Next Generation of Rural Banking by Deputy Governor Espenilla

Hon. Sergio Apostol’s Speech

Download Pres. Ian Eric S. Pama’s Introductory Letter in PDF

Download Hon. Apostol’s Speech in PDF

c649: Issuance of Electronic Money (E- Money)

c678: Rules and Regulations for the Approval and Provision of Housing Microfinance

c680: Rules and Regulations of the Provision of Micro-Agri Loans

c683: Marketing, Sale and Servicing of Microinsurance Products

c694: Amedment of Regulations on the Establishment of Other Banking Offices and Notes to Microfinance

c704: Guidelines on Outsourcing of Services by Electronic Money Issuers (EMIs) to Electronic Money Network Service Providers (EMNSP)

c706: Updated Anti-Money Laundering Rules and Regulations

c730: Updated Rules lmplementing the Truth in Lending Act
Loan Transaction Transparency

 

Gov. Amando M. Tetangco, Jr.’s Speech


 

SURGING TOGETHER FOR AN INCLUSIVE FINANCIAL SYSTEM

Outgoing Rural Bankers Association of the Philippines (RBAP) President Ms. Corazon Miller, incoming President Mr. Ian Eric Pama, officers and board of directors of RBAP, friends in the rural banking industry, ladies and gentlemen, good evening.

 

It is always a pleasure to join RBAP for your changing of guards. I wish to therefore take this opportunity to congratulate the outgoing officers and board for a job well done… Please join me in giving them a round of applause.

 

I would also like to congratulate the new set of officers and directors… We at the BSP look forward to working with all of you.

 

Indeed, the BSP and RBAP have a long history of cooperation in advancing the rural banking sector, and we are happy to sustain this cooperative arrangement.

 

This partnership has taken the industry through good and difficult periods, from remarkable economic growth to global financial crises. In all, ladies and gentlemen, we have remained resilient and prevailed.

 

The demanding challenge facing us today, however, is how we could accelerate economic growth while maintaining price and financial stability. For the BSP, both objectives are important, and both require energy and serious attention from policymakers. From my perspective, the rural banking industry plays a special role in achieving these objections. How you may ask? Clearly, it is through your deep involvement in our financial inclusion effort.

 

Financial inclusion is dear to the BSP. We see it as the means to expand access to financial services through multiple, innovative yet safe channels for more Filipinos, including (and especially) the previously unbanked. The dedication of RBAP, its leaders and its members, is invaluable in pursuing these objectives.

 

A quick look at industry statistics

 

We have gained much ground in positioning the rural banking industry as effective partners. Indicators show that the industry is generally in good condition. As of end 2010, it is adequately capitalized, posting an industry-wide capital adequacy ratio of 19 percent. Rural banks also posted steady profitability indicators. In the period indicated, return on assets (ROA) was at 1.9 percent while return on equity (ROE) was at 11.7 percent, levels that are at par with commercial bank counterparts. Rural banks have continued with their core banking, with your gross total loan portfolio of PhP 100.2 billion and deposits of PhP 108.9 billion, both an increase of 1.1 percent and 3.4 percent, respectively, from 2009. The industry’s NPL ratio is at 8.9 percent and steadily decreasing from the previous year1.

 

The rural banks are also increasingly committing to professionalize their management and operations and maintain strong balance sheets. More and more, rural banks are putting in place risk management systems and internal controls that are necessary defenses against risks and losses.

 

In the area of financial inclusion, rural banks remain at the forefront. As a sector, you continue to take a significant share of the overall physical infrastructure of the banking industry. While the ongoing consolidation has resulted in a leaner physical structure with a total of 595 head offices (as of March 2011) as compared to 624 in the same period last year, the branch network still managed to show a modest increase from 1,993 to 1,997 branches. But more remarkably, this streamlining of physical structures has been further expanded by non-traditional delivery channels such as automated teller machines (ATMs) and electronic banking. As of March 2011, rural and cooperative banks had deployed 187 ATMs and 55 banks have electronic banking services. These were non-existent just a little over five years ago. Indeed, rural banks are embracing opportunities and innovating to continually reach more markets and service more clients. Your close proximity to clients in the countryside likewise makes you ideal partners of financial inclusion.

 

The Industry Opportunities

 

It is therefore encouraging to see that rural banks are among the ones taking the lead in seizing the many emerging opportunities presented by recent BSP regulations. These regulations, as you have clearly come to appreciate, are aimed at diversifying your product base while at the same time expanding the access options to broaden your reach.

 

In the last 12 months, BSP expanded the range of microfinance services that can be offered to your target market, recognizing the varying needs of your client-base. Aside from the usual microenterprise loans, we have recognized micro-housing loans (Circular 678), micro-agri loans (Circular 680), microinsurance (Circular 683), and micro-deposits (Circular 694) as components of the suite of products that can be offered to your clients. This allows you to become more responsive to varied needs of your existing clients, expand your client base, tap deposits from the bankable poor, and increase as well as diversify your income streams. A proliferation of these products, which cater to the low-income markets, would be a significant progress in financial inclusion.

 

To date 21 and 24 rural banks have been authorized to provide micro-agri and housing microfinance loans, respectively; while 26 have been cleared to proceed to the next steps and finally be licensed to distribute microinsurance services.

 

In addition to the wider range of products, our issuance of Circular 694 in October last year, hopes to similarly widen the physical touch points to access these financial products. As such, we have provided opportunity for any qualified bank to setup physical offices in areas where it may not be economically feasible to set up a full-blown branch through the establishment of Other Banking Offices (OBOs) and Micro-Banking Offices (MBOs). The number of applications we received – 97 applications for 800 MBOs and OBOs – is noteworthy evidence of your keen commitment to deliver financial services in the previously unreached countryside where they are most needed. We at the BSP are glad to see how our regulations are complementing your business plans.

 

Through these scaled-down banking offices, the unbanked and underserved will now have access to financial services like loans, savings, remittances, electronic money conversion, bills payment, pay out services and limited foreign exchange purchases. As many rural banks have recognized, these offices will not only allow you to increase the value of your services to your existing clients but also to tap new and unserved market segments at lesser costs.

 

With your strong representation, the BSP has heard how technology has helped you improve efficiencies. Thus we have further expanded the electronic money space to address the barriers that previously prevented many of you to use e-money platforms or to directly become e-money issuers. Circular 649, taken together with Circular 704, allows you to create linkages with authorized e-money issuers or become e-money issuers yourselves. You now have the option of outsourcing automated systems, infrastructure and even network of agents to service providers (e-money network service providers or EMNSP). The complex technology and substantial investment required in e-money issuance should no longer constitute a formidable barrier to entry for smaller banks. With this regulation in place, we expect to see more rural banks becoming competitive in the e-money business.

 

In addition to this already formidable list, we have issued our Updated Anti-Money Laundering (AML) Rules and Regulations (Circular 706), which address a main obstacle in serving the unbanked yet bankable: the lack of necessary IDs, problems of proximity to bank offices and even the high cost of servicing small transactions. This Circular directly addresses this obstacle by allowing banks to classify the levels of risk for different types of customers and apply corresponding rules. Given this flexibility, customers with a small account balance and transactions may be considered low risk wherein the bank may use a reduced due diligence and customer acceptance. The Circular also provides scope for the outsourcing of customer identification and KYC requirements.

 

Ladies and gentlemen of the RBAP, I have to pause here to catch my breath… Hasn’t that been quite a litany of advances and innovations in the regulatory environment already? … I am sure you will agree with me when I say that the regulations and innovations I just shared with you over the last ten minutes or so is a strong testament to our enduring partnership. It is reflective of how a creative partnership between regulator and the industry can make the regulatory framework both responsive and relevant. For this, I believe we all deserve a pat on the back.

 

But wait… as they say when you open a magic box, there is more! We are also excited to work with the new Board in the Technical Working Group for Credit Risk Management. I commend the outgoing officers for initiating this working group to craft a model Credit Risk Management process developed from proven, practical and prudent practices of selected rural banks. This workstream is tangible proof of your commitment to stronger risk management and your conscious effort to comply with banking standards. We commend this self-help initiative to ensure that the rural banking sector adheres to prudent risk management, remains stable and improves competitiveness. The BSP, in its consulting capacity, will be happy to provide all the necessary technical assistance which the working group may need. Let us make this a high priority.

 

We are also pleased to report that the Basic Rural Banking Course (BRBC) has completed its pilot run. As you know, we have worked with RBAP officers to enhance the BRBC modules, which now emphasize the oversight role of bank management and directors, and the operational aspects of banking. The course is now shortened from 10 days to just 3 on account of the enhancements.

 

I thank the 30 senior managers and directors selected from RBAP member banks that participated in the pilot and provided valuable feedback on how the course can be improved further. After the pilot run, the course will be cascaded to 13 regional RBAP federations.

 

After hearing all that, I believe you will agree with me that indeed the outgoing board has given the new board much to pursue… Let me assure Mr. Pama and his new board, you will continue to have my support as well as that of my colleagues in the BSP.

 

Initiative for Greater Transparency

 

Before I conclude my remarks, I wish to speak about a recent issuance of the BSP that is aimed at gently reminding the banks of your legal and moral obligation to practice integrity and transparency in business.

 

Circular 730, issued just last July 20, updates the rules implementing the Truth in Lending Act. Its objective is to ensure better consumer protection by enhancing loan price transparency and improving disclosure practices. In particular, this Circular prescribes a uniform way of computing interest to be always based on the outstanding balance of a loan at the beginning of an interest period; the presentation of only one rate – the effective interest rate – in all loan documents including marketing materials; and a uniform format of disclosure that shows all essential information in a simple to understand format.

 

This issuance, which covers all credit providers of significance, whether bank or non-bank institutions, effectively prohibits practices like the use of so-called “flat” interest rates, which show contractual rates for loans that substantially differ from the effective interest rate; or possible deliberate quoting of lower interest rates and hidden charges. It is important to keep the public’s trust by making the true cost of their borrowings fully transparent.

 

We are hopeful that with universal compliance to this new interest calculation and disclosure rules, the number of complaints against creditors received at the BSP Financial Consumer Affairs Group (FCAG) will decline.

 

The BSP will continue to complement these transparency and consumer protection initiatives with our comprehensive economic and financial learning programs. We hope that, together, these efforts will equip the general public with knowledge, skills and tools to enable them to make better financial decisions and become better partners in ensuring a strong and stable financial system.

 

Circular 730 has had an extensive consultation period with all bank associations, and even non-bank credit providers like microfinance NGOs. You have one year to adjust your systems, revise your loan documents and marketing materials before the Circular takes effect in July 2012.

 

The Challenges

 

Ladies and gentlemen, the environment we operate in is becoming increasingly interconnected. Today, we are more quickly and more potently affected by what is happening globally.

 

The BSP’s cumulative 50 basis points policy rate hike and the 200 basis points increase in reserve requirements on bank deposits this year appear to have been successful in keeping inflation expectations well-anchored and the liquidity generated from the capital flows in check. Our assessment is that these moves are sufficient (for now) to keep average inflation for full-year 2011 and 2012 within the target band of 3-5 percent. But we remain watchful of global developments to ensure our policy settings remain appropriate.

 

Going forward, you can continue to expect from the BSP monetary and financial policies that endeavor to buffet the financial system from external shocks and ensure stable economic growth.

 

The challenge to the industry and this new board therefore is how to create — in this difficult operating environment — a stronger rural banking industry that is able to maximize opportunities within the framework of the innovative regulations we have so far put together.

 

As the industry institutionalizes better governance and management structures, strengthens capital positions and balance sheets, improves risk management systems, greater transparency and market discipline, and increases concern for consumer welfare, you can count on the BSP’s continuing commitment to provide that enabling environment for the rural banking industry to flourish.

 

I am confident that, united, we can successfully drive the transformation towards a truly inclusive financial system that will sustain economic growth and bolster financial stability.

 

Again, congratulations to the new board. Mabuhay ang RBAP! Maraming salamat po!

Delivered by BSP Governor Amando M. Tetangco, Jr. during the RBAP Inaugural Dinner on 4 August 2011 at Hotel Sofitel, Manila.

 

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