Banks seek extension of capital build-up incentive program

The rural banking sector is seeking an extension of an expired incentive program for capital build-up as well as mergers and acquisitions of countryside financial institutions.

Known as the Countryside financial institution enhancement program or CFIEP, the program was originally designed to help increase capital for rural-based financial institutions. It was introduced in June 1995 but expired three years after. It was later extended up to December 2000.

The re-introduction of the program would actually encourage mergers and acquisitions especially rural banks, which have been experiencing difficulties in meeting the capitalization requirements of the regulators.

"Many rural banks have already made use of the program during its effectivity," Ricardo M. Tan, president of the Philippine Deposit and Insurance Corp. (PDIC) said during the 46th charter symposium of the Rural Bankers Association of the Philippines (RBAP).

Tan revealed that the PDIC and the Land Bank of the Philippines (LBP) had already endorsed its extension with the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) although some modifications in its terms and features were also introduced.

If approved, the extension could run from two to three years.

Regulators as well as rural bankers or RBs admitted that the re-introduction could likely lead to further acquisitions as they admitted the presence of more "distressed" rural banks.

So far, six RBs have closed down under the guidance of the PDIC this year, and another 13 the year before.

The CFIEP was designed to raise the capital base of the countryside financial institution (CFIs) by encouraging existing and new investors to infuse fresh equity into "troubled" financial institutions. Another underlying feature was to enhance the overall financial capability and long term viability of CFIs through reduction of debt burden, attainment of economies of scale, achievement of higher lending capacities, and diversification of risks.

The CFIEP has three modules of which the first allows a rural bank to redeem some of its past due loans at 50-percent discount through the BSP. The second module offers the same but through the LBP.

The third module is the merger, consolidation and acquisition (MCA) incentive or known as PDIC credit facility, spearheaded by the PDIC.

"Under this module, PDIC will extend concessional credit facility to qualified CFIs to allow an income spread to cover 50 percent of the eligible bad loans or unbooked valuation reserves, whichever is higher of the merging or consolidation undercapitalized CFIs over a period not exceeding.