Rural banking woes

Last Aug. 1, the Bangko Sentral ng Pilipinas ordered the closure of another rural bank—the Rural Bank of San Jose del Monte in Bulacan—due to insolvency. Meaning, the bank’s assets had fallen short of its obligations to depositors. The bank was placed under the receivership of the state-run Philippine Deposit Insurance Corp. (PDIC), which is now processing 3,855 deposit accounts—or 98 percent of the bank’s total accounts—with balances of P500,000 or less and, therefore, are fully covered by deposit insurance. The total insured deposits amount to P334.1 million, or 91 percent of the bank’s total deposits. That is a lot of government money going down the drain.

The Rural Bank of San Jose is the 12th placed under PDIC’s receivership so far this year. In 2012, 23 rural banks were padlocked by the Bangko Sentral and PDIC spent nearly P4 billion on insurance claims against those financial institutions. Going further back, 25 rural banks were closed in 2011; 21 in 2010; and 31 in 2009, six more than the 25 failed banks in 2008. In all these closures, PDIC had to pay billions of pesos in insurance claims.

Let’s look at the problem from another angle: The non-performing loans (NPL) ratio of the rural banking sector rose to 10.65 percent in 2012 from 10.32 percent the previous year. In absolute amounts, this was equivalent to P12.22 billion worth of bad loans. In comparison, the much bigger universal and commercial banks improved their NPL ratio last year to a record-low of 1.87 percent.

There are more than 500 rural banks catering mainly to the needs of those in the provinces, who have no access to the bigger banks. Only a small portion of this banking segment appears to be the weakest link in the local financial sector, the Bangko Sentral says, noting that problematic rural banks are the exception rather than the rule. Nevertheless, the government—through PDIC—has had to spend billions of pesos when it had to assume the remaining assets of failed banks and shoulder the payment of all their liabilities.

Making things worse is that the closure of many rural banks was due mostly to capitalization and mismanagement problems, the Bangko Sentral said, though some were triggered by unsafe and unsound banking practices.

Because of the spate of closures in the rural banking sector, the Bangko Sentral and PDIC in 2010 moved to give incentives to healthy rural banks that will acquire their troubled peers. The scheme, called Strengthening Program for Rural Banks (SPRB), was expanded in September last year to include in the list of those eligible for incentives commercial and thrift banks. The new and expanded version, called the “SPRB Plus,” is in effect until December 2013.

But the families owning the rural banks seem not really sold to the move to include the commercial and thrift banks to the SPRB Plus program. And yet the program was formulated precisely due to a lack of takers from the rural banking industry. Most of the strong rural banks were not interested in acquiring a weaker industry player, regulators had found out. This, even though the incentives being offered to potential “white knights” include loans to help cover capital shortfalls and improve operations, temporary regulatory relief on capitalization and branching requirements, condonation, restructuring and waiver of past-due rediscounting, and emergency loans. Other owners simply did not want new investors to come in.

Rural bank owners should listen to Bangko Sentral Governor Amando Tetangco. In his speech at the 60th annual convention of the Rural Bankers Association of the Philippines last June, he said: “Inclusive growth is possible only if countryside development is given the support it needs. Embedded and part of the communities where they operate, rural banks are in the best position to help spur rural development. Rural banks have a crucial role to play in national development as 40 percent of Filipinos live outside urban areas. I say this because our efforts to promote mergers and consolidation have yet to produce the results we look forward to. While we continue to receive applications for incentives under the [SPRB Plus], the reality is [that] less than 20 percent of available funding for capital buildup has been utilized.”

Tetangco is looking in the right direction: For rural banks to achieve their full potential, there must be a shift in the mindset of their owners toward mergers and consolidation. There is no other way.