The Market Monitor Minding the Nation's Business
By Jerry Maglunog
The strict capital requirement that the Bangko Sentral ng Pilipinas (BSP) had imposed on rural banks (RBs) are affecting what are considered the last resort of people in the countryside to gain access to the financial services of the government.
BSP Deputy Governor for the Supervision and Examination Sector Nestor Espenilla Jr. said the intention of Circular 854 raising the capitalization for small banks is to let the RB industry have better service to depositors, as bigger capital means bigger leeway to overcome risks.
According to Espenilla, RBs that will not be able to increase paid-up capital only need to write an explanation addressed to the Monetary Board. It will then review if the explanation is valid or not.
“It’s not automatic. Banks can explain and it will be evaluated if sanctions are still warranted. Capital build up plan is also possible,” Espenilla said.
The memorandum issued early this year raised the minimum paid-up capital of all RBs, depending on the number of branches and places where they do business.
Small banks take the circular as a message from the BSP for small banks to consolidate.
Prior to the creation of the new general banking act in 1993, the framework for RBs was already in place, since it was created during the time of former President Ferdinand Marcos in the early 1970s.
The framework was the considered a model for other developing countries for financial inclusion.
That time, Marcos, who came from a remote barangay in Batac, Ilocos Norte, wanted that at least one RB to be set up in every municipality, so that people will have access to entities that offer loans with low interest.
However, Marcos’ dream for RBs to become a major force in the financial sector failed to take off, due to many factors, such as the unstable peace and order situation in the countrysides, mostly in rebel-held areas in the Cordillera, Southern Mindanao and even Rizal province.
“Long before financial literacy was a byword, RBs were already at the forefront of providing low interest loans to people,” said Ives Nisce, president of Rang-Ay Bank, one of the top RBs in assets.
The inability of Marcos to let the smallest categorized banks to prosper, coupled with the unprofessional way of managing many RBs, has led the industry to shrink further instead of growing.
From more than 700 banks, the number of smallest classified banks now are only 535. Of this number, 70 percent have three branches or less, thus, making the reach of many banks in this category very limited.
“We failed to grow because of the very limited access of RBs to many capital-raising activities,” Edward Leandro Garcia, president of Quezon Capital Rural Bank and former Rural Bankers’ Association of the Philippines president, said.
Just last October, RBs industry suffered another blow after the BSP ordered them to raise their minimum paid up capital. Circular 854 covers all banks, not just RBs.
But among the bank classifications, it was the second increase in paid-up capital for RBs in less than five years.
Under Circular 854, an RB with just one branch in Metro Manila needs P50 million paid-up capital. The increase is more than thrice the original capital.
For those that will open a single branch in any city to third-class municipalities, the minimum paid up capital will be P20 million, while those at fourth-class to sixth-class municipalities, the paid up capital is now P10 million.