28 investors line up to buy ailing rural banks

MANILA, Philippines - At least 28 investors have lined up to acquire ailing rural banks under a program being implemented by the Bangko Sentral ng Pilipinas (BSP) and the state-run Philippine Deposit Insurance Corp. (PDIC) to strengthen the country’s rural banking industry through mergers and acquisition.

PDIC president Jose Nograles told reporters during the launching of the Strengthening Program for Rural Banks (SPRB) yesterday that the number of strategic third party investors (STPIs) are expected to further increase with the start of the implementation of the program.

“Some of the people are waiting for this. There are at least 28 investors or STPIs,” Nograles stressed.

He pointed out that the SPRB that involves a P5 billion financial assistance as well as grant of regulatory relief by the PDIC and BSP over a period of two years intends to encourage mergers and consolidations of rural banks to further strengthen the rural banking system.

Nograles signed the Memorandum of Agreement with BSP Governor Amando M. Tetangco Jr. on the SPRB yesterday in Makati City.

Rural banks qualified to avail of the program are those whose risk based capital adequacy ratio (CAR) fall below the BSP required 10 percent and those that are merging or consolidating with an eligible STPIs.

On the other hand, third party investors that are qualified to join the SPRB include those that are not under the central bank’s prompt corrective action (PCA) program and those that are not engaged in unsafe and unsound banking practices. Furthermore, the STPIs should have a CAMELS (capital adequacy, asset quality, management quality, earnings, liquidity, sensitivity to market rating) of at least “3.”

The P5-billion financial assistance covers the equity component in the form of preferred shares equivalent up to 50 percent of additional capital required to bring the CAR to the eligible level of 10 percent and should have a dividend rate equal to five-year fixed rate treasury notes. The shares should alo be non-voting, cumulative, and convertible to common shares and should be redeemable starting the fifth year but not later than 10th year from the issuance of the preferred shares.

On the other hand, the direct loan component of the financial assistance cover the principal amount equal to such amount that would allow the merged or consolidated rural bank to earn a net interest spread over loan tenor and involved an effective interest rate of governmnent securities purchased using loan proceeds less three percent.

On top of the financial package, the BSP agreed to extend regulatory relief to those who would participate in the program including the waiver of the monetary penalties imposed of eligible rural banks for violations of existing laws and BSP rules and regulations as well as the condonation of liquidated damages on past due rediscounting or emergency loans as of the end of the month immediately preceding the data of request for loan restructuring.

Other sweeteners include the restructuring of past due rediscounting or emergency loans of the eligible rural banks with the BSP subject to the compliance on the guidelines of amount to be restructured, interest rate, terms of repayments, collateralization, default clause, and documentary requirement.

Other incentives include preferred shares for staggered redemption as well as the rediscounting ceiling of at least 150 percent of adjusted capital accounts of the merged rural bank for a period of one year.