MORE than half of rural banks are gone. But Antonio O. Pasia of the Rural Bankers Association of the Philippines (RBAP) sees a half-filled glass.
The disappearance of some rural banks (RBs) is taken also as a precaution as the Central Bank has urged them to merge, or else sink into closure from capital inadequacy or tiny market share. Meanwhile, cloud computing and digital banking are previewing an alternative expansion to widen access to credit and ensure payments in the countryside.
“[RBs] have their own challenges, but they are still alive,” Pasia, RBAP president, told the BusinessMirror. “In fact, along with cooperatives, RBs are the only financial institutions that have complied with the loan ratio for farmers that is mandated by the Agri-Agra law.”
From its highest growth of 1,081 in 1981, rural banks dropped to 471 with 21 closures at the end of last year and 24 in 2015, according to the Bangko Sentral ng Pilipinas (BSP). In the first three months of this year, three rural banks followed and stopped their operations in Iloilo, Batangas and Camarines Sur.
“We wish to point out that although the number of rural banks declined from 695 as of end-2006, the number of offices of rural banks increased to 2,611 from 1,964 for the same period,” BSP Gov. Nestor A. Espenilla said.
Consolidation tack
TO enhance the viability of countryside lenders to pool more financial and management resources and expand their market reach, the BSP launched in 2015 the Consolidation Program for Rural Banks (CPRB).
The program, in cooperation with the Land Bank of the Philippines (Land Bank) and the Philippine Deposit Insurance Corp. (PDIC), required rural banks to submit by August 25 their letter of intent to merge with up to four other rural banks in the region or area where their head offices or majority of branches are located.
The resulting single bank must have a minimum risk-based capital-adequacy ratio of 12 percent and a combined unimpaired capital of at least P100 million.
Through the CPRB, the government institutions provide the banks advisory on finances, business operations and capacity building.
The Countryside Financial Institution Enhancement Program funds the service with 80 percent allotment on its first year and 20 percent from the participating rural banks.
The CPRB replaced the Strengthening Program for Rural Banks (SPRB). Began in 2010, the SPRB authorizes rural banks to build more branches, merge and acquire bank or nonbank third-party investors.
“The decision, however, to enter in a merger remains a bank decision depending on its strategic circumstances, and on whether their corporate objective is to strengthen corporate viability, management and governance, as well as expand market reach,” Espenilla said.
Lower CARs
LOWER risk-based capital-adequacy ratio was the main reason the central bank forced RBs to close down.
The ratio is computed by dividing tier-1 capital and tier-2 capital over risk-weighted assets. Tier-1 capital includes more cashable common stocks, while tier-2 capital includes supplementary cash from reserves, debt and preferred stocks.
A higher ratio means more capital can easily absorb bank losses to preserve the depositors fund and maintain operations.
Since 2012 the ratio for rural banks has declined from 20.69 percent to 18.27 percent in September last year. The BSP’s latest records show the rate slowed down with 17.62 percent in 2008, 17.97 percent in 2009, 19.39 percent in 2010, 18.08 percent in 2014 and 18.06 in 2015.
However, with the addition of branches in 2016, total loans and deposits of rural banks increased. In 2006, under Circular 522, the BSP also allowed rural banks to operate foreign currency-deposit units to encourage more savings from remittances of overseas Filipino workers.
“The total loan portfolio and total deposits of the rural banking industry increased to P115.2 billion and P140.0 billion as of end-2016 from P77.1 billion and P89.0 billion as of end-2006, respectively,” Espenilla said.
Main clients
THE RBAP supports the consolidation program, especially for struggling rural banks, to infuse more credit for financing farmers who are their main clients.
“No more RBs will be established, but there will be more mergers because the important thing is for rural banks to continue existing rather than disappear completely,” Pasia said.
In April the Rural Bank of Sibulan Inc. was the first to be revived through its merger with the Dumaguete City Development Bank Inc. in Negros Oriental.
Filidian Rural Bank of Antipolo Inc. agrees that no RBs will be added into the system as it, instead, sees merger as a way for bigger commercial banks to engulf banks in the countryside.
The rural bank has one branch in Quezon City and was originally based in Davao.
“For most rural banks, I think the aspiration is to get bought out,” the bank’s president Hiro A. Budharani said.
Documents galore
BUDHARANI believes documents and regulations that are applied by the BSP to commercial banks (KBs) must not cover RBs, which he said have fewer personnel and information-gathering resources.
“It takes away the speed we provide. Half of our employees are just reporting to the BSP,” Budharani said. “It can also take away the enthusiasm in rural banks when you have a lot of documents to require clients and report everything that you do. But we just have to comply.”
An RB executive who declined to be named believes RBs “are overregulated.”
“We want to be more personal to our clients, but we cannot because of the strict requirements,” the person familiar with RBs said. “These make our operations and services less efficient.”
According to BSP Circular 855, dated October 29, 2014, borrowers must submit audited financial statements, including the stamped income-tax returns (ITRs) by the Bureau of Internal Revenue, as primary document for credit evaluation. The circular provides guidelines on sound credit-management practices.
For bank performance evaluation, the BSP has also required timely submission of complete and accurate reports on approved loans, deposit base, capitalization and corporate governance rules.
Based on Circular 963 issued last month, rural banks are fined P450 for each error or delayed submission and P150 for either violation in their secondary reports. The amounts are tripled for noncompliance and nonsubmission.
Farm loans
THE BSP has advised that RBs must improve systems and acquire more resources to be fully compliant with industry regulations by January 1 next year.
However, the RBAP said the documents, including collateral, in loan applications have long hindered RBs to provide more credit. Thus, it said many farmers still resort to informal or “5-6” lenders who impose up to a 20-percent interest rate.
In March the Securities and Exchange Commission (SEC) warned 300 unauthorized lending companies, which is about one-third of the remaining RBs, to acquire a certificate of authority to lend.
“Many farmers do not file income-tax returns because they do not have regular incomes. In fact, many of our farmer clients mostly [request for a] loan for short-term purposes,” RBAP Executive Director Dennis Emmanuel C. Peña said. “These are [for their] immediate needs, such as tuition, food and medical expenses.”
However, the RBAP said long-term capital, especially postharvest facilities that include resources for construction, acquisition and repair of equipment and buildings for production, processing, storage and marketing, is mostly needed by farmers.
Major considerations
PASSING by rustic views, “it is not uncommon to see rice grains laid out [in the] open on the streets,” Pasia said.
“Rain can spoil their produce and render them unprofitable,” he added. “Farmers then have to wait for another three months or longer because weather can be unpredictable.”
This situation is a major consideration of lending by RBs, according to Agricultural Guarantee Fund Pool Executive Director Edna A. Atienza.
“Formal lenders consider unsecured loans risky because typhoons are as many as the letters in the alphabet, and family emergencies mean no payment of loan and prices of produce are low at harvest time,” Atienza added.
Thus, despite the permission by the BSP for foreign banks to increase ownership of domestic RBs, the RBAP said only two have foreign ownership.
According to the amended Rural Bank Act of 1992, foreign individuals can own up to 60 percent of voting stock of rural banks from 40 percent, provided aggregate foreign-owned voting stock does not exceed 60 percent of the outstanding voting stock.
On the other hand, foreign banks can own up to 100 percent of their voting stocks based on RA 10641 or the Act Allowing Full Entry of Foreign Banks in the Philippines.
Going in
LAST year, TPG Growth, an American equity firm with $7 billion in assets, acquired 40-percent share of One Network Bank through BDO Unibank Inc. (BDO), the country’s biggest lender.
Two years earlier, the Sy-led BDO bought 99.59 percent of the total shares of One Network Bank Inc. (ONB), which is the country’s largest rural bank with 105 branches. ONB had P28.1 billion in assets, P19.7 billion in loans and P17.9 billion in deposits in 2014.
The takeover enabled BDO to reach clients in Mindanao, where 80 percent of the branches of the Davao-based ONB are located.
According to Espenilla, the acquisition of RBs by bigger banks “does not necessarily result in decreased funds available to farmers as it only involves change in ownership.”
Thus, the BSP has also included policies that replace the documentary requirements with alternative proofs showing borrowers’ capacity to pay.
Under a circular, the BSP allows rural banks to create their own sound credit-risk assessment and management measures to protect their depositor funds and, at the same time, provide additional credit to farmers.
“Banks are, thus, afforded the flexibility to use any financial data or information deemed relevant in their credit evaluation provided these are properly documented,” Espenilla said. “The rationale is to give banks more leeway to lend to farmers who are creditworthy but may not necessarily have collateral, particularly real estate, which could unduly restrict their access to credit.”
Agri-Agra law
UNDER the Agri-Agra Credit Reform Act of 2009, banks must lend at least 25 percent of their loanable funds to agriculture and agrarian reform beneficiaries.
According to the law, 15 percent must be allotted to agriculture and 10 percent to agrarian reform. As penalty, banks incur 0.5 percent of the unfulfilled credit amount to be computed quarterly a year.
RBs exceeded the ratios last year with P14.582 billion, or 28.79 percent, in agricultural loans, and P8.327 billion, or 16.44 percent, in agrarian loans.
KBs fell farther with only 0.74 percent for the former loan, but surpassed the latter with 12.75 percent.
Ninety percent of the collected penalties will be equally divided to the Agricultural Guarantee Fund Pool (AGFP) and Philippine Crop Insurance Corp.
The AGFP also absorbs the 2007 surplus of government financial institutions and government-owned and controlled corporations for rice and food production, as provided by the mechanisms of the Department of Agriculture and the LBP in Administrative Order 225-A of 2008 of former President Gloria Macapagal-Arroyo.
With the fund pool, farm loans unbacked by collateral can be covered.
However, to ensure compliance with the credit ratios, AGFP suggests steeper penalties up to 2.5 percent as stated in House Bill 3522 by Enrico A. Pineda and Michael L. Romero of the House of Representatives. The bill has remained pending since 2006.
Reach expansion
TO further expand the market reach of rural banks, the BSP partners with private telecommunications firms to extend financial services in the countryside through cloud computing and digital banking on mobile phones.
In 2013 the BSP introduced cloud technology that shares and streamlines information and transactions through data-storage centers connected by the Internet.
The data include retail-payment and credit histories of borrowers from financial institutions and commercial firms that show their cash flows.
According to the BSP, over 500 rural banks have little or no integrated computerized systems for their core banking processes, while 102 have no system at all.
This year, one rural bank began using the cloud to reach more farmers who may lack ITRs or collateral, but have the capacity to pay as indicated by their load subscriptions for mobile phones and online purchases on the device.
With the technology integrated in the shared services system of rural banks, the BSP aims to build data centers, digitize transactions, provide a credit scoring or level of credit risk of a borrower, secure information and design products for rural banks on a par with bigger commercial banks.
“This is a welcome development as the proposal would be beneficial in enhancing information-technology capabilities of smaller RBs to cope with increasing competition, regulation and market demands,” Espenilla said. “In line with this initiative, one RB is undergoing pilot implementation of cloud-based core banking solution. The BSP is closely monitoring the pilot program, so that the RB is properly guided as to the necessary control measures, robustness and other risk management mechanisms when using cloud-based solutions/infrastructure.”
Fintq, Lendr
ALONG with the launch of the National Retail Payment System (NPRS) in 2015, the BSP partnered with Fintq, a subsidiary of PLDT Inc., to create Lendr.
The NPRS allows cashless transactions through digital payments and fund transfers among banks. According to documents, Lendr is a one-stop loans shop for all mobile networks and participating banks where interested rural banks must sign with the RBAP for a free three-week platform setup.
The digital and financial technology platform offers immediate loan-approval notifications, 24/7 technical support, all-in-one Lendr account and a console for loan updates and management.
With mobile phones, clients can create Lendr accounts, select lending partners and submit loan applications online. Credit becomes claimable at branches or withdrawal points after at least two days.
According to Lito Villanueva, managing director and CEO of Fintq, the company has disbursed over P20 billion in loan volume in the past two years.
“While we have just started with both SME/business and agriculture/crop loans, we are projecting that both would account for more than 20 percent of such volume or approximately P4 billion,” Villanueva said. “So far, we have seven rural banks offering such loans.”
In June Fintq added five partner rural banks in the Visayas to its 50 global partners, he added. Villanueva claims over 40 banks expressed interest to join Lendr during the RBAP annual convention in May.
e-Banking
ACCORDING to Villanueva, Fintq plans to attract over 200 rural banks and reach P30 billion in loan releases this year. He said Lendr receives about 2,000 account registrations a day.
At present Fintq is the first and only BSP-approved cloud-based digital platform lender that has full coverage of the provinces, 93 percent of cities and 14 percent of municipalities.
According to its survey, 80 percent of its borrowers are located in the provinces, and, among them, 47 percent apply loans beyond banking hours.
“Rural banks know that competition will always be there, and it is imperative among them that the only way to arm themselves is to be digital as well, the quickest possible way,” Villanueva said. “The realization that neither the fintechs [financial technologies] of this world nor any other bigger banks are not really the ones providing such competition, but the consumer themselves who dictate what and how banking services best serve them.”
“Note that the key to keep one’s relevance is future-proofing one’s business. One must be ready with the near-future clients,” he added. “You must be equipped with the wherewithal to ensure that you are ready to serve the children of your customers today.”
The BSP said there are 51 RBs offering electronic-banking facilities and two RBs that operate as electronic money issuers would start operating by the end of this year.
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