PDIC prefers consolidation over forced bank closures

MANILA, Philippines - The Philippine Deposit Insurance Corp. (PDIC) supports the strengthening of the country’s financial sector and the route via merger, consolidation, or acquisition (MCA) of financial institutions is one option.

The deposit insurer said that when financial institutions merge or consolidate, they attain economies of scale, achieve higher lending capacities, diversify risks, and improve the quality of their services.

“Stronger banks are in the position to provide better financing products and services to their clientele. This is why we are pleased that PDIC and the Bangko Sentral ng Pilipinas (BSP) have agreed to harmonize merger and consolidation procedures and conduct such in an expeditious manner,” PDIC president Jose C. Nograles said.

The BSP and PDIC recently signed an accord to streamline and expedite the evaluation process for mergers and acquisitions of banks and non-bank financial institutions with quasi-banking license (NBQBs).

PDIC has been advocating the consolidation of financial institutions through its Countryside Financial Institutions Enhancement Program (CFIEP), which provides incentives for countryside financial institutions to merge. 

Under the accord, review of applications for mergers and acquisitions by PDIC and BSP will be simultaneous instead of sequential. The regulators have a maximum of 45 days to process the applications.

The two monetary regulators have also agreed to establish a P5-billion loan facility to encourage acquiring banks otherwise known as “white knights” through incentives and financial assistance.

There are nearly 180 rural banks that have problems related to capital deficiency, roughly a fifth of the entire rural banking system numbering 680.

Recently, it was revealed that 179 of the 680 rural banks were listed under the BSP’s prompt and corrective action (PCA) category, which includes capital deficiency issues.

The troubled banks account for just 8.8 percent of the total assets of the rural banking system. But these banks hold P11 billion worth of deposits or 10 percent of the sector’s deposit liabilities.

The PDIC said that to avoid putting the banking public in a precarious position, the banks should consider swiftly raising capital from its existing stakeholders, from private funding entities, from government agencies like PDIC, or consider being acquired or consolidated with a so-called “white knight” or another rural bank prepared to buy.

“What we are encouraging these capital deficient banks is that they seriously consider entering into a merger, acquisition or consolidation program,” Nograles said, during the 52^nd charter anniversary forum of the Rural Bankers Association of the Philippines (RBAP) last week. RBAP is the trade organization of the country’s rural banking system.

Nograles, who sits at the Executive Committee of the International Association of Deposit Insurers (IADI), said the close coordination between the PDIC and BSP bodes well with the core principles of effective deposit insurance systems.

The IADI is an international organization of 52 deposit insurers established to contribute to the stability of financial systems worldwide. The PDIC is a founding member of the organization. The IADI Core Principles are designed to enhance the effectiveness of deposit insurance systems, and are based on IADI research and guidance papers and practical experience of members, associates and observers.        – Ted Torres