By Mark T. Amoguis, Researcher
IN its bid to boost financial inclusion, the central bank has allowed banks to set up dressed-down branches, which allow banks to design offices that would cater to low-income households as part of efforts to bring more Filipinos onto the formal banking system.
Last December saw the Bangko Sentral ng Pilipinas (BSP) sign Circular 987, which allows banks — from universal and commercial to thrift, rural, and cooperative — to set up branch-lite offices anywhere in the country. These can be placed in locations such as the marketplace, which would not only ward off the intimidating appeal that’s usually linked to a bank office, but also effectively extend full banking services to underbanked and underserved areas.
BSP Deputy Governor Chuchi G. Fonacier told BusinessWorld in an e-mail that the regulation enables more flexibility for banks to establish “fit-for-purpose” offices as well as fulfill the requirements that is commensurate to the banks’ level of operation.
A branch-lite unit is treated as a fully-operational bank branch, but are exempt from the rigid brick-and-mortar standards set under BSP’s rules in terms of look and feel.
“This flexibility hopes to enable banks to expand to new markets in a more cost-effective and targeted manner,” Ms. Fonacier said.
The central bank official explained that the branch-lite concept was expanded from what was then known as micro-banking offices (MBOs), which was, in turn, conceptualized to entice banks to expand access points to serve microfinance clients. The MBO, as a special type of an OBO (other banking office), was subject to less stringent requirements compared to a regular branch.
These units can accommodate regular banking and financing duties depending on the bank’s business model and assessment of a target market or clientele. Unlike the regular bank branch, however, branch-lites do not maintain their own separate books, but record transactions in the books of the head office or the branch to which they are annexed.
“With the emergence of digital technology, BSP recognized that the low-income and the traditionally underserved sector can become a target market not only by microfinance-oriented banks, but also the mainstream banks that are looking to grow their retail business and diversify revenue sources,” BSP’s Ms. Fonacier said.
“Enabling banks — regardless of existing client base — to expand reach more efficiently can promote greater financial inclusion,” she added.
BSP’s Ms. Fonacier also added that rationalization of the OBO/MBO guidelines is aligned with the liberalization of the branching regulation, citing for instance Circulars 902 and 929, which respectively lifted the moratorium on the establishment of new local banks and extended microfinance-oriented banks the option to convert to become regular thrift or rural lenders.
‘NOT ENTIRELY NEW’
For the Chamber of Thrift Banks (CTB), the branch-lites are “not entirely new distribution models.”
“The branch-lite units are presumably more cost-effective distribution mode compared to full branches because of lower license fees [and] processing fees,” CTB said in an e-mail interview.
“[The] [m]ain attractiveness lies in lower cost of setting up. The lower cost matches the lower revenue anticipated from targeted market segments,” it added.
Rural Bankers Association of the Philippines (RBAP) agreed, saying that branch-lites “can be simultaneous with branding and M&As (Mergers and Acquisitions).”
“It is a strategy for market development and penetration. It has become attractive because the requirements were simplified with a streamlined application process,” RBAP said in an e-mail.
“Banks will be better able to expand in areas which are unbanked and underserved, especially because the branch-lite units are easier to comply compared to putting up a branch,” RBAP added.
Processing fee for a bank branch can range from P12,500 to P200,000, depending on the income classification of the municipality. For the branch-lites, meanwhile, the processing fee can range from P5,000 (for 3rd to 6th class municipalities) to P10,000 (1st and 2nd class municipalities, and cities). This fee can be waived if the bank branch or branch-lite will be built in an unbanked location.
On the other hand, the branch/branch-lite licensing fee can vary depending on the bank’s category. Licensing fee per branch for a Universal and Commercial bank (U/KB) is worth P20 million; Thrift Bank (TB), P15 million; and Rural/Cooperative Bank (R/CB), P1.5 million. Meanwhile, branch-lite licensing fee for a U/KB is P5 million; TB, P3 million; and R/CB, P300,000.
“The flexibility accorded to the bank in the operational design and, consequently, the attendant cost of maintaining a branch-lite is the most important incentive for establishing one,” BSP’s Ms. Fonacier said.
“Branch-lites are not considered in the computation of the minimum capitalization requirement that is based on the bank’s total number of branches,” she added.
According to data sent by the BSP, out of 585 banks in the country, 156 banks have branch-lite units as of end-March. R/CBs have the most number of banks with branch-lites (120), followed by TBs (25), and U/KBs (11). All in all, branch-lite units numbered 1,690.
Ms. Fonacier explained that most of these branch-lites were converted from MBOs.
Under Circular No. 987, banks are given six months from date of the circular to convert existing OBOs, MBOs, and extension offices (EOs) into branch-lites. Within that period, banks only need to notify (for MBOs) or seek one-time approval (for OBOs/EOs) from the central bank of the conversion stating, among others, the board-approved activities and services that the branch-lite will offer to specifically defined market.
One of the banks that took advantage of this setup is BPI Direct BanKo, Inc. (BanKo), one of the microfinance arms of the Ayala Group that caters to the self-employed micro-entrepreneurs in far-flung areas.
With this specific clientele as the thrift bank’s focus, the branch-lite is the preferred arrangement in most areas, said Rodolfo K. Mabiasen, Jr., microenterprise loans head at BanKo, in an e-mail.
“We consider proximity to our target clients such as the wet market and other small business establishments. That makes us more accessible and approachable since some micro-entrepreneurs may be intimidated by traditional bank branches,” he said.
In the first half of 2018, BanKo opened 20 branch-lites nationwide: 14 in Luzon, five in the Visayas, and one in Mindanao, according to Mr. Mabiasen. The bank also converted 65 MBOs opened last year into branch-lites.
“For the rest of 2018, we hope to open 65 additional branch-lite offices: 37 in Luzon, 17 in the Visayas, and 11 in Mindanao,” BanKo’s Mr. Mabiasen said.
Meanwhile, Security Bank Corp. is also considering setting up branch-lites to expand its network in the unbanked areas.
“While we would be selective in establishing full-service branch licenses in strategic areas, branch-lite offices can complement our full-service branches by allowing us to have wider reach of the market and greater accessibility,” Security Bank Branch Banking Group Head Leslie Y. Cham said in an e-mail.
“With a more compact version of a brick-and-mortar branch, we can realize the benefit of a lower cost of operations and the flexibility to locate in busy and commercial areas with limited spaces,” he added.
“Typical bank office environment intimidates our clients, who are mostly Nanays from rural communities,” CARD Bank, Inc., a microfinance-oriented rural bank headquartered in San Pablo City, Laguna, said in an e-mail.
“With BLUs (branch-lite units), the office is just a typical house or a simple commercial space that makes our client feel comfortable as compared with bank branches with glass walls, wall paint and designs, air-conditioning, with full security and others.”
CARD Bank said it opened 28 branch-lites in the first half of the year. It also targets this year to open branch-lites in locations such as Quezon Province, North Cotabato, Compostela Valley, Baguio, Davao, Camarines Sur, Leyte, Western Samar, Bohol, Sorsogon, Oriental Mindoro, Davao Oriental, Antique, Biliran, Camarines Norte, and Masbate.
Other banks have likewise expressed interest in opening branch-lite units, among them were Lucio C. Tan-owned Philippine National Bank, Aboitiz-led City Savings Bank, Inc., Bank of Makati, (A Savings Bank), Inc., Gokongwei-led Robinsons Bank Corp., and Sy-led China Banking Corp, among others. These are seen as strategies for expansion in unbanked areas.
‘TOO EARLY TO TELL’
“Since it is still practically the transition period from the issuance of the Circular  in December 2017, it might be too early to tell how banks will position their branch-lites,” said BSP’s Ms. Fonacier.
She said that for branch-lites that were converted from MBOs, they are likely to be offering “at the very least” the same services offered such as servicing of deposit and loan accounts prior to conversion.
Still, the establishment of these branch-lite units remain crucial even as the BSP is pushing for digital finance, Ms. Fonacier explained, saying that this promotes financial inclusion by letting those who have no mobile phones or those who are resistant in going digital still join the formal banking system.
For CTB, branch-lites can become profitable as lower capital expenditures means lower investment requirements.
“The anticipated lower volume accounts and the technology-driven products will require less cash, but movement of cash values are anticipated to be faster,” CTB explained.
“New market will result in increase in loan portfolio and deposits. With it follows improvement in earnings and liquidity which can raise the capital adequacy,” RBAP said.
For BSP’s Ms. Fonacier: “Branch-lites can become the platform for banks to reach new clients, diversify revenue sources, or simply to operate more efficiently. All these can support bank’s financial performance and long-term sustainability.”