Sen. Osmena Sponsorship speech on RB Foreign equity bill

I. INTRODUCTION:

Mr. President, it is my honor, pride and privilege to rise in this august Chamber to sponsor this important piece of economic legislation. I rise to sponsor Senate Bill No. 3282, “AN ACT ALLOWING INFUSION OF FOREIGN EQUITY IN THE CAPITAL OF RURAL BANKS, AMENDING REPUBLIC ACT NO. 7353, OTHERWISE KNOWN AS THE RURAL BANKS ACT OF 1992, AS AMENDED AND FOR OTHER PURPOSES.

This bill is in substitution of Senate Bill No. 1907 introduced by Senator Miriam Defensor Santiago and Senate Bill No. 3089 introduced by Senator Edgardo J. Angara, taking into consideration House Bill No. 5360 introduced by Representatives Sergio Apostol, Rufus Rodriguez, Maximo Rodriguez, Jr., Pedro Romualdo, Roilo Golez, Julieta Cortuna, Isidro Lico, Cresente Paez, Philip Pichay, Arthur Defensor, Jr., Jeci Lapus and Agapito Guanlao.

Mr. President, rural banks have been operating in our country for almost sixty (60) years, and in all that time, have always been important and economic and financial players in countryside development. Throughout the Post-World War II era, they have made positive contributions on our rural economic development and financial inclusion. I will emphasize the leading role that rural banks have played in the development of the countryside for six decades.

Mr. President, this bill aims to open up ownership of rural banks to foreign equity, and in so doing, revitalize the rural banking system and improve access of banking services in rural areas. This legislation will stimulate more lively activity among rural banks by creating an environment that is beneficial to foreign investors, local banking patrons, and national economy.

But first, Mr. President and distinguished colleagues, for the enlightenment of the general public, please allow me to give you a background on why this bill was filed and why it needs to be enacted with immediacy.

Let us begin with Republic Act No. 7353, known as the Rural Banks Act of 1992. R.A. 7353 ensures that it is the only category of local banks that is not allowed to access foreign equity. This restriction has limited the capabilities of our rural banks to improve and expand its services to farmers, micro-enterpreneurs, Small and Medium Enterprises (SME), and rural folk. It has limited the further expansion of banking services especially in the countryside where financial inclusion is most needed.

II. RURAL BANKS’ LEGISLATIVE HISTORY:

I wish, Mr. President, to delve further into Philippine banking history. It has not always been the case that rural banks are not allowed access to foreign equity. In the old “Rural Banks Act” or Republic Act No. 720, which took effect in 1952, it was mandated that “at least sixty percent of the capital stock of any Rural Bank shall be owned and held by citizens of the Philippines: xxxx”. Thus, under Section 4 of R.A. 720, rural banks were allowed foreign equity up to forty percent (40 %).

But on January 16, 1981, Section 4 of R. A. No. 720 was amended by Presidential Decree (P.D.) No. 1794 which provided that, “the capital stock of any Rural Bank shall be owned and held directly or indirectly by citizens of the Philippines.” The rural banking industry was thus effectively nationalized.

Republic Act No. 720 was later repealed by Republic Act No. 7353. But Section 4 of RA 7353 continued to restrict the ownership of rural banks to citizens of the Philippines only.
Recently, this restriction on foreign investment in rural banks appeared to have been relaxed to an extent, with the passage of Republic Act No. 7721 titled “An Act Liberalizing the Entry and Scope of Operations of Foreign Banks in the Philippines”, which expressly modified Section 4 of R.A. No. 7353. Under this Act, foreign banks are allowed to operate in the Philippine banking system by:

a) acquiring, purchasing or owning up to sixty percent (60%) of the voting stock of an existing bank, or

b)by investing in up to sixty percent (60%) of the voting stock of a new banking subsidiary incorporated under the laws of the Philippines, or

c)by establishing branches with full banking authority.

Sadly, the law fell short of allowing foreign individuals or foreign entities which are not banks, to acquire equity in rural banks.

III. RURAL BANKS : CHALLENGES FACED

Mr. President, today, rural banks need to comply with international capital standards; are called upon to expand and improve their competitiveness; and channel more resources and increased investments for the benefit of the unserved and the underserved.

There is pressing requirement for rural banks to strengthen our agri-agra base to enable it to compete globally.

There is a growing demand for capital needed by the microenterprise and SME sectors.

There is an increasing need, Mr. President, for rural banks to invest in expensive but necessary technology to provide more effective and more efficient services.

For this, rural banks need to look beyond their limited resources and take advantage of funds available elsewhere. The opportunity to forge international equity partnerships will put rural banks on a level playing field with its thrift and commercial bank counterparts that are able to take in foreign partnerships. A healthier and more competitive rural banking sector, with the benefit of international partnerships, will mean more resources to reach out to the unbanked, underbanked, and the less privileged sector of society.

IV. RURAL BANKS AS ENGINES OF RURAL ECONOMIC DEVELOPMENT

Mr. President, I cannot emphasize enough the importance of rural banks, and its premiere role as engines of rural economic development.

Microfinance

For example, according to official reports of the Bangko Sentral ng Pilipinas, rural banks have been supportive of, and actively involved in, BSP’s endeavor to promote sustainable microfinance as a response to the needs of the many enterprising poor in the country. Since its launching as one of BSP’s advocacies in 2000, the number of rural banks involved in microfinance has steadily risen as of end-December, 2011. There are already seven microfinance-oriented rural banks, having 293 branches nationwide and 137 others engaged in micro-lending.

For the promotion of microfinance in the countryside, the said Report states that as of the end of September, 2011, rural banks have provided a total of P 5. 4 Billion worth of microfinance loans to 808,021 micro borrowers. Over-all, there were six microfinance-oriented rural banks and 137 rural banks with some level of microfinance operations funding the credit requirements of the entrepreneurial poor.

Automated Teller Machines; Electronic Banking

The industry also further expanded its banking services by providing non-traditional delivery channels such as Automated Teller Machines (ATM) and electronic banking. The same Bangko Sentral report reveals that as of December 2011, rural and cooperative banks had deployed 233 Automated Teller Machines (ATMs) of which 199 are on-site and 34 are off-site.

To complement this, a total of 56 rural banks were provided electronic banking services such as the Electronic Fund Transfer Point of Sale System and Mobile Banking.

Assets

The rural banking industry is one of our most successful sectors. It has sustained its growth momentum. Total assets as of end-September 2011 reached P 169 Billion ——- 9.2 percent higher than the P 155 Billion recorded for the previous year ago.

Loans

Also, the Report reveals that as of end-September 2011, the Agricultural, Fishery, Hunting and Forestry sector was the main recipient of the industry’s loans, following a P2.2 Billion or 6.3 percent growth. Also, loans granted to all sectors of the economy exhibited growths, except for financial intermediation. Substantial increments of more than P 1 Billion also went to the following sectors :

a) Private Household with employed persons at P 2.4 Billion or 42.6 %;
b) Wholesale and Retail Trade, Repair of Motor Vehicles at P 1.6 Billion or 8.5 %;

c) Other Community, Social and Personal Services Activities at P 1.4 Billion or 18. % ; and

d) Real Estate, Construction, Renting and Business Activities at P P 1.2 Billion or 8 %.

The combined P 8.8 Billion loan growth in these sectors accounted for 75.7 % of the industry’s total loan growth of P 11.6 Billion.

Capitalization

The BSP Report, Mr. President, notes that total capital accounts of the rural banking industry strengthened by 11.6 percent (P 3.1 Billion) to P 29.9 Billion, as of end-September 2011, an increase from the previous year’s P 26.8 Billion on the back of the rise in paid-in capital (11.1 percent) and retained earnings and undivided profits (12.5 percent).

However, the BSP report warns that even with a relatively high capital adequacy ratio, only 482 (85.8 percent) out of 565 rural banks, were able to comply with the required minimum amount of capital. The Report advised non- compliant banks to consolidate or merge with stronger banks or increase capitalization.

Foreign equity investments would, without doubt, Mr. President, fill this gap. It would solve the problem of rural banks complying with the required minimum capital.

Foreign equity would definitely be a major stimulus for microfinance, micro-enterprise, and agriculture sectors and will therefore be catalysts in countryside development.

This legislation will open a new source of equity infusion, particularly for the smallest lenders that cannot expand and who cannot afford sophisticated forms of financial services.

V. CONCLUSION

Mr. President, ladies and gentlemen of this venerable institution, in recognition of the limitations brought about by section 4 of R.A. 7353, restricting ownership of rural banks to Filipino citizens only, I am seeking the immediate passage of this measure, which will amend section 4, allowing for foreign individuals and entities to acquire equity of up to 60% in rural banks.

For these reasons, Mr. President, I urge my distinguished colleagues in this august chamber to join me in enacting this measure. Thank you very much.