Help is on the way. Amid the desolate depths of despair that commonly embraces the unfortunate victims of cash-strapped financial institutions like banks going under, a program has been placed to pave the way for the potential onrush of corporate saviors before further damage can be done in the entire banking industry.
Under the milestone initiative called the Strengthening Program for Rural Banks Plus (SPRB Plus), even non-rural banks can come in and invest in financially troubled rural banks, including strong and well-managed thrift banks and commercial banks. In return, the Bangko Sentral ng Pilipinas (BSP) offers various incentive packages to potential white knights in a bid to end costly failures in the rural banking sector.
The incentives being offered include loans to help address capital shortfalls and to help meet needed resources to improve operations; temporary regulatory relief such as on capitalization requirements; and easier requirements for branching for commercial, thrift and rural banks.
Loans to be extended to strategic third-party investors (STPIs) will be sourced from the P5-billion fund, which the BSP and the Philippine Deposit Insurance Corp. (PDIC) have put up through their equal contributions. Rural banks with risk-based capital adequacy ratio of less than 10 percent and willing to merge or consolidate with STPIs are qualified under the SPRB.
The financial assistance under the incentive program is a combination of preferred shares and direct loan to reinforce the bank’s capital. The preferred shares shall be convertible amounting to 50 percent of the capital adequacy of the bank being acquired. The direct loan shall be granted on a concessional rate payable in 10 years.
It is hoped that a government’s stake in a distressed bank, through the preferred shares, will give potential white knights a sense of security.
SPRB Plus will be in effect until the end of 2013.
As of March 2012, the PDIC has received 17 applications for the current SPRB involving 31 rural banks. Four of these applications have been approved by the PDIC and two are in the process.
Under the previous version of the SPRB, only financially sound rural banks were offered incentives to acquire a distressed rural bank old version. The old version of the SPRB was scheduled to expire this August.
The expected entry of investor-banks into the rural banking industry is expected not only to save a lot of cash-strapped rural banks, but also improve the quality of corporate governance and management within the industry, according to regulators. The BSP said that problematic rural banks are the exception rather than the rule, as the country’s entire banking system remains generally sound and stable.
When a bank in Tangkawayan was placed under receivership by the BSP, a new wave of panic and uncertainty among rural bank clients was created. But this should not be the case. In truth, this is just part of the consolidation process under the SPRB Plus that seeks to encourage mergers, consolidations and acquisitions in the rural banking industry through the grant of financial assistance and regulatory support facility.
The bank in Tangkawayan is just one out of the 23 rural banks operating in Quezon province and one out of some 500 rural banks operating in the Philippines. RBAP member-banks remain financially sound and liquid. What occurred with the New Rural Bank of Tagkawayan Inc. is just part of the maturation and development process as we move toward a stronger industry more attuned to the times and much better suited to address the needs of our clientele.
The entry of white knights also alleviates the government of financial burden of rescuing an insolvent bank. Upon closure of a bank, government-owned PDIC assumes the bank’s remaining assets and shoulders payment of all its liabilities, including deposits from the public. Naturally, saving a troubled bank is preferred over closing it down.
A more reasonable way to save banks in trouble is for them to come into strategic alliances with stronger ones, address their capital problem, and allow significant corporate reconstruction. This is how financial regulators from other parts of the globe address this issue.
Rural banks comprise the bigger chunk of the total number of banks in the system at about 86 percent. Their contribution to countryside development should be supported by encouraging them to merge and consolidate to attain economies of scale, achieve higher lending capacities and improve the quality of their banking services, particularly in their niche markets.
The industry is one with the regulators in envisioning that the improved program will ensure the efficiency and effectiveness of rural banks in mobilizing savings and investments toward a robust economy, particularly in the countryside.
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