Rural banks still in the lending game

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By Lourdes O. Pilar
Researcher

RURAL BANKS began to sprout in the 1950s when the countryside lacked basic financial services, which prompted the government to set up measures to incentivize the establishment of such lenders by way of lower interest and other perks. Prior to this, the main sources of credit were moneylenders in the informal sector that charged very high interest rates. Convenient and secured payment facilities in many rural communities hardly existed.

However, issues of undercapitalization, illiquidity, and insolvency have led many of these banks to file for bankruptcy, prompting the central bank to tell these banks to shape up, or else face closure.

From a peak of around 1,040 in 1981, the number of rural banks in the country has been reduced to more than half, with several closures happening every year or so. The growing number of rural banks driven to bankruptcy led to initiatives such as the Consolidation Program for Rural Banks (CPRB) to encourage more mergers among lenders to fortify their financial footing.

“The unfortunate closure of some rural banks resulted to the reduction of the number of banks serving the market, but the joint enabling support of the Bangko Sentral ng Pilipinas (BSP) and the Philippine Deposit Insurance Corp. via the CPRB Plus with the specific push for merger and consolidation, coupled with other regulatory initiatives, has admittedly helped further strengthen the industry,” the Rural Bankers Association of the Philippine (RBAP) told BusinessWorld in an email.

The group cited BSP data explaining that while the number of rural banks’ head offices declined, the number of branches was on an uptrend from 2,956 as of March 2018 to 2,972 as of June 2018.




“In addition, the number of ‘branch lites’ and ‘agencies of banks’ allowed under BSP Circular Nos. 987 and 940, respectively, have scaled up (1,690 branch-lite units, 926 of which are rural banks and 138 micro-banking offices) the capacity of our rural banks to address the financial requirements of these farmers and fisherfolk,” RBAP noted.

In 2015, state agencies launched the CPRB, which aims to strengthen the rural banking system by way of consolidations. The initiative, which expire on Aug. 25, 2017, was extended until 2019 to prod more mergers among small lenders to fortify their financial footing. The revived CPRB program dropped the five-bank requirement in order to be eligible for the funding aid although merging banks still have to meet the required capitalization.

To date, there are four groups involving 18 rural banks under the revived CPRB program according to RBAP.

“Closures and consolidation of rural banks are meant to strengthen and improve the stability of the rural banking industry, and not weaken it. Accordingly, we do not believe such closures have negatively affected the rural banks’ ability to lend to farmers and fisherfolk. Well-managed and strong rural banks can be more responsive to the financing requirements of the rural clients,” said Pia Bernadette Roman-Tayag, Head of the BSP’s Financial Consumer Protection Department and Inclusive Finance Advocacy Office.

KNOWING THE MARKET
The rural banking sector held a combined P238.03 billion in assets, representing a 1.5% share of the Philippine banking system’s total assets of around P15.71 trillion as of the end of the second quarter according to BSP data.

Even with its relatively small size, the rural banking has the advantage of knowing their market in the countryside.

“While the unfortunate closure of some rural banks resulted to the reduction of the number of banks serving the market, it doesn’t necessarily end up to diminishing the ability of the remaining banks to lend to farmers and fisherfolk,” RBAP said.

“Considering that rural banks are strategically located in the countryside, they get to maintain foothold position over the agri-lending market. This is basically the edge of these member-banks of ours over the rest of the banks in the country,” RBAP noted.

“Because of their proximity to the farmers and fisherfolk, they get to immediately reach out to this specific client group and provide them the financial solutions they need.”

Rural banks could also offer services other than loans given their knowledge of their rural clients.

“Our member-banks can further assist them by establishing possible linkages with possible buyers of farm produce. There is always a huge opportunity for our member-banks to work with other merchants in the agricultural value chain to further improve farming business viability,” RBAP said.

“In addition, our member-banks can serve as their financial literacy mentors to also improve the skills of our farmers and fisherfolk in this aspect,” RBAP added.

BSP’s Ms. Tayag, concurred: “These [rural] banks are perceived to have comparative advantage in granting relationship lending to small-sized enterprises, including those belonging to the agriculture sector. For instance, big banks given their sheer size, have ‘standardized’ their lending process. On the other hand, small banks have the advantage of being community-based which afford them with more intimate information and insights about the rural clients,” she said.

“Such local knowledge can be particularly valuable in determining market opportunities and managing credit risk.”

Figures on compliance under the Agri-Agra Reform Credit Act of 2009, which mandates banks to allot at least 10% of total loanable funds for agrarian reform beneficiaries (ARBs) and 15% for farmers and fisherfolk, have shown that only rural banks, along with cooperative banks, have consistently managed to meet the quota while other banks fall short.

As seen in the previous quarter, rural and cooperative banks shelled out 35.64% of their total loanable funds as compliance to the law, allotting 11.2% of their available funds to the agra-component and 24.5% to the agri-component.

Even so, RBAP noted that the 10%- and 15%- cap on the agri-agra components, respectively, have “been a fence” for their member-banks.

“Apparently, it is more challenging to scout for agrarian reform beneficiaries in some areas than to generally find farmers. Having a 25% blanket requirement for lending to agriculture is definitely going to have its ‘liberalizing’ effect to our member-banks. In turn, this would mean having more clients to be openly served,” RBAP said.

RBAP was referring to a proposal to lump the agri-agra lending provisions into a 25%-blanket requirement for lending to the agriculture sector in order to allow for greater flexibility.

BSP’s Ms. Tayag noted the BSP’s reservation to the mandatory credit quota scheme “given its implementation challenges and potential negative impact on financial stability and consumer protection as reported in local and international research papers.”

Ms. Tayag likewise noted that while rural and cooperative banks have been meeting the 10% quota requirement for agrarian reform, their compliance rates has been on a decline to 11.18% in Q2 2018 from 13.97% in Q2 2017.

GETTING BETTER
RBAP reiterated that even with the decrease in rural bank head offices, the rural banking network in general “is growing significantly.”

Latest data from the BSP show the rural and cooperative bank group’s gross total loan portfolio as of June 2018 at around P135.94 billion, 4.6% higher compared to the figure as of June 2017.

BSP’s Ms. Tayag likewise noted the rural banks’ current upward trend, citing the increase of the group’s deposits by 4.8% to P169.6 billion versus the P161.8 billion in the same period last year as well as the number of deposit accounts to 8.18 million as of June 2018 compared to 7.37 million and 6.57 million in 2017 and 2016.

There was also “steady improvements” in the group’s capital adequacy ratio, which increased to 19.57% as of June 2018 versus the 18.32% in 2017 and 17.37% in 2018, Ms. Tayag said.

“In terms of profitability, liquidity and asset quality, however, rural banks’ performance for the same periods has not shown marked improvement,” noted the central bank official.

Selected Performance Indicators of Rural Banking Industry

“Overall and in the long term, we see that consolidation and closures will bring about greater banking stability and strengthen rural banks’ ability to effectively respond to the dynamic operating environment.”

For RBAP, they believe there is “still huge room” for their member-banks to expand their respective agri-loan portfolios: “The demand-supply data that we have from the Department of Agriculture and the BSP are apparently telling us to reach out further to this needing farmers in the countryside,” RBAP said.

The group also cited the passage of Personal Property Security Act (Republic Act 11057) into law as a “confidence booster” of lending towards the agriculture sector. The law increased the list of acceptable personal properties that small businesses can use as loan collaterals besides real estate.

“Our farmers can even make use of their future crops, produce or livestock for this purpose. This should, in effect, encourage these client groups to be on-boarded onto the formal banking scenario,” RBAP said.

They also mentioned the credit guarantees offered by the Agricultural Guarantee Fund Pool (AGFP) program and the crop insurance in the cart of the Philippine Crop Insurance Corp. (PCIC). The AGFP covers 85% guarantee to private financial institutions against default risks of farmers while PCIC gives insurance protection to farmers against certain type of damages and losses to their agricultural assets.

The rural banks have also taken step to digitalize their operations to improve their services.

“To sustain its ability to provide better access to credit in the countryside, rural banks need to effectively adopt and leverage technology. Digitalization will allow rural banks to operate more efficiently and develop contextualized, more convenient and affordable financial services for their clients,” BSP’s Ms. Tayag said.

Ms. Tayag said that the BSP has promoted digitalization to help address the high transaction costs in lending to the agriculture sector.

“The BSP issued a package of policies for digital financial inclusion which are particularly relevant and designed for rural communities… These include polices that aim to: 1.) enable ease in the opening of basic, no-frills accounts; 2.) expand banking access through ubiquitous, low-key cash agents; and 3.) develop and interoperable retail payment system as a platform for innovative banking products,” she explained.

These policies, Ms. Tayag said, enable lenders to develop loan products that “are more aligned with the profile and preferences of agri workers and enterprises.”

Aiding in the digitalization process, Ms. Tayag said, is the Philippine ID system that is expected to further expand and deepen digitalization of financial services benefitting the underserved and financially excluded.