RBs outperform banking industry anew

In the past four years, the rural banking system has risen from the Philippine banking system’s "poor cousin" to the most profitable.

The once parochial, myopic and antiquated system is not only becoming what others classified as regional business centers, or community banks to global community banks. It has not only infused credit into the provincial and regional level but it has extended its reach to overseas Filipino workers (OFWs) and migrant Filipinos.

Based on data acquired from the Philippine Deposit Insurance Corp. (PDIC), the profitability of the rural banking system was the highest among all bank types last year.

Return on equity (ROE) in 2005 reached 9.69 percent, higher than the 9.46 percent of the commercial banking system and the (-) 0.44 of the thrift banking system.

Return on assets (ROA) rose to 1.49 percent versus the 1.15 percent of the commercial banks and the (-) 0.06 percent of the thrift banks.

Since 2002, the rural banks were outperforming the rest of the field when it recorded an ROE of 8.98 percent in 2002, rising to 10.79 the followiung year, and peaking at 11.14 percent in 2004.

In the same period, its ROA grew from 1.46 percent in 2002 to 1.73 the following year and peaked at 1.77 in 2004.

In both categories, it outperformed the commercial and thrift banking systems.

"That is what the numbers show, and the numbers do not lie," William K. Hotchkiss III, president of the Rural Bankers Association of the Philippines (RBAP), said.

Total assets rose from P89 billion in 2003, to P100.9 billion the following year, and P115.33 billion last year.

Total net income grew to P1.61 billion from P1.1 billion in 2002, P1.48 billion in 2003, and P1.69 billion in 2004. Last year, the commercial banking system realized a net income of P42.85 billion.

Hotchkiss said that the regulatory environment has been conducive to growth for the entire banking system, and the rural banks in the past year has been able to take advantage of the situation.

From a high of 1,032 rural banks in 1980, the system has since shrunk to 754 as of end 2005. Thus consolidation, attrition, new regulatory frameworks, closures and mergers and acquisitons (M&As) has made the system stronger.

However, it also became clear that rural banks with assets of less than P50 million (numbering nearly 300) remain relatively unprofitable.

"For over 50 years, we have fueled the economic activities benefiting the lives of the farmers, the fisherfolks, and the small and medium entrepreneurs (SMEs). Microfinance – the current buzzword in people empowerment and a major thrust to alleviate poverty, continuous to provide the impetus for growth. And the rural banks have been in the thick of that growth area," the RBAP president stressed.

From mere deposit taking and credit extension, rural banks have developed into as provincial and regional business centers to community banks. Others have even gone as far as extending its services to the Filipino communities overseas through the remittances business, with the help of technology.

Rural banks in general have become so profitable that even thrift and commercial banks have forged tactical or strategic alliances to market bank and investment products.

It has tapped the expertise of First Metro Investment Corp., the United States Agency for International Development (USAID), Deutsche Bank, the Economic Resource Center for Overseas Filipinos (ERCOF), Citigroup, as well as hire experts.

In fact, several still unnamed foreign financial institutions have already signified their formal or informal interest in investing in rural banks, directly or indirectly.

Even other business sectors entered into working relationships with rural banks including telecommunications giants Globe Telecommunications and Smart Communitions for the sale of its units to the use of its technology for the remittance business as well as other banking products and operations.

In fact, the RBAP Text-A-Payment and G-Cash services has been so successful that it merited the academic interest of the Boston-based Harvard Business School to study and write a full case material on this novel banking service for the use of their graduate students. It is a "first" both in the local banking industry as well as abroad.

The most recent evidence of the rural banking system’s maturity and reliability was marked last March when the Bangko Sentral ng Pilipinas (BSP) allowed RBs or rural banks to handle and trade foreign currency in recognition of its vital role in encouraging OFWs to send their remittances through formal channels, and more importantly, direct to their municipalities for the immediate benefit of their families and communities.

Hotchkiss, however, indicated that the positive gains was but a step in its continuing journey "to empower the rural banking system, and in so doing, nurture the growth of rural banks and fuel wealth generation in the local economies.

"High on our list of related efforts are amendments to the Rural Banking Act of 1992, strengthening of the capital structure of RBs, and the creation of mechanisms to allow RBs the flexibility to engage in a broadened scope and definition of allied undertakings," he explained.

Likewise, the gains must be complemented by a strong self-criticism on the role of individual rural banks and the RBAP.

"But all these efforts will be for naught if we, as individual members of our cherished Association, could not rise above our own and interests, our myopic views, our narrow understanding, and our selfish individualism. If we allow parochial mentality driven by geographical dominance, personal loyalties, group factionalism, and even a notion of being primus inter pares, we have written the death sentence to the over half-a-century existence of our association," Hotchkiss was quoted during his speech before the Confederation of Southern Tagalog rural banks last March.