BSP Circular No. 900: Guidelines on Operational Risk Management

20 January 2016

TO: All Rural Banks

Dear Rural Bankers,

The Monetary Board in its Resolution No. 2115 dated 18 December 2015, approved the following guidelines on operational risk management for BSP supervised financial institutions and amendments in the Manual of Regulations for Banks (MORB) and Manual of Regulations for Non-Bank Financial Institutions (MORNBFI).

Section 1. Sections X179/4179Q/ 4198N/ 4179T are hereby added to the MORB/MORNBFI to read as follows:

Policy Statement. It is the thrust of the Bangko Sentral ng Pilipinas (BSP) to promote the adoption of effective risk management systems to sustain the safe and sound operations of its supervised financial institutions (BSFIs). Cognizant that operational risk is inherent in all activities, products and services, and is closely tied in with other types of risks (e.g., credit, liquidity and market risks), the BSP is issuing these guidelines to clearly set out its expectations and define the minimum prudential requirements on operational risk management. These guidelines align existing regulations to the extent possible, with international standards and best practices. BSP expects its BSFIs to adopt an operation risk management framework, as part of the enterprise-wide risk management system, that is suited to their size, complexity of operations, and risk profile.

Section 2. Subsections Xl79.t/4t79Q.t/4L9BN.L/4L79T.1 shall read as follows:

Definition of Operational Risk. Operational risk refers to the risk of loss resulting from inadequate or failed internal processes, people and systems; or from external events. This definition includes legal risk, but excludes strategic and reputational risk. Operational risk is inherent in all activities, products and services, and cuts across multiple activities and business lines within the financial institution and across the different entities in a banking group or conglomerate where the financial institution belongs.

Section 3. Subsections X179.2/4179Q.2/4198N.2/4179T.2 shall read as follows:

Duties and Responsibilities
a. Board of Directors. Consistent with the principles embodied under Subsection X141.3 of the MORB, the duties and responsibilities of the Board of Directors in relation to the effective management of risk include the establishment of comprehensive and effective operational risk management framework as part of the enterprise-wide risk management system. In this regard, the board of directors shall:

1. Ensure that it is aware of and understands the nature and complexity of the major operational risks in the BSFI’s business and operating environment, including risks arising from transactions or relationships with third parties, vendors, suppliers including outsourced service providers, and clients of services provided. This should include understanding of both the financial and nonfinancial impact of operational risk to which the BSFI is exposed to;

2. Approve the operational risk management framework which shall form part of the BSFI’s enterprise-wide risk management system and shall cover all business lines and functions of the BSFI, including outsourced services and services provided to external parties. The operational risk management framework should include an enterprise-wide definition of operational risk, which should be consistent with the definition under section 2 of this circular, governance, and reporting structures including the roles and responsibilities of all personnel, feedback mechanism, as well as standards and tools for operational risk management. In this respect, the board shall:

a. Define the operational risk management strategy and ensure that it is aligned with the BSFI’s overall business objectives. Relative to this, the board should set and provide clear guidance on the BSFl’s operational risk appetite (i.e. the level of operational risk the BSFI is willing to take and able to manage in pursuit of its business objectives as well as the type of risks that are not acceptable to the board and management), which should consider all material risk exposures as well as the BSFl’s financial condition and strategic direction;

b. Approve appropriate thresholds or limits to ensure that the level of operational risk is maintained within tolerance and at prudent levels and supported by adequate capital. Relative to this, the board shall approve policy on resolving limit breaches which should cover escalation procedures for approving or investigating breaches, approving authorities, and requirements in reporting to the appropriate level of management or the board;

c. Ensure that operational risk is appropriately considered in the capital adequacy assessment process;

d. Ensure that it receives adequate information on material developments in the operational risk profile of the BSFI, including pertinent information on the current and emerging operational risk exposures and vulnerabilities as well as information on the effectiveness of the operational risk management framework. The board must challenge the quality and comprehensiveness of the reliability of the said information and the monitoring system for operational risk;

e. Ensure that business objectives, risk appetite, the operational risk management framework, and the respective roles and responsibilities of personnel and officers at all levels in terms of implementing the operational risk management framework, are properly disseminated, clearly communicated/discussed, and understood by personnel concerned;

f. Provide senior management with clear guidance and direction regarding the principles underlying the operational risk management framework. The board shall ensure that senior management appropriately implements policies, processes and procedures, and provides feedback on the operational risk management process. In this regard, the board shall establish a feedback and reporting system that will allow employees to raise their concerns without fear of negative consequences; and

g. Ensure that the operational risk management framework is subject to effective and comprehensive independent review, on a periodic basis, by operationally independent, appropriately trained, and competent staff to ensure that it remains commensurate with the BSFl’s risk profile and continues to be adequate and effective in managing operational risk. The review should take into account the changes in business and operating environment, material changes in systems, business activity or volume of transactions, quality of control environment, effectiveness of risk management or mitigation strategies, loss experience, and the frequency, volume or nature of breaches in limits or any policy.

3. Provide adequate oversight on all outsourcing activities and ensure effective management of risks arising from these activities. In this regard, the board of directors shall approve a framework governing outsourcing activities, which includes a system to evaluate the risk and materiality of all existing and prospective outsourcing engagements and the policies that apply to such arrangements;

To view full copy of the guidelines, please refer to the attachment.
c900- Guidelines on Operational Risk Management

Thank you.

RBAP Secretariat

BSP Circular No. 899: Amendments to the Guidelines on Outsourcing

20 January 2016

TO: All Rural Banks

Dear Rural Bankers,

The Monetary Board in its Resolution No. 2115 dated 18 December 2015, approved the following amendments in the Manual of Regulations for Banks (MORB) and Manual of Regulations for Non-Bank Financial Institutions (MORNBFI) on the guidelines on outsourcing. These guidelines shall be read in conjunction with the guidelines on operational risk management.

Section 1. Section X162 and all its subsections in the MORB shall now read as follows:

Section X162. Statement of Principle on Outsourcing. A bank may outsource to third parties or to related companies in the group, in accordance with existing BSP regulations, certain services or activities to have access to certain areas of expertise or to address resource constraints, Provided, That it has in place appropriate processes, procedures, and information system that can adequately identify, monitor, and mitigate operational risks arising from the outsourced activities. Provided further, that the bank’s board of directors and senior management shall remain responsible for ensuring that outsourced activities are conducted in a safe and sound manner and in compliance with applicable laws, rules and regulations.
Subsection XL62.T Definition. Outsourcing shall refer to any contractual arrangement between a bank and a qualified service provider for the latter to perform designated activities on a continuing basis on behalf of the bank.

Subsection XL62.2 Prohibition against outsourcing of inherent banking functions. No bank shall outsource inherent banking functions such as:

a. Services normally associated with placement of deposits and withdrawals including the recognition based on recording of movements in the deposit accounts;
b. Granting of loans and extension of other credit exposures;
c. Position-taking and market risk-taking activities;
d. Managing of risk exposures; and
e. Strategic decision-making.

Subsection X162.3 Authority to outsource. Only those banks with a CAMELS composite rating of at least 3 and a Management rating of not lower than 3 shall be allowed to outsource designated activities without prior Bangko Sentral approval. Otherwise, the bank must secure prior approval from the appropriate department of the SES whose evaluation will be based on the bank’s ability to manage risks attendant to outsourcing.

Subsection XL62.4 Governance and Managing of Outsourcing Risks. Key risk areas related to outsourcing such as strategic; reputation /legal; operational, compliance, country and concentration risks should be evaluated before entering into and while managing outsourcing contracts. In this regard, banks shall:

a. Perform risk assessment of a business activity and evaluate the implications of performing the activity in-house or having the activity outsourced.

The following factors shall be considered in the assessment:
(1) Level of importance to the bank of the activity to be outsourced and potential impact on bank’s operations, financial condition, reputation, and ability to achieve its objectives, strategies and plans, should the service provider fail to perform the services;
(2) Outsourcing costs in proportion to total operating expenses and compared with costs of developing own infrastructure and expertise;
(3) Aggregate exposure to a particular service provider, in cases when the bank outsources various functions to the same service provider;
(4) Ability to maintain appropriate controls and meet regulatory requirements, in cases of operational constraints of the service provider; and
(5) Exposure to risk of confidentiality, integrity and availability of customer and bank data.

In cases when the risk management system is deemed inadequate for purposes of managing outsourcing-related risks, the BSP may direct the bank to terminate, modify, make alternative arrangements or re-integrate the outsourced activity into its operations, as may be necessary.

b. Establish policies and criteria to select the “best” service provider for the outsourced activities and to get said services at reasonable price. The following factors should be considered in evaluating potential service providers:

(1) Reputation, ownership structure (to identify potential conflict of interest), technical expertise, and operational capability;

(2) Financial performance and condition (e.g., ongoing viability, outstanding commitments, capital/funding strength, liquidity and operating results; and reliance on subcontractors) of the service provider and its closely-related affiliates;

(3) Operations and internal control environment (e.g., internal controls, facilities management, training, security of system, privacy protection, maintenance and retention of records, business resumption and contingency plans, systems development and maintenance, and employee background checks);

(4) Fees and charges (e.g., outsourcing cost should be lower than developing the necessary infrastructure and expertise, comparable with market rates, and reasonable vis-à-vis scope and complexity of services);

(5) Actual performance vis-à-vis service level agreement;

(6) Performance of the service provider (past and present engagements) including the reasons/causes of disengagements, if any; and

(7) Compliance with provisions of service agreements, performance standards and adherence to applicable laws, regulations, and supervisory expectations.

In cases when the clients are prejudiced due to errors, omissions, and frauds by the service provider, the bank shall be liable in providing the appropriate remedies or remuneration as may be allowed under existing laws or regulations, without prejudice to the bank’s right of recourse to the service provider.

c. Establish, maintain, and regularly test business continuity and contingency plans for situations wherein the service provider cannot deliver the required services. The contingency plan must indicate whether another service provider will be tapped or the service/activity will be brought back in-house. This should in turn consider the costs, time, and resources that would be involved.

Contingency arrangements in respect of daily operational and systems problems should be covered in the service provider’s own contingency plan. The contingency plan must be reviewed regularly to ensure that it remains relevant and ready for implementation.
d. Ensure that it has adequate resources to manage and monitor outsourcing relationships on a continuing basis. Banks are expected to develop acceptable performance metrics to assess outsourcing contracts. They shall also maintain records of all outsourcing activities which should be updated and reviewed regularly.

e. Ensure that personnel with oversight and management responsibilities for service providers have the appropriate level of expertise and stature to manage the outsourcing arrangement. The oversight process, including the level and frequency of management reporting, should be risk-focused. Banks should design and implement risk mitigation plans for higher risk service providers. These may include certain requirements or processes such as additional reporting by the service provider or heightened monitoring. Further, more frequent and stringent monitoring is necessary for service providers that exhibit performance, financial, compliance, or control concerns.

Subsection X162.5 Documentations. The bank should maintain necessary documentation to show that outsourcing arrangements are properly reviewed and the appropriate due diligence has been undertaken prior to implementation. The bank shall keep in its file the documents shown in Appendix 100 and the same shall be made available to authorized representatives of the Bangko Sentral for inspection.

Subsection X162.6 Intra-group outsourcing. The guidelines and requirements of outsourcing to third-party service providers shall be observed when outsourcing within a business group including its head office, another branch or related company. When the bank is the service provider, the bank may only render services it performs in the ordinary course of its banking business: Provided, That (i) the service is rendered to subsidiaries, affiliates and companies related to it by at least five percent (5%) common ownership; or (ii) the service is rendered to its own depositors on account of the bank being a depository. The bank, acting as a service provider within its group, shall uphold the following:

a. Confidentiality of deposits and investments in government bonds as defined under R.A. No. L4O5, as amended;

b. Prohibition on cross-selling except as allowed under applicable regulations.

Subsection X162.7 Offshore outsourcing. Offshore outsourcing exists when the service provider is located outside the country. Subsec. X162.7 on intra-group outsourcing likewise applies in cases of offshore outsourcing. ln addition, offshore outsourcing of bank’s domestic operations is permitted only when the service provider operates in jurisdictions which uphold confidentiality. When the service provider is located in other countries, the bank should take into account and closely monitor, on continuing basis, government policies and other conditions in countries where the service provider is based during risk assessment process. The bank shall also develop appropriate contingency and exit strategies.

The Bangko Sentral examiners shall be given access to the service provider and those relating to the outsourced domestic operations of the bank. Such access may be fulfilled by on-site examination through coordination with host authorities, if necessary. The domestic branch of foreign bank shall be principally liable in cases where the clients are prejudiced due to errors, omissions and frauds of the service provider located offshore.

The Bangko sentral may require the bank to terminate, modify, make alternative outsourcing arrangement or re-integrate the outsourced activity into the bank, as may be necessary, if confidentiality of customer information, effective customer redress mechanisms or the ability of the Bangko sentral to carry out its supervision functions cannot be assured.

Subsection X162.8. Transitory provision. All outsourcing agreements must be aligned with the provisions of sec. xL62. Existing outsourcing agreements which are not in accordance with this section will not be unwound. However, it must comply with the requirements provided herein upon renewal of the agreements.

Subsection X162.9. Supervisory Enforcement Actions. Consistent with Circular No’ 875 dated 15 April 2015, the BSP may deploy enforcement actions to promote adherence with the requirements set forth in this Circular and bring about timely corrective actions’ The BSP may issue directives to improve the management of outsourcing arrangements, or impose sanctions to limit the level of or suspend any business activity that has adverse effects on the safety or soundness of the BSFI, among others. Sanctions may likewise be imposed on a BSFI and/or its directors, officers and / or employees.

Section 2. Section 4162e and 4190N shall now read as follows:

Section 4162Q Guidelines on Outsourcing. The rules on outsourcing of banking functions as shown under section X162 of the MORB and Appendix e_37 of the MORNBFT shall likewise apply to eBs.

Section 4190N Guidelines on Outsourcing. The rules on outsourcing of banking functions as shown under section X162 of the MoRB and Appendix e-37 of the MORNBFI shall likewise apply to NBFIs.

Section 3. Effectivity. This Circular shall take effect fifteen (15) calendar days after its publication either in the official Gazette or in a newspaper of general circulation.

To download full copy of the guidelines, please refer to this link: c899 – Amendments to the Guidelines on Outsourcing

Thank you.

RBAP Secretariat

Building financial capabilities through m-banking

Rural banks already play a big role in small communities. They serve over one million low-income families who trust them for microinsurance, loans, savings and other crucial banking services that help them build a financial foundation to support themselves and their families.

As such, it is important that these services are made readily available and accessible to the poor in remote places, where a vast majority of rural bank clients’ are situated. By improving access to financial services, rural banks represent a key component to the government’s vision of inclusive growth by reaching a wider number of clients while effectively saving on costs.

In fact, since mobile banking was introduced in 2006, the rural banking industry has been able to process more than P16 billion in mobile money transactions, involving almost 100 rural banks and their 1,200 branches and other banking offices.

Through its Microenterprise Access to Banking Services program or MABS, the Rural Bankers Association of the Philippines (RBAP) assisted member-banks to increase the financial services offered to small farmers, fisherfolks and small and micro-entrepreneurs by providing microfinance technical assistance and training.

On the other hand, trained banks develop their products and services–such as loans, deposits, and money-transfer services, to name a few–to specifically suit the needs and requirements of the poor. One of the tools constantly utilized by rural banks is mobile banking.

While bigger banks have been investing in their own ATMs, most rural banks have partnered with a third party ATM provider such as ENCASH and offering a GCash and Smart Money-enabled ATM card services to their customers. Mobile money-enabled services, SMS banking, Point of Sale systems, cash cards, ATM cards, and prepaid debit cards are technologies that are now within the grasp of rural banks.

Improved banking services are likewise complimented by regulations that provide greater opportunities for rural banks to grow and expand both their services and their market reach.

Already, rural banks and their clients have a strong relationship; there are challenges that need to be addressed. One is building awareness amongst banks, cash-in/cash-out partner merchants and clients of the benefits of mobile phone banking services; and two, ensuring that banks maintain a close and continuous relationship with their clients and seeing to it that they are updated on the various new services that will make their financial situations easier and more productive.

Recently, MicroFinance Opportunities (MFO) has developed an online Course and Toolkit aimed at supporting branchless banking providers interested in incorporating Consumer Education as part of their adoption strategies. This Toolkit gathers lessons learned and insights from the implementation of a Consumer Education for Branchless Banking (CEBB) Program in India, Zambia and Philippines.

Practitioners will be able to use the Toolkit to identify the challenges their customers face as they adopt their branchless banking service and determine how consumer education can help to address them. The steps and guidance provided in the Toolkit will then enable practitioners to design a successful consumer education strategy for their branchless banking services.

Branchless banking is important because it allows microfinance institutions to serve more clients at lower cost, increases reach into areas where a full branch would not be cost-justified, and allows clients to access their accounts more frequently and manage their loan funds more easily. It likewise enables clients to access their funds closer to their homes or businesses through automated teller machines (ATMs), for instance, which implies less waiting time, less travel time to the service outlet, and 24 hour a day access to their funds.

Last March 7, MFO, together with the RBAP and its technical arm, the Rural Bankers Research and Development Foundation, Inc. (RBRDFI), launched the first run of the CEBB training at the Asian Institute of Management Conference Center Manila. The event – attended by various member rural banks and microfinance institutions and cooperatives – was graced by representatives from the Bangko Sentral ng Pilipinas, USAID, and the Asian Development Bank. The next run will be sometime May 2014.

CCLRB: A Brave New World


CCLRB: A Brave New World

In its effort to promote awareness among rural bankers on the country’s changing financial landscape, the Confederation of Central Luzon Rural Banks (CCLRB) held the 2014 Annual Management Conference last February 27-28 at Forest Lodge in Camp John Hay, Baguio City.

The annual event focused on the theme, “A Brave New World: Facing Up to the New Competitive Realities of Rural Banking, Coming Up with Ways to be more Competitive as Small Banks.”

Present during the first day of the event were CCLRB President Marie Aimee M. Samson-Maramba and the former Rural Bankers Association of the Philippines (RBAP) President Tomas S. Gomez IV, who discussed the challenges faced by the rural banking sector and possible opportunities for growth.

A roundtable discussion was also conducted to allow the attendees to share ideas on strategies that could help rural banks step up against challenges and competition.

The second and last day of the event was graced by Agricultural Guarantee Fund Pool (AGFP) Executive Director Dick Pajarillo and RBAP President Vittorio Z. Almario. Mr. Pajarillo recalled AGFP’s successful partnerships with rural banks and how it significantly improved agricultural lending in the countryside.

Development Bank of the Philippines Executive Director Benel Lagua was also in attendance and has asked rural banks to consider the untapped potential of the small and medium enterprises market. Gracing the event were Directors Teodora San Pedro and Mary Jane Chiong from the Bangko Sentral ng Pilipinas.


To view pictures taken during the CCLRB Management Conference, please click on this link:

To download copies of the presentations, please click on the following links:

1. Presentation/Speech of Ms. Mary Jane Chiong of BSP – Copy of Ms. Chiong’s Speech_CCLRBI_22814 Baguio City
2. Presentation/Speech of Mr. Gus Poston of Bridge Advisory – Gus Poston_Bridge
3. Presentation/Speech of Mr. Benel Lagua of DBP – Mr. Benel Lagua_DBP
4. Presentation/Speech of Ms. Teodora San Pedro of BSP – Ms. Teodora San Pedro_BSP

Speech of Mr. Francis Estrada, Chairman of Equity Managers Asia, Inc.*

Confederation of Southern Tagalog Rural Bankers
Plenary Address – “Back to Basics”
2014 Annual Management Conference
Forbes Ballroom, Baguio Country Club
March 3, 2014

When I was invited to speak at this Conference by your colleague – and my cousin, Ricky Estrada – I was of course, honored and intrigued.

I currently serve as independent director to a number of leading public companies. I also serve as Chair, Vice-Chair, Trustee or Director in a number of not-for-profit organizations and advocacies ranging from: Good Governance (private and public), Education, Environment and Sustainable Development.

Having spent most of my professional life as an international investment banker and private equity investor I feel that, with this invitation, I have come full-circle to where “the rubber meets the road”.
Hon. Nelson (Sonny) P. Collantes – Representative, 3rd District of Tanauan, Batangas and Chairman, Committee on Banks and Financial Intermediaries, Mr. Vittorio (Vitto) Z. Almario – President, Rural Bankers Association of the Philippines (RBAP), Atty. Edward Leandro (JunJun) Z. Garcia, Jr. – Chairman, Rural Bankers Research & Development Foundation Inc. (RBRDFI), our host, Mr. Antonio (Tony) O. Pasia – President, Confederation of Southern Tagalog Rural Bankers (CSTRB, our host), Presidents, Directors and members of the many rural bankers’ federations and confederations represented here today, friends:
This Management Conference comes at a crucial time. I understand that you intend to use this occasion to “take stock”, re-visit your “raison d’etre” and craft a relevant and sustainable industry strategy.
On one hand, we have all read/learned about how the Philippines has outperformed most of our neighbors in aggregate economic growth, i.e. GDP, GNP, National Income. We have also learned that, as a “reward” for prudent Monetary and Fiscal policies, the Philippine sovereign has been “re-rated” and our country has become investment grade – and therefore entitled to benefit from forthcoming attendant funding cost benefits.

Poverty and the Inequality Imperative

Following the unprecedented post-Vietnam War global economic growth – despite a number of intervening international financial crises – the global community has begun to realize that the world is paying a steep price for this “prosperity”.

The Global Scene

Attendees at the recent Davos Conference of the World Economic Forum – that most quintessential of gatherings of the world’s movers and shakers – were told some very stark realities:

1. The 85 richest people in the world have as much wealth as the 3.5 billion poorest – the bottom half of the world’s population.

2. Almost half of the world’s wealth is owned by just one percent of the population; the wealth of the one percent richest people in the world amounts to $ 110 T, 65x the wealth of the bottom half.

3. Seven out of ten people live in countries where economic inequality has increased in the last 30 years.

4. The richest one percent increased their share of income in 24 out of 26 countries (for which there is data), between 1980 and 2012.

5. In the US – the “poster child” of the prevailing liberal economic paradigm – the wealthiest one percent captured 95 percent of post-financial crisis growth since 2009 – the bottom 90 percent became poorer. The phenomenon of “jobless growth” has burst into the scene.

The Philippines

In the Philippines, we have similarly been doused with a splash of cold water:

1. Despite exceptionally favorable macro-economic performance (GDP, National Income, Current Account, International Reserves, Inflation, etc.), we have been losing the poverty battle – or, at best, been “dead in the water”.

2. The Philippines will miss its 2015 Millenium Development goal of reducing poverty to 16.6% (it was at 25.2% in 2012). Its new goals are: 23-25% in 2014, 20-23% by 2015 and 18-20% by 2016.

3. The Social Weather Station “Self-Rated Poverty/Food Poverty” survey in the fourth quarter of 2013 showed that:

a) 55% of respondents (11.8 million households) consider themselves “poor” while 41% (8.8 million
households) consider themselves “food poor”.

b) This represented an increase from the third quarter numbers (50% and 37% respectively).

c) The 2013 average of “Poor/Food Poor” stood at 52% and 39% – not much different from 2012 (52% and 41%).

4. The Philippine agriculture/rural sector has been sorely neglected.
a) Despite accounting for 33%of our total workforce (and where 70% of Filipinos live), the sector has seen its share of total loans from the banking system decline from 9.17% (Php. 232.7 B) in March 2008 to 4.6% (Php. 197.2 B) in December 2012.
b) Pious statements of commitment to the contrary, support for this sector has been virtually nonexistent.
c) Not surprisingly, only .1% of the Q4 2013 GDP growth (6.5%) was accounted for by this sector – services and industry contributed 3.5% and 2.8% respectively.

Banking and the Economy

At the risk of being somewhat pedantic, let us revisit what I feel is far too often forgotten – the nature of banks and why they exist.

If you were an average, rational investor, there is no way you would lend – let alone invest – in the equity of a typical bank, for the following reasons:

1. It’s leverage (measured in debt-to-equity or capital to assets terms) far exceeds what any conventional analyst would consider prudent.
2. A daunting maturity mismatch in its balance sheet, i.e. the weighted average maturity of its assets vs. liabilities that would give even the bravest of souls, nightmares.
3. The fact that its liquidity is based on the precarious assumption (which recent global financial crises have dramatically and repeatedly illustrated) that in the event of a crisis, one would be able to “liquefy” its principal assets, i.e. its loan portfolio.

And yet, as we know, banking is among the largest “industries” in the world. Why?

The banking business model is predicated on:

1. The law of large numbers, which says that, under “normal” market conditions, it is unlikely that the majority of depositors would choose to withdraw their funds at the same time.
2. The existence of deposit insurance to protect smaller investors and,
3. The availability of “lender of last resort” facilities during periods of systemic stress or “abnormal” market conditions.

But what justifies the state providing – what the average person/citizen would consider the “fat cats” of society – these extremely valuable privileges?

That, my friends, is the root of the issue.

Banks, and indeed the banking system, are designed to play a critical role in the economy. That role is integral to what we know as the savings-investment process.

The banking system is like the circulatory system of the economy: mobilizing cash (savings) from the surplus units (depositors and investors) and directing them to the deficit units (borrowers/issuers) that would maximize their use. The process is called financial intermediation.

The cost of a banking system’s financial intermediation may be seen as the “spread” between the yield of the system’s assets and the cost of its liabilities.

An efficient process is virtuous: providing higher yields to saver-investors and a lower cost of capital to issuer-borrowers – the entire economy benefits from a lower cost of intermediation.

One must understand that the banking system – and indeed, the financial markets – do not operate in a vacuum. They are not separable from – in fact, they are integral to – the real economy.

Hence, there is really no point to having a strong, well-capitalized and “stable” banking system where large swathes of the population are impoverished or where the benefits of growth are enjoyed by a very small minority. That would be a case of the “tail wagging the dog”, wouldn’t it?

As we noted in the earlier part of this talk, that is precisely the situation we are confronted with. Unless we take this as our “reality check” and point of departure, I do not believe we will arrive at a sensible solution.

That, ladies and gentlemen, is the way I propose you frame your discussions on your industry, its role and the formulation of a strategy that is, at once, relevant and sustainable.

The Philippine Banking Industry

The Bangko Sentral ng Pilipinas (BSP) appears pleased with the state of the Philippine banking system as at the first half of 2013, reporting that:
• Key performance indicators showed steady growth in assets, loans, deposit liabilities and capital accounts
• Soundness and stability indicators of asset quality and solvency remained strong as NPL/NPA ratios reached historic lows while capital adequacy ratio (CAR) remained above regulatory and international standards.
• Cost efficiencies and wider customer reach through maximization of technologically enabled service delivery channels led to a healthy bottom line and positive returns to shareholders.

It went on to report that (the) “landscape remained streamlined on account of continued industry consolidations, acquisitions and bank closures.”

In aggregate terms, universal and commercial banks accounted for 89.7% of total assets, 86% of net loans, 89.1% of deposits and 89.2% of capital accounts; thrift banks, 8.3%, 11.1%, 9.01 and 7.9%; rural banks, 2.07%, 2.91%, 1.89% and 3%.

By segment, the banking “industry reflected the following salient numbers:
1. ROA
a) U/KBs – 2.0%
b) Thrifts – 1.7%
c) RBs – 1.9%
d) INDUSTRY – 2.0%

2. ROE
a) U/KBs – 15.8%
b) Thrifts – 14.1%
c) RBs – 10.4%
d) INDUSTRY – 15.4%

3. Net Interest Margin
a) U/KBs – 3.2%
b) Thrifts – 5.0%
c) RBs – 10.4%
d) INDUSTRY – 3.5%

4. Cost to Income
a) U/KBs – 56.7%
b) Thrifts – 64.3%
c) RBs – 76.5%
d) INDUSTRY – 58.7%

5. Capital Adequacy Ratio (Solo)
a) U/KBs – 17.3%
b) Thrifts – 17.6%
c) RBs – 18.4%
d) INDUSTRY – 17.7%

The rural banking industry is clearly long on reach and short on “firepower”.

In more specific terms, BSP reported that:

Bank Office Distribution
1. There were 9,543 banking offices, up 3.6% from the 9,207 at end-June 2012) with universal and commercial banks accounting for 54.8%; thrift banks, 17.4% and rural and cooperative banks, 27.8%.
2. However, banking presence remained concentrated in highly urbanized, densely populated areas with NCR on one end of the spectrum showing 100% and ARMM on another, showing 8% coverage respectively.
3. The ATM network grew 10.4% for the year as at end-June 2013 with universal/commercial banks accounting for 86%; thrift banks, 11.9% and rural/cooperative banks, 2.1%.


From a purely financial/operational point of view, the overall banking system performed positively.
1. Net profit was up 60.6% (Php. 97.7 B vs. Php. 60.8 B).
2. Key financial indicators stood as follows: return on assets of 2% p.a., a net interest margin of 3.5% and a return on equity of 15.4%.
3. Reflecting an exceptionally long period of accommodative monetary policy (in the US and domestically), bank trading activity grew substantially resulting in an increase in the share of trading gains to total profit (20.9%) – introducing a level of earnings volatility not seen before.
4. The banking system’s cost-to-income ratio improved significantly from 64.6% to 58.7%.
5. The banking system’s ROE compares with 10 Year Philippine Treasury yields (as of February, 2014) of 4.32% p.a. – reflecting a premium on the “risk free” return on capital of a whopping 11.08%.

NPAs and NPLs
1. The NPA ratio for all banks stood at 3.13%; universal/ commercial banks, 3.13%; thrift banks, 6.29% and rural banks, 12.04% respectively.
2. NPL/NPA coverage ratios for all banks stood at 110.84% and 69.88%; universal/commercial banks, 130.11% and 77.98%; thrift banks, 72.28% and 50.28% and rural banks, 61.54% and 40.67% respectively.

Relative to the ASEAN 5
1. As at end-March 2013, the Philippines reflected a CAR of 17.8%, second to Indonesia’s 18.9% and the average of 16.8%.
2. Net Tier 1 ratio stood at 15.9%, again second to Indonesia’s 17.3% and the average of 14.2%.
While much remains to be done, it is clear that the Philippine banking industry is strong and profitable – and, one would assume, perfectly capable of discharging its fundamental development obligations.

Rural Banking and Philippine Development Imperatives

I submit that the over-arching Philippine development imperative is to substantially reduce poverty and implement an economic development program that is holistic, inclusive and sustainable.

Accordingly, it is crucial that, our rural communities in particular, are brought into the mainstream of economic activity. With technical support and focus, the rural banking industry would appear to be logical development catalysts. That is not to say that only banks based in rural communities have a role.
Former NEDA Director General Ciel Habito recently described the current USAID strategy, which appears to focus on key secondary cities (“KSC”)”, beginning with Batangas City, Cagayan de Oro and Iloilo. They seem to believe that, focused properly, these regional centers can spur growth in the surrounding rural communities.

The idea is to develop “value chain linkages” between adjoining rural-based production units (agriculture, livestock, fisheries, forests and mining) and these key secondary cities (KSCs), which provide utilities, infrastructure, processing facilities and markets (local, regional and export).

A SWOT (“Strengths, Weaknesses, Opportunities and Threats”) analysis of the Philippine industry might show the following:

1. Strengths
a) “Last mile” to the rural-based production units (real or potential).
b) Intimate knowledge of the “terrain” and the players – precisely what the larger financial institutions do not have.
c) Long-standing relationships with the community and its major players.
d) Comparatively lower absolute cost to access loan and deposit business.

2. Weaknesses
a) Lack of appropriate/cost-effective technical support covering recruitment, training, IT, credit/loan administration, treasury, etc.
b) Lack of scale, narrow talent base and limited product lines/services.

3. Opportunities
a) Strategic partnerships (on an industry, regional and institutional basis).
i. Educational institutions: for training, recruitment (OTJ and permanent), and market research in exchange for case research and placement of graduates.
ii. Selected Universal/Private Banks and LBP: for training, systems (credit, loan administration, treasury), funding, “syndications”, origination of larger deals, etc.
iii. DBP: offer to serve as an alternative to a far more expensive branch network development strategy; explore “window 3” possibilities.
iv. Specialized Agencies e.g. Phil-Exim (export credit programs), NDC, Dep-Ed (school-house reconstruction), DSWD (CCT Program), etc.
v. Leading Micro-Finance Institutions (e.g. Card, etc)
vi. Foundations and Enterprises with significant CSR programs.
viii. Indigenous communities with significant ancestral domain land and “developable” resource base, e.g. commercial forest and processing facilities at the Lumad ancestral domain in the CARAGA region.
ix. Enterprises with a large number of suppliers or sub-contractors.

b) On an industry or region basis, approach multi-lateral and bi-lateral agencies: to secure funding and technical support for training, modernization and special programs (e.g. ADB’s inclusive growth program).
c) Substantial infrastructure-related projects (e.g. construction, tourism, municipal utilities, etc).
d) Reconstruction of typhoon/earthquake-ravaged communities (housing, schools, etc.)
e) Higher-value agro-industry (e.g. new coconut product processing, latex rubber, cacao, Arabica coffee, livestock, commercial fishing, cultivation and processing, etc.).
f) Tourism-related services in designated tourism “hubs”.

4. Threats
a) Inertia or the will to reinvent itself.
b) NPA/NPL levels.
c) Lack of capital/funding.
d) Shortage of talent committed to build a future in your banks’ respective communities.
e) Reluctance to invest in relevant new technology and “professional management” systems and processes.
f) Reluctance to adapt to modern governance practices.
g) Unpreparedness for ASEAN integration.

As a matter of strategy, I recommend that the rural banking industry get together and:
1. Consider a subtle, but fundamental, change in how it sees itself and, as a consequence, begin to modify its business model.

a) More than offering just its modest balance sheet resources, the rural banker should strive to be a trusted “financial adviser” and, in time, hopefully gate-keeper to the community. In this role, it would:
i. Assist in determining the community’s financing needs, ii. Propose financing solutions (which may or may not involve a balance sheet exposure on its part) and,
iii. Introduce the appropriate finciers and investors to the community.

b) The process will take time and require a significant training/re-training for both young and the existing senior managements of the rural banks.
c) However, if successful, it would create a significant and relevant non-interest income stream for the rural banks.

2. Engage qualified/capable outside advisers to:
a) Assist you formulate a strategy and implementation plan for the key segments of the rural banking industry, i.e. the authentically rural and the somewhat more urban).
b) Recommend short and medium term target institutional partnerships from among those indicated.
c) Assist in negotiating the subject partnerships.
d) Select and/or design training programs for the industry based on it most pressing imperatives and its overall vision.

3. Secure BSP endorsement and advice on which multilateral, bi-lateral and other agencies to approach for technical and financial support to implement your strategy.

Ladies and gentlemen, you have a formidable challenge and opportunity before you.

Quite apart from energy, commitment and focus, engaging this challenge will require you to re-invent yourselves. You must dare to innovate, collaborate and listen to a wide range of partners – with diverse points of view.

I wish you every success on this exciting journey – our country needs you to win!

*Francis G. Estrada currently serves as independent director in a number of public and private For Profit and Not-for-Profit organizations. He was the first alumnus to be elected President and Chief Executive Officer of the Asian Institute of Management (“AIM”). He has served as Chairman of the board of trustees at De La Salle University, its leading member institution and a leading private Philippine university. He serves as independent director and adviser to a number of for-profit and not-for-profit institutions in Asia. Upon his return to the Philippines in 1997, after 22 years overseas, Mr. Estrada co-founded and served as Chairman, General Partner of Equity Managers Asia, Inc. (Philippines), a financial and investment advisory boutique.

To download a copy of the speech, please click on this link: Speech of Mr. Francis Estrada during the 2014 Annual Management Conference of the Confederation of Southern Tagalog Rural Banks (CSTRB)

Reinforcing Agri Finance

The government’s goal to achieve financial inclusion rests on the capability of the rural banking sector to spur countryside development.

Such holistic growth depends on rural banks’ continued dedication to invest in agriculture and agrarian reform projects. Thus, the recent accreditation given by the Bangko Sentral ng Pilipinas (BSP) to another set of rural banks, making them eligible institutions to receive financing from other banks in line with the provisions of Republic Act 10000 or the Agri-Agra Reform Credit Act of 2009, is another step in the right direction towards the fulfillment of this goal.

The central bank’s accreditation will not only expand the functions of rural banks now tagged as Accredited Rural Financial Institutions (ARFI), it will also allow them to increase their presence in poor communities and thereby, enhance the access of the rural agricultural sector to financial services and programs.

Based on the data of the Philippine Statistics Authority, the agricultural sector accounted for the 11% of the country’s gross domestic product in 2012 and employed 32% of the working population. With the improved access to financial services, the sector’s contribution could grow even more.

Aside from increasing market efficiency and promoting modernization in the countryside, the program, which augments agricultural productivity and investing in Agri-Agra, is also a step towards having food security for a growing population with a pressing poverty problem.

For most of Filipino families, putting food on the table trumps everything else and unless large crop yields are reached and more farmlands are distributed to farmers, many people will remain hungry and mired in poverty.

Large-scale monocrop agricultural industries alone cannot solve the problem. They are not the answer to poverty and unemployment. They are not sustainable enough to fuel economic growth.

On the contrary, the solution lies in small and medium agriculture investments. Higher yields prompted by the increase in investments will lead to higher incomes for farmers, better education for the children and more opportunities to engage in small-scale businesses that will benefit the whole community and improve non-farm rural employment.

Moreover, boosting agricultural productivity will reduce the risk and vulnerability of farmers and their families during time of contingencies. This is also critical considering that the country is often pounded by typhoons and other natural calamities.

Investments in agriculture will also lead to a host of environmental benefits including better agricultural and natural biodiversity, reduced greenhouse gas emissions, improved water retention, carbon sequestration and resilience to droughts and floods.

Ultimately, the agricultural sector needs sufficient funding to achieve significant growth. With more support coming from rural banks now accredited as ARFIs, the country’s goal of sustaining agricultural growth and promoting financial inclusion is becoming more attainable.

A matter of trust

Banking is a business of trust.

It involves money, which is important to practically everybody, and anything important ought to be protected and entrusted only to those worthy.

Among the poor, the trust in rural banks has always been there and continuously builds up steadily as these community-based financial institutions have shown the capability to not only protect the financial interest of their clients, but also the willingness and confidence to adopt new technologies and banking techniques to continuously improve services.

In the 2014 Annual Management Conference of the Confederation of Central Luzon Rural Banks (CCLRB), key personalities in the banking industry and its corporate partners will share some valuable inputs on how rural banks can be more competitive in today’s environment.

That even in the face of the unrelenting dominance of the bigger universal and commercial banks, as well as the possibility of financial integration taking shape soon, rural banks can remain relevant by investing in scalable technology to be more efficient and profitable.

Aside from this, the speakers will point out that it is imperative for rural banks to continue professionalizing their management and develop strategic alliances with other financial service providers to leverage their reach.

The latter will come into play with the recent extension of the Strengthening Program for Rural Banks Plus, a joint measure by the Bangko Sentral ng Pilipinas and the Philippine Deposit Insurance Corp. that offers financial and regulatory incentives to those that will engage in mergers and acquisition.

Meanwhile, another major event – the 2014 Confederation of Southern Tagalog Rural Bankers Annual Management Conference this March – will likewise highlight the industry’s role in sustaining the country’s financial growth and to reintroduce consciousness to the banking public that rural banks serve as the engine of economic growth in rural areas.

By making credit available and readily accessible in rural areas at reasonable terms, rural banks give small-scale farmers, fishermen and small and micro entrepreneurs with the means to not only improve their respective lives but also the economic standing of the communities where they belong. It will create a domino effect wherein a single family, through the efforts of a rural bank, can positively influence other families as well. How does that work? Say an OFW beneficiary uses the remittance money sent though a rural bank to put up a small business. As that business grows, the beneficiary-family will then borrow from the rural bank to finance the growth. A bigger entrepreneurial venture will also mean potentially hiring more people and also creating another opportunity for more business partnerships, like supplier of goods, for instance.

This distribution of opportunities, income and wealth will promote comprehensive rural development and raise the quality of life for all, especially the underprivileged.

Again, it is a matter of trust – trusting that the system works and trusting that the different components of that system will do their part. For the rural banking industry, their customers have to trust that rural banks will unwaveringly provide them access to financial services and, more importantly, take care of their hard-earned money with utmost dignity.

The two aforementioned important events give rural banks an opportunity to assure their clients that they will do just that and even beyond.

Big fish in a small pond

Our society tends to focus too much on size. “The bigger, the better,” they said. “Size matters!” others quipped. Often overlooked in our obsession with anything large is the quiet resiliency and efficiency of the little guys. While the big ones get the glory and prestige, the little guys just keep on plugging away and achieve success nonetheless, albeit through a longer route usually.

The same can be said for industries like banking. While the bigger universal and commercial banks have bigger revenues and assets and get all the publicity, their smaller counterparts are no slouch either. Community-based financial institutions like rural banks have developed a niche that enables them to not only thrive in their own market, but practically become indispensable among the poor.

Rural banks serve as the main vehicle for financial intermediation and capital formation in rural areas. They often have branches in locations not served by other banks. Most bank owners and staff grew from the same community as their clients. Thus, the bankers and bank employees know the local needs and circumstances far better than their bigger competitors do. Lending judgments can be based on personal knowledge and understanding of the financial conditions of the customers. Clients appreciate that personal kind of service. They tend to reward that professional-personal touch with more availment of the bank’s services.

In short, the more love you give, the more love you get.

The overall success of rural banks will be contingent on the success of the local communities and vice versa. The combination of enhancing network value and offering a broader range of solutions strengthens the rural bank’s market position with individual customers and communities.

Another importance of rural banks in a community is their ability to provide loans faster than any other type of banks. Even with the entry of big banks in various municipalities, the rural banking industry can pride itself with being able to give loans as fast as possible. A big factor to this is the aforementioned familiarity between banks and clients.

The role of rural banking is paramount in the expansion of the economy in the countryside, by providing people living in the rural communities with basic financial services.

Furthermore, rural banks spearhead the government’s financial inclusion efforts through the utilization of varying services to address the needs of their client base in the countryside, including micro-housing loans, micro-agri loans, micro-insurance, and micro-deposits.

Despite their smaller stature compared to their larger brethren, rural banks remain very important to the cause of countryside development because of their key role in fuelling the economic growth of rural areas.

Simplifying a complex problem

Poverty is a constant headache for every administration. It seems that no matter what the government does–whoever is at the helm of Malacanang at a particular time—there will always be poor people and their number will always be overwhelming.

One typical characteristic of being poor is the lack or utter absence of access to basic banking services. They often have no savings account to speak of, nary any borrowing to finance any budding entrepreneurial venture, nor a microinsurance instrument to fall back on in times of emergencies.

Thus, can poverty be fully addressed just by enabling the poor have access to financial services? No one truly knows. Poverty is such a complex animal that eliminating it effectively requires a multi-pronged approach covering a long period of time. However, it will certainly go a long way in support of the present administration’s poverty alleviation efforts if the poor will be empowered economically. One such way is through microfinance, an instrument tailor-made to the needs and financial capability of the rural poor and an important mechanism that rural banks wield today.

As described by Ms. Pia Bernadette Roman in her paper titled, “Microfinance in the Banking Sector: Current Environment and Future Directions,” traditional collateral requirements have been replaced with collateral substitutes such as peer-support or peer lending in microfinance. Documentary requirements and processing have also become simpler and faster, while product design is based on character and cash flow analysis, and savings is emphasized as an integral part of the microfinance package. All these add up to not only ease the requirements on the poor, but also enable their entrepreneurial ventures to be self-sustaining.

Rural banks are also deemed natural fit to engage in microfinance. For one, according to Roman, they have the resources and expertise in the provision of financial services that make them ideal vehicles for microfinance. Banks also have the authority and means to access cheaper sources of funding particularly by attracting deposits from the public. In addition, the existing network of banks is also an avenue in which to magnify the many benefits of microfinance.

Rural banks cover around 80 percent of the total municipalities in the Philippines, with more than 600 banks and 2,000 branches nationwide. By reach alone, rural banks can be the most effective purveyor of microfinance as majority of the country is still composed of the rural poor.

Microfinance today has morphed into a far more sophisticated tool than just loans for microenterprise. It has since expanded to micro deposits, microinsurance, micro-agri, housing microfinance, and microfinance plus for growing enterprises.

It has been proven over the years that microfinance is an effective poverty alleviation tool. Microfinance empowers those living in poverty to increase their economic activity and income, generate employment and improve the overall quality of their lives.

Rural banks have acted as effective conduits of microfinance in the countryside, disbursing more than P40 billion to micro-entrepreneurs. Through the provision of microfinance, rural banks have encouraged businesses to be market driven and not relying on subsidies to thrive, as well as encouraged poor individuals to help themselves and not depend on dole-outs or charity.

Poverty remains an overwhelming problem. Given that, it can still be conquered and we must believe that it can be done. Microfinance, with the help of rural banks, gives us the hope to finally slay that beast once and for all.

Taking care of our own

The spirit of “Bayanihan” was never more pronounced than the time the whole country bonded together in multi-pronged recovery and reconstruction efforts following the bout with super typhoon Yolanda. Political, religious, and ethnic differences were temporarily shelved in favor of helping each other bounce back from that harrowing ordeal.

The rural banking industry epitomizes that Filipino spirit when bankers and bank staff alike poured in more than P2 million in total to help those in the industry who were adversely affected by Yolanda.

As of January 16, the contributions have reached P2,656,512.65. Both the Rural Bankers Association of the Philippines and its technical arm, the Rural Bankers Research and Development Foundation, Inc., chipped in P500,000 each, while rural banks poured in a total of P1,656,512.65.

A total of 747 officers and staff of rural banks who endured and survived the super typhoon onslaught benefited from this gesture. Each of the 747 employees is getting P3,550.

In turn, the rural banks will assist their respective clients who were also devastated by Yolanda.

Earlier, the Bangko Sentral ng Pilipinas extended special regulatory relief measures to all banks in areas devastated by Yolanda, on top of its standard relief package, to enable lenders like rural banks to better assist calamity victims.

Thrift, rural and cooperative banks with head offices in the affected areas were allowed to apply for condonation of annual supervisory fees for this year. Depending on the severity of losses that a bank has incurred, the BSP may condone the supervisory fees for up to five years.

The additional special regulatory relief measures were made available to banks in Palawan, Iloilo, Aklan, Capiz, Cebu, the Samar provinces and Leyte. These provinces were earlier declared under Proclamation No. 682 as “severely affected” areas.

The affected banks were likewise allowed to book on a staggered basis over a five-year period the losses on loans outstanding as of November 7, 2013 that are partially or fully condoned and written off. Impairment losses on bank premises, furniture, equipment and real and other properties acquired may also be recognized over a staggered period of up to five years.

The BSP will also allow flexibility on branch relocation and temporary offices to a more viable location within the affected area for a period not exceeding six months.

The submission of periodic and branch reports will also be relaxed, while presentation of the required documents of clients will be allowed without sacrificing appropriate controls.

Think big, aim high

In the face of the ever present stiff competition from bigger banking brethren, rural banks need to rapidly evolve and “be big enough” to remain efficient and profitable.

Rural banks will continue to have a niche market in the ultra-competitive banking industry even if a spate of mergers and consolidation shapes the future of the rural bank sector.

In remaining viable, rural banks are professionalizing their management and targeting well-defined niche markets using their inherent strengths as rural banks. By inherent strengths, it means capitalizing on banks’ knowledge and familiarity of the rural communities they serve. It likewise involves the training of rural banks in the area of microfinance to effectively serve their respective markets.

For instance, the technical arm of the Rural Bankers Association of the Philippines, the Rural Bankers Research and Development Foundation Inc. (RBRDFI), has been busy conducting microinsurance basic training courses for rural banks to enhance their capacity to serve as effective access points for microinsurance services for its low-income clients, as well as ensure their compliance with relevant BSP regulations.

As a result, rural banks can now offer microinsurance services to all micro-borrowers and/or micro-deposit account holders as well as their family members as dependents. Rural bank clients can now qualify for the bank’s microinsurance services if they have either a micro-credit account or a savings account with an average daily balance of P15,000 or below. In effect, all qualified rural banks may choose to offer microinsurance services and apply for Microinsurance Agent license to cover their micro-deposit account holders.

Meanwhile, just in case there are rural banks that will not be able to compete effectively, there is a safety net program for rural banks that will afford them an exit mechanism, in the form of the Strengthening Program for Rural Banks Plus or SPRB Plus.

The BSP recently extended the program for another year up to December 31, 2014.

Prior to the extension, the Philippine Deposit Insurance Corp. has approved five merger applications involving 10 banks, which are being processed by the BSP. There are also a couple more applications waiting in the sidelines.

The SPRB Plus has amendments and enhancements that encourage more mergers and acquisitions of eligible rural banks and thrift banks by strategic third party investors.

Among the amendments include the relaxation of the required ownership control in an eligible bank from 67 percent to at least 60 percent.

The financial assistance from the PDIC, on the other hand, may now be in the form of either a combination of preferred shares and direct loan, or direct loan only.

Thus, whether competition from commercial or universal banks remains daunting or the impending consolidation with prospective white knights feel intimidating, in the end, there will always be a market for rural banks all across small town Philippines.

The RBAP continues to work with partner regulators in creating a conducive banking environment that will serve as front-liners in financial inclusion programs. This is what will make a difference in the future. This is what will make rural banking remain relevant all across the Philippines.

The message is clear: the growing competition and the evolving business environment in the Philippines or across the Region does not faze Rural Banks. Instead, we embrace them, we adopt technology, we evolve and adjust accordingly to continue endearing ourselves to our communities and giving them the legitimate, institutional financial services they require.

Strong inflow of OFW remittances to fuel rural banks’ growth anew

The bullish outlook on remittances from overseas Filipino workers (OFWs) this year bodes well for businesses like rural banks which act as formal remittance channels and serve as an affordable conduit between OFWs and their beneficiaries here in the Philippines.

Industry analysts expect OFW remittances to increase by 8-8.5 percent this year anchored on improved global prospects and the reconstruction efforts following the onslaught of super typhoon Yolanda.

Remittances account for almost 10 percent of the gross national product of the Philippines.

As of August 2013, personal remittances increased 7.4 percent to $2 billion.

There are early reports that remittances from Hong Kong and Singapore—home to two of Asia’s biggest overseas populations of Filipinos—could grow by as much as 20 percent in the aftermath of Yolanda as OFWs gear up for special reconstructions efforts and expenses.

Aside from fueling consumption growth, an increased inflow of US dollars and other foreign currencies into the Philippines will mean dynamic business opportunities for rural banks by utilizing the Bangko Sentral’s Philippine Payments and Settlement System or PhilPASS.

Under PhilPASS, an online and real-time payment system the BSP administers to facilitate transaction between banks, rural banks can offer cheaper transaction fees to OFWs and their families.

The PhilPASS remit system offers a rate of P50 per transaction compared to P100-P500 per transaction charged by other money transfer systems.

The system acts as the local clearinghouse for the transfer of remittances from a local bank to another bank where the OFW beneficiary maintains an account.

OFW families are expected to save at least P92 million to as high as P922 million due to the faster and cheaper delivery of remittances to the beneficiaries at a lower rate using PhilPASS.

In addition, the system provides safer means of sending OFW remittances via a formal banking channel. OFWs and their families or beneficiaries will likewise have peace of mind when using PhilPASS as it is equipped with an efficient feedback mechanism that enables OFW remitters to trace the status of their remittances.

OFW remittances also provide microfinance institutions (MFIs) with an important source of funds that can help propel the growth of micro and small businesses in the countryside.

MFIs can partner with OFWs to promote microfinance as one of the more productive ways by which remittances can be put to use. Instead of simply being used to purchase items, the money can be invested to livelihood programs that will benefit not only OFW families but also rural communities.

In response, rural banks will be encouraged to develop credit facilities with less stringent requirements to address the needs of small and medium enterprises, farmers and fisher folk.

Agribiz’s development rests on rural banks’ commitment

For years, the agricultural sector has been the unheralded hero of the economy, often operating under the radar compared to the more celebrated services and industry sectors. Meanwhile, the rural banking industry has consistently been supportive of agri, also in consonance with its mandate to allocate a portion of their loanable funds to the sector.

Under Republic Act No. 10000 or the Agri-Agra Reform Credit Act, local banks are required to allot 15 percent of their portfolios for agriculture, and 10 percent to agrarian reform beneficiaries.

This time, rural banks must up the ante insofar as its commitment to agriculture development is concerned. Agriculture’s progress will prove instrumental in helping the country achieve financial inclusion.

Based on the Policy Notes publication of government think-tank Philippine Institute for Development Studies (PIDS), agricultural development is key to inclusive growth.

“The accelerating pace of economic growth in the Philippines will not translate into inclusive, sustainable growth if agricultural development is neglected,” PIDS said.

The government research institution explained that agricultural development in the Philippine context involves a transition from farming to agribusiness.

With agribusiness, agri-related activities put farmers, processors, distributors, and consumers within a system that aims to produce, handle, process, transport, market, and distribute agricultural products. This will entail a structural transformation in agriculture itself, from traditional to high-value crops, as well as product upgrading.

The question is, where will farmers source funds to enable such transformation? This is where rural banks come in.

Accredited rural financial institutions such as rural banks act as direct conduits to the agriculture sector and agrarian reform beneficiaries by channeling the funds specifically allotted by other banks for the program, thus giving rural banks an important role in the funding chain.

By enhancing access of the agricultural sector to financial services and programs that increase its market efficiency and promote modernization in the sector, rural banks serve as a crucial catalyst in rural development.

PIDS noted that one of the primary reasons for the non-inclusivity of economic growth and persistence of poverty in the Philippines is the lack of productive employment. With the development of agribusiness anchored on the aggressive involvement of rural banks, the agriculture sector will not only be responsible for putting food on the table, but also for creating jobs and livelihood for the poor.

BSP MEMORANDUM NO. M-2013-055: Standard Coding for PhilPass Transactions

The Bangko Sentral ng Pilipinas (BSP), with its mandate to ensure a safe and efficient payments system, will be implementing a standard transaction coding system in order to properly identify the nature of banks’ funds transfer and payment instructions that are coursed through PhilPass for settlement.

To get a copy of the BSP Memo, please click on this link: BSP Memorandum No. M-2013-055

BSP Circular Letter No. CL-2013-064: National Banking Week 2014

Subject: National Banking Week 2014

Pursuant to Proclamation No. 2250 dated 10 December 1982 (copy attached) designating 1 to 7 January as National Banking Week, all banking institutions and their branches are enjoined to undertake during the period such promotional and publicity-generating activities as advertising, window and counter displays, streamers, distribution of give-aways, raffles and seminar incentives and devices.

The BSP also enjoin the banking industry to promote more vigorously the benefits derived by our communities from banks. They believe it is imperative to convey the important role that banks play in the lives of our people, economy and our country as a whole.

To unify the campaign for our celebration of the National Banking Week 2014, banks are requested to incorporate the theme, “Sa Wasting Pagbabangko, Aasenso Tayo” and the phrase “National Banking Week, 1 to 7 January 2014” in their promotional materials and print advertisements during the period.

A prescribed tarpaulin layout for this campaign may be downloaded here:
National Banking Week 2014_FINAL 3x10

National Banking Week 2014_FINAL 3x10

To download a copy of the BSP Circular Letter, please click on this link: cl064