Rural banking industry on execution block?

Is the Bangko Sentral ng Pilipinas (BSP) slowly killing the rural banking industry? Let us analyze and validate or invalidate latent fears.

There are five core principles where money, banking and financial markets are concerned.

The first is that time has a monetary value. The second: Risk requires compensation. The third: Information is the basis for decisions. The fourth restates the principles of a market economy that determine prices and allocate resources accordingly.

The fifth is that stability and consistency are paramount. For authorities in an industry as heavily regulated as banking and finance, this is the most important.

Up until 10 years ago, at the nadir of the BSP’s regulatory powers, erring banks got away with mere raps on the knuckles for even the most serious infractions. Notably, system-wide bank failures dovetailed with the 1983 financial crisis. On a smaller scale, erring rural banks often ignored BSP audits and audit findings, focusing rather limitedly only on the Manual of Banking Regulations and addressing only its letter and word.

The BSP was viewed as a “paper tiger.” While indeed there was a spattering of bank closures precipitated by bank runs, by the time the public realized the full extent of a rural bank’s predicament, aberrations would have festered and worsened beyond salvation.  It was an era of regulatory laxity, accommodation and fraternization.

The Legacy scam changed everything.  Rediscovering a spine and growing a pair of walnuts, authorities applied full regulatory powers to unravel the Gordian knot of dummy trusts and eventually mete out penalties as the pendulum swung in the opposite direction.

In certain instances, walking tall and wielding a big stick may be justified. Failing to extract the Philippines from the money laundering blacklist of the Financial Action Task Force—a conditionality essential for an investment upgrade of debt papers—authorities sought assistance from the International Monetary Fund.

Help arrived, albeit entering through the service entrance among garbage bins and dumpsters. A parachute consultant’s advice eventually carried so much weight that it gave rise to draconian measures where the BSP’s curative “Prompt Corrective Action” (PCA) program—a therapeutic halfway house for ailing banks—transformed into an instrument for harassment.

Against errant banks, the heavy-handed application of the PCA may be justified. But against banks inadvertently weakened by undercapitalization, or anemic Quick Asset ratios?

Without benefit of an explanation of the PCA mechanics, banks were summarily shoved onto the execution block for the smallest issues. Some were coerced into impossible three-year undertakings, little realizing that the handcuffing ultimately led to death row.

The next was the coup de grace. Authorities virtually disenfranchised rural banks by precluding critical revenue-generating activities allowed other banks.  Effected by contracting inexperienced accountants who know little to nothing of banking and arming trigger-happy greenhorns with deadly high-caliber audit powers, the scheme to purge the rural-bank population to 200 catalyzed a virtual genocide. Nearly half of all rural banks were forced under the PCA, there condemned even for curable minor lapses.

The result: industry-wide frustration and disgust, and grave concerns for the industry’s future.

Despite the criticality of financial inclusion, that of providing basic banking to the unserved and underserved, the overwhelming disenfranchisement of retail banking institutions upon which financial inclusion is founded results in economic failures in the countryside where these matter most.

Unfortunately, current jurisprudence and pending laws all but ensure even darker prospects.

Because the courts allow authorities wanton police powers to summarily close banks without prior due processes, arguing that those are not denied even when applied after the fact, such a tenuous fiat nevertheless violates basic tenets on presumptive innocence.

Moreover, a pending bill in the House of Representatives seeks to fund bank regulators personally involved in lawsuits while a bill in the Senate seeks immunity for regulators. Imagine the moral hazards of self-proclaimed infallibility. Imagine also the floodgates torn open should other agencies, including those complicit in the controversies involving the Priority Development Assistance Fund and the Disbursement Acceleration Program, argue for similar immunities.

A third bill now at the Senate forces banks to disclose confidential client information beyond the provisions of the Banking Secrecy Act. Already, the Philippines has among the lowest national savings rates in the world. Those could simply dry up.

After the Legacy bank scandal, it is understandable that authorities should be inclined to impose tighter controls.

But state strangulation is another matter. The scandals worsened because the authorities had been remiss and uncoordinated. Issues fell in the cracks among the Securities and Exchange Commission, the Insurance Commission and the BSP. To penalize the industry for its regulatory lapses is not only unfair, it also reeks of regulatory myopia—shortsightedness that may very well kill the critical rural banking industry upon which necessary financial inclusion and countryside development hinge.

Dean dela Paz is a former investment banker and a consultant to the Joint Congressional Power Commission. He authored a book on energy governance tool kits and teaches finance, investment mathematics, and corporate strategy.