Comments on BSP’s Reducing Restrictions on Bank Branching in Support to Microfinance Development
The rural banking system is ideally situated and structured to evolve into the most sustainable microfinance provider in the Phil countryside. While many NGOs have successfully grown their portfolios and outreach through the years, they remain hampered by the fact that as NGOs, they are not allowed to accept deposits per se, like the rural banks, and therefore are unable to mobilize savings from the public, to channel to the growing needs of the MF sector. External funding from donors is slowly dwindling and costs of borrowings,even from a dynamic govt. agency like the PCFC, is much higher (13% vs. deposit costs of 1.5 – 4%, if internally generated)
Instead , what seems to happen is that NGOs, if they are able to utilize the savings of their clients at all, deposit these into their own central account – as capital build-up or even individual savings – with only internal records identifying the amounts of deposits of clients. Not only is this system limiting, it is bordering on illegal as it is a disguised way of accepting deposits. Further, such “deposits” or savings of clients are, in effect, denied insurance coverage as they are all lumped in the organization’s bank account and not divided into individual accounts covered by bank passbooks and insured by the PDIC, at least to the amount of P200,000.
But NGOs have a great advantage over rural banks in that they can branch out at will, beyond supervision and regulation of the central banking authority, BSP. As such, their outreach is wider and faster, even as it remains riskier for its lack of supervision and review by the BSP.
Their presence in the field makes for good competition but rural banks who have taken up the Microfinance program chafe under the severe requirements of the BSP in the branching which is inevitably required if one’s outreach is to improve and grow in the same rate as those of the NGO sector. There is a perception of an uneven playing field and not a few are beginning to entertain the idea of spinning of their MF operations into a foundation or a non-bank equity, to liberate the same in terms of increasing outreach, while booking savings in the bank and lending these back to these created entities. Such creative solutions are less than desirable however, as it would again bring MF operations out of the ambit of supervision and risk control. In fact, the reverse (NGOs converting to banks and subjecting themselves to regulation and supervision by the BSP) is the more desired phenomena.
In this respect, liberalizing branching requirements, particularly for RBs involved in MF, will go a long way of leveling the playing field and encouraging the more formal rural banking system to take on MF operations as their regular and primary operations and providing the sector with a provider with cheaper source of funds, more accountability and more permanent presence in the community. It may even encourage the more developed NGOs to transform into a rural bank, should they lose this advantage of branching at will. It can only be better for the entire system as more MF providers would be under supervision and regulation – thus developing themselves as strong, sustainable microfinance providers well into the future.
FRANCIS S. GANZON