Rural Banks aim for New Vision, One Direction, Stronger Organization
R ural banks are largely privately-managed and privately-owned banks that provide credit to farmers, merchants, cooperatives or in general, people in the rural community.
As one of the main economic arteries of the countryside, rural banks provide the basic banking service and mobilize financial resources. The local economy is dependent on its service, especially in far-flung areas still unreached by larger commercial and universal banks.
With the ASEAN Financial Integration, there is a need to better consolidate the rural banking industry for the country’s gradual entry into the greater South East Asian bloc. To better understand the dynamics of big international institutions penetrating the niche market of countryside-based banks, The STAR talks to Rural Bankers Association of the Philippines (RBAP) president Jose Misael B. Moraleda as he discusses the opportunities and challenges faced by the rural baking sector and the banking industry ahead of the RBAP 62nd Annual National Convention and General Membership Meeting on May 18-19 at EDSA Shangri-La Manila, Mandaluyong City with the convention theme, “New Vision, One Direction, Stronger Organization.”
ROLE AND RELEVANCE
Rural banks are especially important in the development of the agricultural sector as they primarily cater to the needs of the low-income segment such as farmers and fisherfolk, who are often regarded as risky clients by bigger banks. Rural banks, together with cooperative banks, lent a combined P26.8 billion out of their P50.1 billion loanable funds in compliance with the Agri-Agra Law as of December 2014.
Rural banks also support the growth of the small businesses through microfinance. As of December 2014, rural and cooperative banks exceeded the minimum requirements for MSME lending as 25 percent for micro and small enterprises and 9.3 percent for medium enterprises. The Magna Carta for Micro, Small and Medium Enterprises (MSMEs) mandates banks to set aside at least eight percent of their total loan portfolio for micro and small enterprises, and at least two percent to medium enterprises.
THE INEVITABLE ASEAN FINANCIAL INTEGRATION
For the past three years, the RBAP has been openly discussing the ASEAN integration and its effects on the local level. According to Moraleda, it would be the commercial banks in the urban areas that will initially feel the brunt of bigger ASEAN banks entering into the country.
“Commercial banks, with their financial muscle, could give us a stiffer competition when bigger international competitors come into the fray. We realize now why commercial banks are now very aggressive in looking for rural banks. They might want to deepen their grounding or exposure in our areas, which was the niche market of the rural banks. I think the commercial banks realized the strategic importance of rural banks,” he says.
Moraleda adds, “The good thing about this is that, for rural banks that want to exit can do so. For example, (for owners) if no one in the family wants to continue the business, now is the time to step aside and let banks consolidate or merge with other players. With a certain size, you become more stable and sustainable. With this, it’s possible that rural banks will evolve into community banks with less entities but stronger, less players.”
Despite the changing landscape, Moraleda is optimistic about the inherent advantage of rural banks. “Rural banks still has the advantage of having the deepest penetration in the countryside. As you can see, only rural banks have the courage to open branches even in third to fifth class municipalities. An example would be in my region; in Masbate, there is no big-name bank there, but there are rural banks at the smallest municipalities. And with the strengthening program by the Bangko Sentral ng Pilipinas (BSP) and Philippine Deposit Insurance Corporation (PDIC), we are able to maintain those access points of financial inclusions for the marginalized sector as they get into formal banking,” he confers.
CONSOLIDATION FOR STRENGTH
Acceding to the suggestions of the regulators, rural banks are now in the process of merging and consolidating in order to scale up ahead of the economic integration. There are seven merger/ consolidation applications involving 15 rural banks that were green-lighted by the PDIC and are currently being processed by the BSP.
“Since last year, we have asked the BSP and the PDIC to expedite consolidation
of banks on the federation level. Right now, some of our smaller bank members are having some issues with succession, management and capitalization. To save the operations of these banks, we have initiated talks with the PDIC and requested for technical support so that these banks can consolidate and evolve into stronger banks on the local level. BSP is supporting this because instead of smaller banks ending up as a failure or ending up closed by the PDIC; you strengthen them as they band together; and when you strengthen these banks, the whole project of government which is financial inclusion, is promoted,” Moraleda discusses.
Ongoing projects
As the largest association of rural banks nationwide, the RBAP also works to maintain banking standards among across the industry and to guide rural banks in the implementation of laws and regulations. Its technical arm, the Rural Bankers Research and Development Inc. (RBRDFI), has conducted 84 trainings and seminars that benefitted 3,380 rural bank personnel.
Recently, the RBAP and RBRDFI have partnered with Washingtonbased non-profit financial literacy advocate organization, Microfinance Opportunity for the Consumer Education for Branchless Banking (CEBB), which seeks to educate rural banks in developing consumer education program in order to boost their branchless banking efforts.
RBAP and RBRDFI also assisted rural banks in integrating other services into their operations, including the Micro-insurance Initiative (MI), a project that offers micro-nsurance course to rural banks who wish to enter the business. The said course is a prerequisite to the licensing process for banks to be recognized as institutional microinsurance agents. The MI promotes the use of technology, particularly that of SMS (text messaging), to enhance bank service for micro-insurance. There are now 41 rural banks licensed as micro-insurance agents.
This year, the RBAP also set aside budget for the renovation of RBAP building and complex. “This complex was donated to us by the BSP way back; we will fix this up to accommodate more space for seminars and trainings,” the RBAP president discloses.
Working with the government
Moraleda discusses further, “The leadership of RBAP focused on the continuous dialogue with the BSP in looking into what would have substantial effect to the rural baking sector and the banking industry, namely the Circular 855 which is the Credit Risk Management. Lately, there have been proposals to also look into a particular product—a salary loan product—for the private and public sectors. We have also come up with position papers through inputs from our members and collated these and put them forward to the BSP.”
“On the regulatory level, there are other frameworks in the banking
industry that the BSP would like to implement. This is the Operational Risk Framework and the Market and Liquidity Framework. The BSP is very proactive in making the banking industry insulated from external shocks as well as making sure that the economy is run well. They are proactive and forward-looking, taking into consideration the effect on the banks—rural banks included. For these new frameworks that would come out eventually as circulars, the central bank would always consult us. I think, in the next months, this open communication would be instrumental in tackling major areas of concern,” he says.
Current challenges
Nowadays, there is intensified competition in the niche of rural banks. Middle-income customers and smaller enterprise lending are now part of commercial banks’ targets, compressing the market for the two industries. Specialized lending companies and pawnshops are also competing for the rural bankers’ market.
There are also increased regulations, as the central bank is requiring rural banks to comply with more rigorous regulations. Additionally, banks are also urged to invest in new information technology (IT) systems to enable them to comply with check-clearing requirements and customers demand for new channels such as mobile banking. Meeting these demands will be costly for smaller banks.
Lastly, there is the issue of credit risk. Because they cater to the lowincome, rural banks are exposed to high-risk transactions. As of December 2014, rural banks posted a double-digit non-performing loan (NPL) ratio—11.77 percent.
To better meet these challenges, the RBAP will be holding its 62nd Annual Convention and General Membership Meeting on May 1819 at EDSA Shangri-La Manila in Mandaluyong City. The convention theme “New Vision, One Direction, Stronger Organization” features the combined efforts of rural banks in promoting economic growth in the rural areas and valuable contribution to the national economy.
Highlighted topics would be the consolidation work within the rural banking sector discussed by expert speakers that have first-hand experience in consolidation and mergers, specifically talking about certain cases of successful bank mergers to learn how to survive in a more competitive environment. Another important topic would be the prospects and opportunities in the ASEAN Integration. For a more forward-looking convention, representatives from the BSP and PDIC would also speak on the developments of the banking industry and the rural banking sector.
“Since last year, we have asked the BSP and the PDIC to expedite consolidation of banks on the federation level. Right now, some of our smaller bank members are having some issues with succession, management and capitalization. To save the operations of these banks, we have initiated talks with the PDIC and requested for technical support so that these banks can consolidate and evolve into stronger banks on the local level. BSP is supporting this because instead of smaller banks ending up as a failure or ending up closed by the PDIC, you strengthen them as they band together; and when you strengthen these banks, the whole project of government which is financial inclusion, is promoted.”