Government eyes more incentives for rural banking sector

The Arroyo administration is looking into an incentive scheme to boost the rural banking sector and in turn increase productivity in the countryside.

It is looking at exempting deposits in rural banks from the 20-percent withholding tax on interest earned on deposits. This will further encourage savings and generate more capital for investments among the rural households, farmers, fisherfolk and the like.

Another incentive scheme is the exemption from dividends earned from investments in rural and cooperative banks from taxes. It is likewise looking to resort the collateral integrity of lands in the countryside, particularly lands covered by the Comprehensive Agrarian Reform Program (CARP).

The three proposed incentive steps is part of the government’s modernization plan for the agriculture and fisheries sector to create a channel for credit assistance and financing for the rural areas.

In fact, the national government has already earmarked P350 million for the use of rural banks for retailing and re-lending in the countryside. The administration claims that it is only an initial release and that it was prepared to release more funds as the need arises.

The Arroyo administration recognizes the important role of the rural banking system in increasing the productivity of the agrarian sector, which in turn could increase the country’s gross national product.

"My administration recognizes that rural banks individually and collectively as an industry have the capability of delivering much-need credit services to the rural poor and the broad masses of our farmers and fisherfolk. This is the emphasis and preeminent objective of my administration," President Gloria Macapagal Arroyo said before a recent rural banking conference.

The President promised that the proper allocation of resources will give particular emphasis toward rural areas and the agricultural sector, and that includes infrastructure development and credit resources.

However, the new administration said that its rural development and financial assistance program "is not another Masagana 99."

"This is not another Masagana 99 due to which I know a lot of rural bankers got burned. This is rather a more serious attempt to bring the financial and credit resources directly to rural households, farmers and fisherfolk, within the framework of a market-oriented financial policy," Arroyo told rural bankers.

The Masagana 99 program of the Marcos administration resulted in rural banks extending credit to the rural sector under the guarantee of the national government, which eventually failed to reimburse the banks.

From then on, rural banks have been wary of any government initiative to extend credit to the agricultural sector under government guarantees.

The rural banking system outperformed its "rich" cousin or the commercial banks (KBs) in terms of deposit mobilization. The rural banks reported a 16-percent increase from P35.6 billion in 1999 to P41.3 billion for the whole of 2000 while the KBs shown a mere nine-percent deposit growth.

Likewise, the rural bank’s asset base grew by 8.5 percent while the traditional high capitalization ratios of between 16 to 17 percent of total assets have been maintained.

The rural banks reported a return on assets (ROA) 1.6 percent and a return on equity (ROE) of 9.4 percent.

Rural banks posted steady growth in total assets rising by 8.5 percent from P60 billion at the end of 1999, to P65.1 billion by end December 2000. Gross loans increased by 1.4 percent from P41.6 billion in 1999 to P42.2 billion last year.

In contrast, the universal banks and KBs reported a ROA of 0.4 percent and an ROE of three percent in the period in question. The same sector gained P0.04 for every peso of assets and P0.03 for every peso in capital.