escalation Clause?

RULING:
NO.
FIRST, it is clear from the stipulation between the parties that the interest rate may be increased
"in the event a law should be enacted increasing the lawful rate of interest that may be charged on this
particular kind of loan." The Escalation Clause was dependent on an increase of rate made by "law"
ALONE. However, CIRCULAR No. 494, although it has the effect of law, is not a law but an Administrative
Regulation.
The distinction between a law and an Administrative Regulation is recognized by P.D. No. 1684
which provides that from March 17, 1980, escalation clauses to be valid should specifically provide:
(1) that there can be an increase in interest if increased by law OR by the Monetary Board; and
(2) it must include a provision for reduction of the stipulated interest "in the event that the
applicable maximum rate of interest is reduced by law or by the Monetary Board." (De-escalation
Clause)
While P.D. No. 1684 is not to be given retroactive effect, the absence of a de-escalation clause
in the Escalation Clause in question provides ANOTHER REASON why it should not be given effect
because of its one-sidedness in favor of the lender.
SECOND, the Escalation Clause specifically stipulated that the increase in interest rate was to be
"on this particular kind of loan, " meaning one secured by registered real estate mortgage.
Yet, CIRCULAR No. 494 makes no distinction as to the types of loans that it is applicable to,
unlike Circular No. 586 dated January 1, 1978 and Circular No. 705 dated December 1, 1979, which fix
the effective rate of interest on loan transactions with maturities of more than 730 days to not
exceeding 19% per annum (Circular No. 586) and not exceeding 21% per annum (Circular No. 705) "on
both secured and unsecured loans as defined by the Usury Law, as amended."

In the absence of any indication in CIRCULAR No. 494 as to which particular type of loan was
meant by the Monetary Board, the more equitable construction is to limit CIRCULAR No. 494 to loans
guaranteed by securities other than mortgage upon registered realty.