RURAL BANKS with a lower asset base are likely to be more affected by tighter monetary policy, especially in terms of lending, a study by the Bangko Sentral ng Pilipinas (BSP) found.

A BSP working paper titled “Heterogenous Impact of Monetary Policy on the Philippine Rural Banking System” said highly capitalized rural banks are more inclined to protect their capital than expand their lending portfolio in cases when the central bank raises rates.

“[L]ending of rural banks with smaller asset base is adversely affected during period of contractionary monetary policy whereas higher asset base of larger banks enables them to insulate their bank lending activity from the impact of contractionary monetary policy,” it said.

“This is not surprising since smaller rural banks also presumably face tougher competition from branch network and branch-lite operations of bigger universal and commercial banks as well as from government lending programs,” it added.

The study looked into balance sheet and profitability indicators including return on assets and net interest margins of some 609 head offices of rural banks from the first quarter of 2010 to the second quarter of 2018. The said period saw the Monetary Board hiking benchmark rates by 50 basis points in 2011 and 2014.

The BSP noted the dataset has an “unbalanced panel data structure” as the industry saw some closures and mergers and as some rural banks were upgraded or created during the period.

During the period, the study also found rural banks on average were able to keep their capital adequacy ratio (CAR) above the 10% minimum required by the BSP. Moreover, net interest margin was also “quite high” at 10.6%.

“The encompassing reforms in the regulatory milieu such as the introduction of Basel regulatory standards, the Consolidation Program for Rural Banks, the establishment of microfinance business offices, and branch lite concept in banking, among others, may have spawned differential impact of monetary policy on the credit intermediation function of rural banks,” the study said.

As of end-June, rural and cooperative banks recorded consolidated total assets worth P271.9 billion.

Amid the coronavirus pandemic, rural lenders’ gross nonperforming loan ratio stood at 13.47%. This, as bad loans accounted for P19.93 billion out of the total loan portfolio worth P147.93 billion.

At end-2019, rural and cooperative banks logged a CAR of 19.46%. — L.W.T. Noble