BSP Circular No. 2016-028: Authority of the Insurance Commissioner to Appoint a Conservator or Receiver of Insurance Companies

30 March 2016

TO: All Rural Banks

Dear Rural Bankers:

The BSP, in a communication, advised all Banks of the authority of the Insurance Commissioner to appoint a conservator or receiver to take charge of, among others, the assets and liabilities of the insurance companies, pursuant to Sections 255 and 256 of the Insurance Code, which read as follows:

“Section 255. If at any time before, or after, the suspension or revocation of the certificate of authority of an insurance company as provided in the preceding title, the Commissioner finds that such company is in a state of continuing inability or unwillingness to maintain a condition of solvency or liquidity deemed adequate to protect the interest of policyholders and creditors, he may appoint a conservator to take charge of the assets, liabilities, and the management of such company, collect all moneys and debts due to said company and exercise all powers necessary to preserve the assets of said company, reorganize the management thereof, and restore its viability. The said conservator shall have the power to overrule or revoke the actions of the previous management and board of directors of the said company, any provision of law, or of the articles of incorporation or bylaws of the company, to the contrary notwithstanding, and such other powers as the Commissioner shall deem necessary.”

x x x

“Section 256. Whenever, or upon examination or other evidence, it shall be disclosed that the condition of any insurance company doing business in the Philippines is one of insolvency, or that its continuance in business would be hazardous to its policyholders and creditors, the Commissioner shall forthwith order the company to cease and desist from transacting business in the Philippines and shall designate a receiver to immediately take charge of its assets and liabilities, as expeditiously as possible collect and gather all the assets and administer the same for the benefit of its policyholders and creditors, and exercise all the powers necessary for these purposes including, but not limited to, bringing suits and foreclosing mortgages in the name of the insurance company.

x x x

For information and guidance.

To download copy of the circular please click through this link:

RBAP Secretariat


30 March 2016


Dear Rural Bankers:

For information, listed below are the (1) approved applications for new banking offices, and (2) opened banking offices during the last quarter of 2015.

I. Approved Applications for New Banking Offices
Rural and Cooperative Banks

1. Banco Dipolog Inc., (A Rural Bank) – Extension office
2. Card Bank, Inc. (A Microfinance Oriented RB) – MBO
3. Cooperative Bank of Cotabato – MBO
4. Rizal Bank, Inc. (A Microfinance Oriented RB) – MBO

II. Opened Banking Offices
Rural and Cooperative Banks

1. BOF Inc. (A Rural Bank) – Regular Branch
2. Camalig Bank, Inc. (A Rural Bank) – Regular Branch
3. Card Bank, Inc. (A Microfinance Oriented RB) – MF Branch, MBO
4. East West Rural Bank Inc – Regular Branch, Extension Office
5. New Rural Bank of San Leonardo (N.E.), Inc. – Regular Branch
6. Rural Bank of Capalonga (Cam. Norte), Inc. – Regular OBO
7. Rural Bank of Medina (Mis. Or), Inc – Regular OBO
8. Rural Bank of Mexico, Inc. – Regular Branch

To view and/ or download complete list of approved banking offices applications, please click through this link:


Executive Director

BSP Circular No. 2016-024: Credit Consciousness Week

28 March 2016


Dear Rural Bankers:

Pursuant to Proclamation No. 568 dated April 25, 1995 designating April 24 to 30 as Credit Consciousness 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 similar incentives and devices.

We hope that through the observance of Credit Consciousness Week, we will be able to promote awareness and appreciation of the vital role of credit in national development.

To unify the campaign, banks are also requested to incorporate the theme,“Sa tamang gamit ng pautang, ekonomiya at bayan makikinabang.”, and the phrase “Credit Consciousness Week, April 24-30, 2016” in their promotional materials and print advertisements during the period.

Attached herewith is the BSP-prescribed tarpaulin layout for this campaign. For more information, banks may contact the BSP Corporate Affairs Office at 708-7142.

You may also download copy of this memo and the prescribed tarpaulin through these links:


Executive Director

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

BSP Memorandum No. M-2015-008: Strengthening Program for Rural Banks (SPRB) Plus









To download a copy in PDF, please click on this link: m008

BSP Memorandum No. M-2015-006: Guidelines on the Imposition of Service Fees under the Enhanced Cash Management Services




To download a copy in PDF, please click on this link: m006

2015 Visayas Management Conference

The Cebu Federation of Rural Banks, Inc. will be hosting the Visayas Management Conference at Marco Polo Plaza Cebu, Cebu City on March 2-3, 2015.

The theme for this conference is “Revitalizing the RB’s to meet future challenges.”

This gathering will be an opportunity for active participation and interaction among delegates and resource speakers. We are inviting you to be a part of this important learning activity.

The registration fee for the conference is P4,700 per delegate. If you register on or before February 6, 2015, a discounted rate of P4,200 will be given.

Attached for your reference are following:
1. Circular Letter – Scan0083
2. Registration and Hotel Accommodation Form – Scan0084

For inquiries and reservation, you can call the CFRBI Secretariat at telefax no. (032) 232-5745 or at (032) 430-9318; (032) 430-9133 c/o Maureen Cuyos or email at

Hope you can be with us to strengthen the bonds of friendship among rural bankers for countryside development.

Very truly yours,

Conference Chairperson President

BSP Memorandum No. M-2015-005: Regulatory Relief for Banks/Non-Bank Financial Institutions with Quasi-Banking Functions (NBQBs) Affected by Typhoon “Ruby”








To download a copy in PDF, please click on this link: m005

2014 RBAP Annual National Convention Advisory

RBAP Advisory:

Madayaw na pagbati gikan sa Dabaw!

The Davao Federation of Rural Bankers will host this years 61st Annual National Convention and General Membership Meeting on May 21-22, 2014 at SMX Convention Center at SM Lanang Premier Lanang, Davao City.

On the fellowship night, we have prepared the traditional Davao food stations – Fresh Tuna, Davao Fruits and Unlimited Drinks. We will be entertained by Davao home grown singer led by Ms. Krissel Valdez, Star Power 1st Runner up together Day Break Band. The highlight will be a Singing Contest by Federations. Great prizes at stake. Surely, we will go dancing and singing the whole night!

For accommodations, some hotels were listed in the circular. And there would be more posted on the website.

The DFRB is still coordinating with City Tourism Office for Optional Tours you wish to have on Friday, May 23 to have a more memorable weekend in Davao.

For you to have a wonderful stress free stay, let me remind you of some City Ordinances:
• No Smoking in all Public Place. Smoking Places are provided in designated areas
• Liquor Ban at 1:00 in the morning
• Speed Limit at 30 kph, 40kph in respective city areas
• No Fireworks

In addition, parking in all places in Davao City is for free. For those who will be taking taxis, you may pay in cash or credit card (Black Cabs we call it) and don’t forget to ask for a receipt.

See you in Davao!


To download a copy of this advisory, please click on this link: NatCon Advisory

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.

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.

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.