A raft of activity is expected in the rural banking industry after the approval of the landmark Strengthening Program for Rural Banks (SPRB) late last month, which has a P5-billion fund approved by the Monetary Board.
The SPRB is intended to encourage mergers and consolidations of rural banks in order to further strengthen the rural banking system via the grant of financial assistance by the Philippine Deposit Insurance Corp. (PDIC) pursuant to Section 17(d) of RA 3591, as amended (the PDIC Charter) and the grant by the Bangko Sentral ng Pilipinas (BSP) of regulatory relief pursuant to the BSP Guidelines on the Grant of Regulatory Relief under the SPRB.
The SPRB is in recognition that the rural banking system provides essential financial services in the economy, particularly in providing adequate banking services in local communities and specialized or niche markets.
Who are qualified for SPRB?
Rural banks with risk-based capital adequacy ratio (RBCAR) of less than 10 percent and willing to merge or consolidate with a strategic third party investor are those who can qualify under the SPRB.
Under the scheme, banks are required to submit written request to the PDIC for its help in identifying prospective investors to be accompanied by their latest audited financial statements, background information, and board resolutions or certification of the board secretary declaring intent to locate prospective investors.
Financial assistance to be provided mainly by the PDIC can either be equity infusion in the form of preferred or non-voting shares and a direct loan.
A government’s stake in a distressed bank through the preferred shares, will give potential white knights a sense of security.
Incentives for ‘White knights’
Under the program, the government will also provide incentives for investors on troubled financial institutions. As a deal comes along, the PDIC will evaluate it in accordance with an agreed set of criteria with the BSP.
The PDIC, then, will measure how much it can inject as capital contribution through the preferred shares subscription. The BSP, for its part, will provide regulatory incentive to help troubled banks to again stand on its feet.
While the BSP put up the money for the SPRB, it will be the PDIC that will provide the infusions in banks since the BSP is prohibited under the law to make any investments.
The infusion will be worth up to half of the additional capital required by the banks or an amount enough to bring back the RBCAR to 10 percent. The direct loan will be in the form of government securities, the interests on which will accumulate in favor of the borrower up to the amount equivalent of preferred share, that would have otherwise been infused in the bank to allow a merger or consolidation. This will have an annual interest rate equivalent to the rate of government securities, less 3 percent and payable in 10 years. The scheme, thus, uses the government debt papers as collateral for the direct loan.
The SPRB compliments another existing program of the PDIC, which encourages foreign investors to invest in the local rural banking sector.
PDIC Investor-Investee Helpdesk
PDIC’s other program–the Investor-Investee Helpdesk—seeks to make it easier for investors looking for banks to acquire, merge, consolidate with, or invest in banks and banks seeking interested investors.
Both initiatives were part of the government’s thrust to promote mergers, consolidation, and acquisition in the local banking industry in a bid to strengthen the front liners in of the rural economy. Banks will achieve higher lending capacities and economies of scale and improve quality of their services through mergers, consolidations and acquisitions.
We in the Rural Bankers Association of the Philippines (RBAP) expect both programs to compliment each other. It gives added security and confidence for our depositors that rural banks are being strengthened. In fact, we are going on several caravans or road shows to the different regions to inform our members and consumers about these programs. This will show our own resolve and support for the program.
Author: Vicente R. Mendoza
Executive Director/ Assistant Treasurer RBAP Inc.
(Manila Times Column published on 11 Aug 2010)