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Sunday, December 17, 2017 | MANILA, PHILIPPINES
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   banking report
Date posted: Monday, May 29, 2017 | Manila, Philippines

1st Quarter Banking Report (2017)

How rural lenders failed to hitch a ride on BSP growth train

CONTINUITY. This is the promise of the incoming central bank governor, keeping monetary policy data-driven, as well as fortifying regulation and financial inclusion initiatives that are already under way.

One of Bangko Sentral ng Pilipinas (BSP) Deputy Governor Nestor A. Espenilla, Jr.’s priorities is recognizing the opportunities in the rural areas, particularly agriculture.

However, these opportunities should be backed by an effective financial system, which unfortunately was hampered by the series of rural bank closures.

During his speech at the BSP-Asian Development Bank (ADB) Conference on Financing Agriculture Value Chain in the Philippines, Mr. Espenilla, said: “My hope is the banks and other financial institutions will see the ACPC figures as an invitation to study the agricultural sector closer and to recognize the business opportunities and the growth potential that they can offer.”

Mr. Espenilla was referring to the recent data from the Agricultural Credit Policy Council (ACPC), particularly the large portion of unmet credit demand for priority agricultural commodities that was estimated at around P364 billion.

Mr. Espenilla noted that 53% of Filipino farmers get their credit from formal sources, which “is quite an encouraging figure considering that only 12% of Filipino adults borrow from a formal financial institution in 2014.”

While the BSP kept on pushing for a more inclusive financial system, rural banking appears to be the lone black spot in the sector’s success story.

The series of rural banks closures has not let up. Last year, the BSP ordered 22 banks closed, 20 of which were rural lenders. The 2016 figure was the highest in the last three years. As of April this year, five rural banks have already folded.

“In terms of size, the total number of rural banks has been reduced to almost half of its size in 2005,” the Rural Bank Association of the Philippines (RBAP) said in an e-mail.

“The percentage share of the [rural bank] industry asset to the total banking industry was also reduced, which could be the result of the growing assets of the big universal and commercial banks and indirectly, the reduction in the total number of [rural banks] as a result of closure, mergers and acquisitions,” RBAP added.

“Yet, in terms of network size, rural banks still have more presence nationwide, especially for far-flung municipalities which the big banks don’t go into.”

At end-2016, rural banks recorded P194.37 billion in total assets, up by 6.8% from the previous year, but just a mere 1.43% share of the entire Philippine banking system’s combined assets, which stood at P13.59 trillion in 2016.

But according to RBAP, the industry is in a healthy position. Its capital adequacy ratio stood at 18%, well above the 10% minimum requirement.

At end-December 2016, the number of rural banks was reduced to 471 with 2,140 branches and offices throughout the country, as against 582 or 35.6% unbanked cities and municipalities.

The number of independently owned rural banks has also decreased, as bigger lenders ventured outside the metro and gobbled up their smaller peers in the countryside on the back of incentives provided by regulators.

“Our members feel the increasing competition from the big players as well as the non-banks and the strict regulation imposed on rural banks is not helping us compete with the other players,” RBAP said.

Despite the competition, a scenario of a rural bank-less rural area is far from becoming reality.

Monetary Board member Felipe M. Medalla said rural banks’ competitor is not the big urban bank. “It’s not that easy to lend to farmers,” he said, adding that farmers’ input suppliers are giving rural lenders a run for their money.

That is because input suppliers are willing to take a more risky position, Mr. Medalla said, adding that they supply the inputs and in return, have first dibs on the output, which means that they are familiar with both sides of the market. The advantage of that is they would know the most efficient farmers. “In fact, I’m talking to some farmers. They’re even willing to deliver money to the children of the farmers who are studying in Manila,” Mr. Medalla said.

“So, in other words, contrary to what [Department of Agriculture (DA) Secretary Emmanuel F. Piñol] is saying, the traders are a lot more useful than the NFA (National Food Authority). They are not able to buy the rice because of the cartel, they’re able to buy the rice because they are willing to finance the inputs.”

Rural bank bankruptcy still persists even with the several bailout programs rolled out for its revival.

“There is no uniform reason for these closures as each bank has its own unique circumstance. However, some of the major concerns that emerge is weak governance, capitalization and lack of a clear business plan,” RBAP said.

“While the issue on governance is still there, the threat of unsound banking practice has already been addressed by the strict regulation imposed on rural banks,” RBAP added.

Mr. Medalla agreed, saying that some rural banks were hard up giving out salaries to their employees, as their interest margin was not enough to cover, not to mention having bad business models.

“In some cases, the other reason for the consolidation was run badly and we want it to be taken over by a better bank,” Mr. Medalla said.

“We don’t necessarily force consolidation, but if we find that some of the smaller ones are having a hard time surviving then therefore we should not get in the way of consolidation,” he added.

In 2015, the BSP, Philippine Deposit Insurance Corp. (PDIC) and Land Bank of the Philippines launched the Consolidation Program for Rural Banks (CPRB), which aims to strengthen the rural banking system by way of consolidation. The initiative -- which runs from Aug. 25, 2015 to Aug. 25, 2017 -- prods groups of at least five rural banks in one area to consolidate and boost their capacity as small-scale lenders.

Prior to the CPRB, the central bank also ran a Strengthening Program for Rural Banks (SPRB) from 2010 to 2015, which allowed the entry of strategic third party investors to help thrift and rural banks in their capital buildup.

The SPRB was enhanced in 2012 and renamed SPRB Plus, expanding its scope to include thrift banks among those that can be acquired. Also, where the SPRB only allowed mergers and acquisitions among rural banks, the SPRB Plus opened the door to acquisition of troubled rural or thrift lenders by their stronger peers or by universal banks and nonbank corporations.

Earlier this month, PDIC published revised implementing rules covering the government’s CPRB to allow a group of four lenders to proceed with a merger, relaxing the five-bank standard that was set two years ago.

“Under the original IRR (implementing rules and regulations), the combining banks should be at least five. There are three groups actively applying, and it’s turning out that one of those groups have only four but their capital is above P100 million... The policy was [revised] just to allow that flexibility,” BSP’s Mr. Espenilla said

The CPRB will accept applications until Aug. 25. Following the new guidelines, the PDIC will accept merger proposals from less than five small banks located in one region or area if their combined unimpaired capital is at least P100 million and their risk-based capital adequacy ratio is 12%.

Since the program was launched in 2015, three merger proposals from three different groups of banks have been submitted to regulators, although these have yet to be approved amid some documentation issues.

Mr. Espenilla said the lenders may receive the green light for consolidation within the year.

As regulator of the banking system, the central bank can order the closure of a financial firm if this is found incapable of offering services to the public.

Sought for assessment on these bailout programs, RBAP said: “We think that the creators of these programs wanted more participants in comparison to the actual results. The idea of consolidation did not appeal immediately to rural bankers given that we are basically family-owned and governed.”

To push for a more inclusive growth, the central bank enhanced the reach of a more stable banking system through its financial inclusion programs.

High rural poverty is attributed to slow agricultural growth. During the past two administrations, the agriculture sector only grew by 2.8% (2001-2010), and 1.2% (2010-2016). The sector only contributes around a tenth of the country’s economic output despite generating about a fourth of the country’s jobs. Due to this slow growth, the current administration approved a budget of P120 billion for agricultural development and agrarian reform. A third of it was granted to the DA , to initiate research and development, market development, credit support services for the commodity programs in agriculture and fishery, and construction of farm-to-market roads.

Based on the BSP’s latest Consumer Finance Survey (CFS), majority of Filipino families remain unbanked in 2014. For this survey round, 18,000 households were tapped nationwide, except families in Leyte and areas within the Autonomous Region in Muslim Mindanao.

The BSP said the survey results highlighted the need for greater efforts towards financial inclusion by allowing the entry of more micro-banking offices to unbanked areas, while also improving financial education strategies for Filipinos.

“The BSP’s general approach is to ensure that an enabling regulatory environment is in place to promote a more inclusive financial system,” said BSP Governor Amando M. Tetangco, Jr.

“This is characterized by openness to innovations and market-based solutions which can have a transformative role in expanding the scale and reach of financial services. This includes the use of technology in reaching the financially excluded population,” he added.

Recently, BSP introduced the idea of agent banking, which is another cost-efficient service delivery channel.

“With cash agents, banks will be able to strategically leverage on innovative digital banking solutions to onboard clients and expand market reach,” Mr. Tetangco, said.

“Under the framework, cash agents can accept and disburse cash on behalf of the bank, facilitate online self-service deposits, withdrawals and fund transfers as well as bills payment.”

In addition to this, the BSP’s Monetary Board issued Resolution 1855, which allows the conversion of microfinance-oriented banks/branches to regular banks/branches. The move rationalized the branching guidelines to provide banks with more flexibility in expanding their branch network to strategic locations and foster market competition.

According to the BSP, the number of bank branches expanded by almost 1.6 times to 10,576 since 1998. The number of operating banks went down to 602 amid the industry consolidation.

The increasing number of micro-banking offices (MBOs) has also contributed significantly to better access and availability of financial services in the Philippines, as the latest data from BSP showed an increase to 651, up by 22.6% compared to the third quarter of 2015. -- R. O. R. Reusora

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