Time for review

The recent symposium of the Rural Bankers Association of the Philippines (RBAP) held in November centered on relevance for this year’s theme, believing that it is high time to examine the significance of rural banking to the owners themselves, to the clients, community and to regulators. Flags of concern should be hoisted up if any part of this link, the relevance has diminished, or worse, is gone.

For rural banks to remain relevant, Batangas Rep. Nelson P. Collantes, who also chairs House Committee on Banks and Financial Intermediaries, mentioned in his speech the need for Congress to assess and re-evaluate the relevance and practicality of mandatory credit allocation programs such as Republic Act 10000 (otherwise known as the Agri-Agra Law) and Republic Act 9501 (otherwise known as Magna Carta for Micro, Small, and Medium Enterprises).

For one, the RBAP supports the direction of Rep. Collantes’ committee as mandatory credit programs only force banks to compromise best prudent practices in order to comply with the law. Thus, the same should be gradually lowered to a certain percentage that is feasible for banks to comply, with the goal of eventually terminating its mandatory nature in order to promote increased banks’ participation in lending in the sector.

Under Section 6 of the Agri-Agra Law, banks should allocate 25% of their total loanable funds for agriculture and fisheries in general, of which at least 10% should be made available for agrarian reform beneficiaries.

The resultant risks associated with such mandatory loans are then hedged in the form of higher rates. As they are gradually terminated, credit risk on private banks (such as rural banks) are mitigated while participation of Government Financial Institutions, especially the Land Bank of the Philippines (LBP), on Agri-Agra lending should be increased.

While the law provides that excess compliance in agrarian credit may be used to offset a deficiency in the agricultural, the RBAP proposes to allow excess compliance with agricultural requirement be applied to the agrarian requirement.

Meanwhile for the MSME, there is a need to review specifically the provision mandating banks to allocate at least 8% of their loanable amount for micro and small enterprises wherein non-compliance will result in a penalty of no less than P500,000.

Apart from providing infrastructure and social support from the National Government, creating a conducive environment for banks, characterized by strong incentives instead of imposing penalties, would encourage lending to the sector. In effect, this would increase productivity and spur economic activities in the rural areas and more importantly, to achieve financial inclusion.