The Ying and Yang of the Rural Banking Industry in the Philippines

The opportunities present with the opening to foreign investment up to 60% ownership, we have a chance to revolutionise the smallest part of the Philippine banking system. I would think whatever challenges the industry currently faces will be slowly addressed as the capital, technology and management expertise available from abroad come to revive a banking system focused on countryside development.

From BusinessWorld Philippines

July 02, 2014

Rural banks said facing ‘greater’ challenges

THE COUNTRY’s rural banks are in a “struggle” to maintain their relevance, an industry leader said Tuesday, noting that management and regulatory compliance issues continue to hound the sector now bracing for stiffer competition.

“Rural banks continue to operate in a challenging environment. We continue to suffer from poor reputation brought about by a large number of rural banks being closed,” newly inducted Rural Bankers Association of the Philippines (RBAP) President Jose Misael B. Moraleda said in his inaugural speech Tuesday night.

“The efforts and costs in order to survive, compete, and meet the demands of the market — including the regulatory requirements — are greater than before,” Mr. Moraleda said.

“More and more of us find it difficult to compete with the superior products and efficiency being offered by bigger banks,” he admitted.

“Today, as the country goes through a positive economic transition, we find ourselves in a constant struggle to prove our relevance in the societies we serve.”

At the sidelines of the event, Mr. Moraleda said in an interview that challenges facing rural banks include obstacles to management professionalization.

“There are rural banks that are professionally run already, but some are still in the process,” Mr. Moraleda said.

“Right now, there are some practices that BSP (Bangko Sentral ng Pilipinas) is promoting. Let’s say the oversight of the board: the board has to be active, management has to be guided with a lot of policies and guidelines,” the industry leader noted.

“Some rural banks, as they transition, are not yet used to it,” Mr. Moraleda said.

“But right now, because these are regulatory requirements, we are actually forced to adapt to the new and prudent ways in running the banks, so it is really a challenge. It’s either we address this or we face some of the penalties.”

Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco, Jr. gave the same picture.

“Rural banks face increasingly stiffer competition. This is coming from both smaller and bigger players,” Mr. Tetangco said in his own speech.

“More cooperatives and NGOs (nongovernment organizations) now operate in the countryside, with relatively lower cost than most rural banks… these entities may acquire portions of your market,” the central bank governor told his audience, composed of leaders in the sector.

“We also see the increasing presence of larger financial institutions in various municipalities,” he added.

“Furthermore, the passage of legislation allowing the infusion of foreign equity in rural banks is bound to be a game-changer.”

In August last year, the BSP issued Circular No. 809, meant to support the goals Republic Act No. 10574 that amended the Rural Banks Act of 1992.

The measure allows infusion of foreign equity in rural banks. Foreign individuals, banks or non-bank corporations can now own or control up to 60% of the voting stock of a rural bank.

Previously, foreign individuals and non-banks could take up only a 40% stake in universal, commercial and thrift banks, while foreign banks could acquire 60%.

Nevertheless, Mr. Tetangco reported that the rural banking industry is still growing.

“The Philippine rural banking sector continues to grow and expand, as indicated by key performance indicators, including consolidated assets, deposits, and loans,” the central bank chief said.

“As of March this year, the total resources of rural banks stood at P209.4 billion, representing a year-on-year growth of 8.8%,” he said.

“At the same time, total loan portfolio increased by 6.5% to P138 billion, while deposits climbed 10.6% to P145 billion.”

In his address, Mr. Tetangco also touted BSP’s own initiatives to support the sector.

“Another program tailor-fit for rural banks is the Strengthening Program for Rural Banks (SPRB), a joint undertaking of BSP and PDIC (Philippine Deposit Insurance Corp.),” Mr. Tetangco said.

“Launched in 2010 to strengthen rural banks and to minimize bank closures, the program has been extended as SPRB+ until December 2014 to encourage more mergers, consolidations, and acquisitions of eligible rural banks and thrift banks by strategic third party investors,” the governor explained.

“As of June 30, 2014, seven merger consolidation applications involving 15 banks have been approved by the PDIC and are being processed by the BSP,” Mr. Tetangco said. “In addition, there are five other applications for consolidation and acquisition that are in the pipeline.”

But rural banks’ fortunes are not dependent just on upsizing to stay competitive, as difficulties of regulatory compliance remain pronounced.

“There is a credit risk rating that we have contend with, but right now, because of the constant dialogue with the BSP, we see to it that rural banks realistically comply with it,” Mr. Moraleda commented on banking regulations concerning mandated lending.

The Magna Carta for MSMEs law requires lending to micro and small business to account for 8% of all banks’ total loan portfolio and 2% for medium enterprises.

The agri-agra law, meanwhile, mandates all lenders to set aside at least 25% of their total fund for the agriculture and fisheries sectors, with 10% of that just for agrarian reform beneficiaries.

Apart from this, also high on rural bankers’ minds is compliance with the soon-to-be operational Credit Information Corp. (CIC), the country’s credit bureau established by law in 2008.

“We will look into the information that needs to be presented [to CIC],” Mr. Moraleda said, noting some rural banks now furnish the Bankers Association of the Philippines with information on bank customers with bad credit history.

“Now, some banks are still hesitant… to give away (information on) the good clients, because they fear that if the good clients list is readily available to all banks, they might lose these customers to larger banks.”

As of June 6, 2014, the BSP listed 559 rural and cooperative banks in its directory. — Raymund Luther B. Aquino

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