New capital rules could spell doom for rural banks

AS THE PHILIPPINES starts to recover from the pandemic-caused recession, the Bangko Sentral ng Pilipinas (BSP) plans to hike the minimum capital requirement of rural banks in a bid to strengthen and enhance the capacity of these small lenders which could spell the doom for some of them.

In a draft circular, the central bank sought to raise the minimum capital requirements for rural banks to P60 million (head offices and banks with less than five branches) up to P200 million (more than five branches). This excludes the lenders’ 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.

The planned adjustment of required capital for smaller banks forms part of the initiatives under the Rural Bank Strengthening Program (RBSP), which was approved by the Monetary Board last March 3.

The RBSP was developed to enhance the operations, capacity, and competitiveness of rural banks. It is composed of four key elements: strengthened capital base; holistic menu of five time-bound tracks, all aimed at ensuring that rural banks that continue to operate have adequate capital to support their operations and effectively comply with regulatory expectations; incentives and capacity building interventions to promote successful undertakings; and review and enhancements of existing regulations to ensure consistency in policy approach and direction.

Under the strengthened capital base, the central bank created five tracks under the program that would encourage the promotion of a strong capital base for banks. These five tracks were merger/consolidation; acquisition/third-party investment; voluntary exit/upgrade of license; capital-build up program; and supervisory intervention.

Furthermore, this program aims to aid the challenges that rural banks’ face in terms of enhancing their risk management systems; upgrading resources and managing operational costs; meeting prudent standards; and accelerating digital transformation, among others.

INCLUSION INTERRUPTED?
With its primary objective of meeting credit needs and providing affordable financial services to the rural population of farmers, fishermen, and merchants, the new minimum capital requirement would push the rural banks to close their doors.

This move of the regulators will stunt the financial inclusion initiatives in the rural areas, Rural Bankers Association of the Philippines President Albert T. Concha, Jr. said.

“We find the proposed amounts too high given the BSP concerns that the increase in capital seeks to address… The increase should be aligned to the needs and realities of each rural bank,” Mr. Concha said in an e-mail interview.

Mr. Concha said the rural banks’ hiking of minimum capitalization should not be across the board, but should consider each lender’s market availability, local economy, and operational requirements.

“A look at the annual 2019 to 2021 per capita local GDP (gross domestic product) shows that an increase of the requirement to P60 million and P200 million is unwarranted as the local economic activity cannot support said capital and the market to lend to simply does not exist,” he said.

The current RBSP is “better” compared to the previous strengthening programs in the past, except for the proposed hike in minimum capitalization requirement, Mr. Concha said.

Further, he expressed concerns on the deadline that was given to them for the compliance of amended minimum requirement, noting that “rural banks are still recovering from the losses of the pandemic and the timeframe proposed of three years is too short a time to work on capital buildup of that amount.”

For her part, Guagua Rural Bank, Inc. Chief Operations Officer Elizabeth C. Timbol said it would be wise for the BSP to extend the compliance period to 10 years to give rural banks ample time to raise a large amount to meet the new minimum capital.

“For if the smaller banks become big, they will surely cater to larger markets and the unbanked market will no longer be reached and will then remain unbanked,” Ms. Timbol said in an e-mail.

Rural banks shall be given three years from the draft circular’s effectivity to meet the revised minimum capital requirements.

There were 15.90 million rural bank depositors as of end-March with a total of 16.23 million accounts, central bank data showed. The bulk of them — around 13.91 million — have account values amounting to P5,000 and below.

“With account values falling below P5,000 per depositor and the limited number of depositors available per community, we highly doubt that commercial or thrift banks would be interested to open and operate branches where single-unit rural banks have decided to close shop,” Mr. Concha said.

“This will stunt the financial inclusion initiatives in the countryside,” he said.

Early this year, the BSP has launched a six-year financial inclusion plan that aims to onboard unbanked adult Filipinos who belong to small businesses and agriculture sectors. The National Strategy for Financial Inclusion 2022-2028 is an update to a similar plan in 2015. The central bank eyes to onboard 70% unbanked Filipinos by 2023.

Notably, Ms. Timbol commended the program which sought to boost the resilience of rural banks in the countryside.

“The rural banking industry has always been resilient especially during challenging times, and we remain relevant in the respective communities we serve. With the BSP’s RBSP, it aims to provide strategic and policy direction in developing a sustainable capacity-building program for the RB (rural bank) industry. Our mandate to help develop the countryside and literacy for all Filipinos is close to our hearts,” Ms. Timbol said.

In terms of developments in digitization efforts of rural banks, according to Mr. Concha, some of rural banks has embraced online mobile banking and the National Retail Payment System — a policy and regulatory framework that aims to provide direction in carrying out retail payment activities through BSP-supervised financial institutions (BSFIs).

Meanwhile, a large number of rural banks have adapted technology in its back office, altering its core banking systems, digitization of records, and accelerating its internet connectivity.

“We continue to support the micro, small, and medium enterprise (MSME’s), farmers and fisherfolk, and with rural banks going digital, we enjoin the local government units in the disbursement and collection of payments through our digital platforms. We continue to be strong partners with the government in promoting financial inclusion even in far flung areas in the countryside,” Ms. Timbol said.

IMMINENT CLOSURES
However, Mr. Concha expressed a gloomy outlook with the amendment of capital requirement, citing possible closures of multiple rural banks in the countryside.

“With RBSP and the increased capital stock requirement, if implemented in its current form of P60 million, we foresee many single unit RBs to voluntarily surrender their licenses and severely crippling access to banking and credit in the countryside,” he said.

Since the start of the pandemic, the BSP has closed a total of 21 rural banks while two rural banks voluntarily surrendered their banking licenses. Meanwhile, the regulator has processed 18 transactions for mergers, consolidations, and acquisitions — nine of these were rural banks.

In addition, a total of 30 rural banks have undergone mergers and consolidations under its previous program, the Consolidation Program for Rural Banks (CPRB). Of the 30 rural banks, 16 have been absorbed by thrift banks while the rest were merged with other rural banks.

Amid the challenges that the rural banks are facing, Ms. Timbol expects the rural banking industry to be more secure and strong. However, she believes that the new minimum capitalization requirement should not be the priority in these times when the local economy is still in the recovery period from the impact driven by the global pandemic.

“The rural banking industry will definitely be more stable and will continue to be a strong partner of the government in promoting growth and development in the countryside. With the assistance of the BSP, rural banks are poised for greater heights in bringing credit to the underbanked and developing entrepreneurial activities in the countryside,” she said.

“However, this is not the best time to impose increase in capitalization while everyone is recovering from the pandemic because many RBs, especially from the remote areas, need to focus in helping in the countryside development,” Ms. Timbol said. — Mariedel Irish U. Catilogo