Most rural banks very healthy, many exceed required CAR

News reported by our Reporter Maricel Burgonio on Saturday that according to the Philippine Deposit Insurance Corp. (PDIC) president, Jose Nograles, 103 out of the country’s 690 rural banks are undercapitalized (as of June 2009) should not make people begin thinking dark thoughts about the rural banking sector.

This negative outlook began to cloud the reality of the rural banking sector’s good health and vast contribution to the economy when the Legacy Group’s scandal erupted.

The 103 undercapitalized rural banks represent about 17 percent of all rural banks.

These undercapitalized banks hold P11 billion in deposits, or 10.3 percent of the rural banking sector’s total deposits. Many of these non-compliant banks are, however, also solid institutions. These 103 lenders hold P11 billion in deposits, or 10.3 percent of the industry’s deposit liabilities.

The combined assets of these banks make up 8.8 percent of the total assets of the rural banking industry as of June. Industry-wide, the average capital adequacy ratio (CAR) in the rural bank sector was 18.3 percent or nearly double the 10 percent requirement.

The PDIC chief said this development points to the need for mergers and acquisitions in the rural banking sector.

“We are aware of the need for capital enhancement and attendant process improvements to revitalize these troubled rural banks and thus fortify the whole sector,” he said during the Rural Bankers Association of the Philippines (RBAP) 52nd charter anniversary.

Rural banks generated P108.3 billion in deposits in the first semester, contracting by 12.3 percent from a year ago primarily because of closures. However, the rural banks in eight regions posted deposit growth of from 2.8 percent to as high as 18 percent.

“Despite their problems, the rural banks have continued lending activities, financing a total of P8 billion in micro-entrepreneurial ventures,” our Ms. Burgonio’s report said.

Not like national commercial banks

Rural banks have more impact on the life of the community they serve than commercial banks that are mainly urban-based.

The effect of the failure of any of 103 undercapitalized banks on its particular community would be more pronounced than the failure of a commercial bank, say, in Metro Manila whose citizens and businesses are clients of usually a spread of several big banks.

But the health of the 587 other rural banks promises the continuing good health of the rural communities they serve. And since most of these 587 other rural banks are very well-capitalized and profitable the plight of their brethren banks should not cause much worry among these healthy rural banks’ customers.

The members of the Rural Bankers Association of the Philippines (RBAP) has a risk-based lending program (similar to microfinance lending) for small and medium enterprises (SMEs).

Tomas Gomez, chairman of the industry group’s Rural Bankers Research and Development Foundation Inc, the RBAP members have improved their lemding program to SMEs.

Under the collateral based lending, SMEs are allowed to borrow 80 percent of their assets from a rural bank. This way the RBAP-member rural banks can vastly increase an SME business’ liquidity.

Rural banks’ exposure to small enterprises reached P32.4 billion, or 51.4 percent of their total loan portfolio at end-December 2007, while loans extended to medium enterprises amounted to P8.4 billion. Rural banks have a 75.4-percent compliance rate for lending to the SME sector, way above the minimum requirement of 8 percent.

Rural banks have greater access to the small-income individuals or business enterprises mostly in agriculture. The country has 600 rural banks with a branch network of more than 2,000.

“We put our confidence and, subsequently, our resources to this segment [micro enterprises and SMEs] which is unserved and/or underserved by the bigger banks,” Gomez said.

Rural banks had a loan portfolio of P8 billion for the micro-enterprise sector as of last year.

P2.7 monthly for micro businesses

Rural banks release approximately P2.7 billion every month as working capital for micro entrepreneurs.

This represents more than 30 percent of the total number of micro entrepreneurs served nationwide and also account for 50 percent of the value of total loans to this sector.

Rural banks however charge higher interest rates for microfinance lending, at 2 percent to 3 percent, given its riskier nature.

The rural banks are the ones who serve most of the banking needs of the rural and agriculture-based businesses.

Gomes said micro, small and medium enterprises (MSMEs) are rural banks main clientele.

The president of RBAP, Joseph Omar Andaya, said in his Times column that at the top of the rural banks list clients “are the micro, small and medium enterprises (MSMEs). Just by virtue of us rural banks being in the countryside consisting of communities heavy in MSMEs—with rural banks themselves belonging to MSMEs—it is second nature to us to prioritize extending valuable services to members of our “league.”

“While the larger banks, including commercial and thrift banks, are finding it difficult to comply with the microfinance requirement of the law—especially the 8 percent for the micro and small enterprises—rural banks (RBs) are already over-compliant year-on-year on the 10 percent microfinance lending.

“And this has been the case even before the Republic Act 9501, or the Magna Carta for MSMEs that mandated the allocation of 10 percent of banks’ credit resources to MSMEs. This is further broken down to 8 percent and 2 percent of banks’ total loan portfolio for micro and small enterprises, and medium enterprises, respectively.

“Furthermore, rural banks have a significant portion of their loans extended to the agricultural sector, which reached P 36.7 billion in 2008, up from P 30.8 billion in 2006 or an equivalent to 36.2 percent of total loans. This exceeds the 25-percent mandatory allocation for agri-agra loans.

“Rural Banks have 54.3 percent exposure to this sector or more than double than what is required by the Agri-Agra Law. Total agrarian reform loans have reached P14.8 billion, while total agricultural loans reached P22.9 billion

“Obviously, unlike the larger banks, rural banks are more equipped to deal with MSMEs and those belonging to the agricultural sector, which are larger in number but with a lot lower transaction values.

“RBAP has also been successful in maintaining public confidence. Through vigilance and proactive measures, RBAP ensured that its clients understood that some of the high profile bank closures within their ranks basically involved a single group that is not representative of the management of other rural banks.

“The rural banking sector has also moved towards inclusive banking through technological and product innovations, as well as its continuing efforts to be more responsive and efficient in serving their clients. Six years ago, ATMs and electronic banking services in the rural banking sector were non-existent. “Today, there are at least 253 ATMs deployed in RBs, with more being added each month. Also, increasing numbers of rural banks are engaged in mobile phone banking, with around 70,000 rural bank clients and employees already registered for this service.

“Rural banks have also been expanding its operating network to reach more clients. With a total branch network of over 2,000, rural banks now number approximately 700, more than 650 of which are RBAP members.”

Mr. Omar Andaya, besides being the current president of the RBAP, is also the Chairman of the Board of Green Bank, a multi-awarded rural bank based in Butuan City. Green Bank has 46 branches and 70 kiosks spread all over the countryside and is heavily engaged in microfinance. It has over 250,000 depositors and 80,000 active borrowers. –Manila Times