Consolidation a current buzzword among rural banks

DAVAO CITY – Like their bigger commercial bank counterparts, the country’s rural banks are undergoing mergers and consolidations, resulting in a number of rural banks either closed down or sent for receivership.

However, Bangko Sentral ng Pilipinas (BSP) deputy governor Nestor A. Espenilla Jr. pointed out that this is a positive development for the rural banking sector.

"We are convinced these efforts have resulted in increasingly stronger, more resilient banking institutions," Espenilla said in his speech during the 53rd national convention of the Rural Bankers Association of the Philippines (RBAP).

From a high of 1,032 rural banks in 1980, the rural banking system has since shrunk to 754 entities as of end-2005 due to a string of consolidation, attrition, new regulatory frameworks, closures and mergers and acquisitions.

"A major consolidation process is underway and institutions that are not willing to reform are inevitably being weeded out," the BSP official added. "And while we may have fewer rural banks, the operating network of the system continues to increase through the branches, and through application of new technologies."

Reforms include strengthening good corporate governance, improving the balance sheets, increased transparency, implementation and adoption of domestic and international accounting and regulatory standards such as the implementation of international accounting standards (IAS) and Basel II.

The BSP wants rural banks not only to institute reforms in the system but scale up its capabilities. The branch moratorium had already been lifted and banks opening branches that are microfinance-oriented get better incentives. There is also the use of the automated teller machines (ATMs) especially the offsite models which extend the reach of rural banks.

But the main factor actually being embraced by the rural banking system is the use of technology and forging institutional alliances.

Espenilla, who heads the BSP’s regulatory arm, urged rural banks to forge alliances with other financial and non-financial institutions to strengthen and expand its influences.

So far, rural banks have forged alliances with local investment houses, domestic and foreign commercial banks, domestic and foreign money transfer establishments, development agencies, and telecommunications companies.

The BSP official also took note of the importance of introducing new banking products and banking systems, stressing the latest regulations allowing rural banks to deal in foreign currency and form their own forex deposits.

"Rural banks are in the forefront in utilizing technology, of revolutionizing electronic banking in countryside, which has increased efficiencies while lowering costs," Espenilla said, adding that the BSP "wants to stand out of the way."