A HIKE in rural banks’ minimum capital requirements is “necessary” to protect depositors and ensure a healthy financial system, the Bangko Sentral ng Pilipinas’ (BSP) incoming chief said.

Monetary Board member and incoming BSP Governor Felipe M. Medalla said in a virtual roundtable discussion with BusinessWorld editors last week that some rural banks are operating in an unsustainable manner and requiring them to have more capital buffers will benefit the depositing public.

“Every time we close a rural bank, it’s because even without bad loans, they are having difficulty making a profit,” Mr. Medalla said. “For instance, there are rural banks with annual operating costs say P5 million, which is not [good] because you have a lot of expenses and the interest margins are about exactly that or even less. One little mistake and they’re dead… They cannot even have checks and balances.”

“In other words, size is necessary. Clearly, the justification for higher capitalization is you want to protect the depositors. A rural bank that could barely earn interest margins to cover electricity and salaries is always a disaster waiting to happen,” he said.

The BSP plans to increase the minimum capital requirement of rural banks to strengthen and enhance the capacity of these smaller lenders.

A draft circular showed the central bank wants to require rural banks to put up capital of at least P60 million for those with just head offices and less than five branches) and P200 million for those with more than five branches. The office count excludes branch-lite units.

Under the current regulations, rural banks and cooperatives must have a minimum capitalization of P10 million to P200 million depending on the location and number of branches.

Under the draft, rural lenders will have three years to comply with the new rules.

The planned adjustment forms part of initiatives under the Rural Bank Strengthening Program, which was approved by the Monetary Board on March 3.

Industry players have said some rural banks would find it difficult to meet the proposed requirement and would be forced to shut down, adding the increase should not be done across the board as this could stunt financial inclusion gains, as these lenders mostly serve the agricultural sector as well as small businesses in the countryside.

For his part, Mr. Medalla said the BSP would be willing to give rural banks a reprieve on a case-to-case basis.

“My view is if there are rural banks that are below the targets, the regulations, but they have fantastic records, then of course, we can probably say, ‘Oh, you’re the exception, we’ll give you time,’” he said.

“But if you’ve lost money in the past two years, there’s no prospect of you making money because you can barely cover operating costs. We would rather let you voluntarily exit. Either you merge with somebody, get a bigger player that can come in and help you expand, or of course you can voluntarily close,” Mr. Medalla added.

He, however, emphasized the need to implement the new capital requirements “in the most reasonable amount of time as possible,” saying the 10-year compliance period proposed by one rural banker would be “too long” because prices are not constant.

“Of course, the discussions with the rural bankers will continue. And if we can find a tweak…that can help us achieve our objectives, to give them time, we are willing to look at that,” Mr. Medalla said. — Keisha B. Ta-asan