Pumping fresh capital to rural banks

With the law allowing the infusion of foreign equity in rural banks now in place as embodied in Republic Act (RA) 10574, it is expected that foreign investors will start fostering partnerships with local industry players to fuel new investments to boost economic growth in the countryside. In the next months, financial strategies shall be planned, discussed and finalized.

The rural banking industry nowadays is comparable to top-rated stocks in the stock market, where share prices will go through the roof due to the rush of excitement among industry players. Anticipation will drive investors into buying shares, at least for the short term.

After the euphoria brought about by the passage of RA 10574, we should put into perspective the status of the rural banking industry in providing for the needs of its clientele, to see the possible effects of foreign investments in the industry.

Before the law was passed, only foreign banks are allowed to acquire equity in rural banks. Foreign individuals or entities are prohibited from doing the same.

The new law amended Section 4 of RA 7353, or the “Rural Bank Act of 1992,” and enables foreign individuals and entities to acquire equity of up to 60 percent in rural banks. To quote, “non-Filipino citizens may own, acquire or purchase up to 60 percent of the voting stocks in a rural bank. The percentage of foreign-owned voting stocks shall be determined by the citizenship of the individual or corporate stockholders of the rural bank.”

It is true that foreign investments will not pour in to the coffers of rural banks overnight. However, the thought of allowing foreign capital infusion in rural banks is just a small step that will pave way for the much-needed push for the industry. In the same way that it will also aid in the overall development of the countryside by creating an environment beneficial to foreign and local investors alike and encourage more borrowing activities from rural bank clients to finance their respective enterprises.

Based on the “2012 Status Report of the Philippine Financial System” of the Bangko Sentral ng Pilipinas (BSP), the rural banking industry continues to report gains from its core lending activities. In March 2012, it has posted a total loan portfolio of P110.70 billion, higher by 4.2 percent (P4.5 billion) in 2011.

The agricultural, hunting and fishery sector is still the main recipient of loans from the rural banks. In compliance with RA 6977, or the Magna Carta for Small Enterprises, as amended by RA 8289 and 9501, a total of P11.70 billion has been set aside by the rural banking industry for micro, small and medium enterprises credit. According to the same BSP report, rural banks exceeded the statutory floors of 8 percent for micro and small enterprises, and 2 percent for medium enterprises at P8.2 billion and P3.5 billion, respectively.

With the potential financial backing provided by foreign investors, these small achievements can be replicated to even likely register a double-digit growth rate in loan portfolio, which in effect places rural banks in a better position to serve rural areas especially amid the prognosis of a robust economic growth this year.

For 2013, financial analysts see the Philippine economy growing by 7 percent, mainly attributed to sound policy developments and economic fundamentals, which provide investors with a solid foundation for confidence in the Philippines.

As economic activities flourish, borrowings will also perk up, helping both the client and more significantly, the entire rural banking industry.


Published in The Manila Times, 6 June 2013