Rural banks’ expanding roles

Access to credit among small businesses are largely associated with the level of development of rural banks in their area since most of the country’s small and medium enterprises (SMEs), mostly located in the provinces, rely on the services of banks nearest to them.

Those SMEs that grow and graduate to becoming major contributors to the economy or those that seek more sophisticated services mostly to expand end up gravitating to the nearest commercial banks. This adds to the dilemma of rural banks of not being able to attract enough clients to generate profits to expand their services. SMEs have an estimated P9-billion worth of financing each year that are sourced from outside of the banking system as a result of the shortage of capital among rural banks.

Moreover, the bulk of these loans are considered retail—of up to P150,000 per borrower—that the bigger banks do not give preference to and are left for rural banks to meet. Most of the small businesses, thus, end up in the hands of loan sharks, middlemen or the 5 to 6 racket, as a result of the vacuum in banking services. They find themselves in a black hole usually ending up in running the business just to pay off the debt.

Focusing on SME’s

Rural banks recognize these and are adjusting with the introduction of new innovations and services geared toward serving not only the agricultural sector but also expanding focus to the needs of SME’s.

At the end of last year, rural banks had a loan portfolio of P8 billion for the micro enterprise sector alone, benefiting more than 800,000 micro-entrepreneurs. Rural banks release some P2.7-billion loans every month as working capital for micro-entrepreneurs. The loans provided last year went to more than 30 percent of the total number of micro-entrepreneurs served nationwide or half of the total value of loans to this sector. Rural banks’ exposure to small businesses, or those that require more capital than micro enterprises, last year reached P32.4 billion, or 51.9 percent of the total loan portfolio while loans extended to medium enterprises amounted to P8.4 billion in the same period.

The over 700 banks comprising the rural banking sector, with a branch network of more than 2,000, is also the single biggest contributor to employment growth in the local banking system. Rural banks accounted for 71.6 percent of new employees generated by the entire banking system last year and most of it were generated where it matters the most: in the countryside.

Based on data of the Rural Bankers Association of the Philippines (RBAP), which under its umbrella groups about 630 rural banks, the lack of banking services in the rural areas deprive at least 2 million SMEs of their needed financing. That in turn impacts on the economy since most of these businesses are in areas where development is mostly needed.

As it is, lending from rural banks in the first half almost did not grow affected partly by a slowdown in economic activity. Yet the potential is huge when the underserved and untapped sectors are considered. Such potential, however, would translate into revenues only if rural banks catch up to their bigger peers in terms of capital and technology.

CAR is proof of industry performance

At the moment, rural banks service the requirements of six million clients, 97 percent of which reside in places where access to financial services is either very limited. RBAP figures show that the effort to improve services among rural banks is currently at high gear.

For instance, automated teller machines (ATMs) among these banks expanded from less than 100 six years ago to 280 at present located in about 60 rural bank head offices. Other rural banks have partnered with bigger banks that have an extensive ATM network. At the moment, the use of ATM services in the provinces cost more than in Manila. Since most of the machines are located in areas where there are no banks, P35 is charged for withdrawals against the usual P10 in the urban areas. Still the trade off is usually worth it for clients since it would cost more in terms of transportation to go to a bigger town to access banking services.

Rural banks are exploring, with mostly promising results, the use of mobile banking and e-wallet programs to bring more banking services to the countryside. There are also plans to link extensively with huge retail outlets such as 24-hour convenience stores and even sari-sari stores as accredited cash outlets, which are backed by the Bangko Sentral ng Pilipinas (BSP) policy to include more firms in providing financial services.

Rural banks’ capital adequacy ratio (CAR) also stood at 18.03 percent based on the recent BSP report, way above the mandatory 10 percent. The BSP has committed cooperation toward the creation of an appropriate policy and regulatory environment that will enable more innovation, greater efficiency, better risk management, stronger capitalization, improved disclosure and transparency practices, and enhanced corporate governance standards in the banking system, particularly rural banks.

With help from government and BSP, as well as support from their own province-mates, the transformation of rural banks into a more potent force in the development of the countryside is not a far-fetched reality, but rather just a blink away.

The author is the treasurer-executive director of Filipino Savers Bank. –RBAP, Vicente Mendoza