A break for our rural banks

FINALLY, the country’s rural banks can play a greater role in national development after the House of Representatives opened the door to the entry of foreign equity in the provincial-based financial institutions.

The House recently ratified a bill allowing foreign ownership of rural banks ranging from a minimum of 40 percent to a maximum of 60 percent. The floor and ceiling in ownership was actually based on the Senate version of the bill and should not raise any serious objections from the banking industry.

The bill amends Republic Act 7353 or the Rural Banks Act of 1992 and is one of the final bills passed by the 15th Congress. President Benigno Aquino 3rd is expected to sign the bill into law soonest.

For the longest time, the country’s rural banks had been left in the doldrums. They were left behind by the big savings, commercial and universal banks. Their most common and biggest problem was that they were mostly family- owned enterprises with little or no access to large amounts of cash to lend to their clientele. Yet these rural banks are where they are needed most, in the provincial areas where small businessmen, farmers and fisherfolk are usually in dire need of loans to finance their activities.

Without an easy source of funds, they would end up getting bridge financing from informal lenders, AKA fivesix. These are the financiers who charge usurious rates but who do not require too much in terms of documentary requirements.

The easy availability of ready cash is something that the bigger Metro Manila-based banks’ provincial branches could match, but not without the rigorous paperwork that caused most borrowers to look elsewhere for quick loans.

With the entry of foreign equity, the rural banks can suddenly become awash with the cash that their clientele so desperately seek. The small borrowers will thus be able to get loans faster, and very probably at lower interest rates.

It is no secret that the top banks prefer to lend big sums to big borrowers, instead of small sums to small businessmen. They earn more this way. The major borrowers are also able to get preferential rates.

Profits are not everything

The banks justify this by saying that they are in business to make money, and no one can begrudge them for this. But the banks must also realize that they play a great role in national development. Even the most profitable of businesses require loans from time to time. What more the small businesses in the rural areas?

Farmers, fisherfolk, traders, store owners and middlemen know that they can earn decent profits from their livelihood. But they also know that there will be instances when they will have cash flow difficulties now and then.

For the most part, they do not pose huge risks to the lenders. Being part of a community, the rural banks know who the borrowers are. In most cases, they are also friends and neighbors, and not merely strangers seeking loans.

Once the bill has been signed into law, foreign investors are expected to start looking at the hundreds of rural banks, who will then be expected to compete with each other to prove who can best manage the fresh infusion of funds. This will not be a one-way street, however.

A large percentage of rural banks are not desperate for investments. They have been around for years or decades and have survived. Being family-run corporations, they have also developed their own respective cultures. They may or may not accept offers of investments. It will all depend on the package that the big players will offer them.

At least now they will have a choice of whether to expand, or remain the friendly, neighborhood lender that they have always been.