Rural banks worried over higher capital requirements

By Keisha B. Ta-asan

MANY RURAL BANKS may have difficulty in meeting the higher minimum capital requirements set by the Bangko Sentral ng Pilipinas (BSP), which may force them to scale down operations, according to an industry group.

Rural Bankers Association of the Philippines (RBAP) President Atty. Mary Ann Tupasi-Saddul said that while she supports the BSP’s efforts to strengthen local banks, the hike in capital requirements comes at a time when many small lenders are still recovering from the coronavirus disease 2019 (COVID-19) pandemic.

“Coming as it does on the heels of more than two years of economic slowdown, and a little more than two years after the completion of the last capital call by BSP, not all rural banks are in an ideal position to deal with a 500% hike in the minimum capital requirements,” Ms. Tupasi-Saddul said in an e-mail.

The BSP last week raised the minimum capital requirements for rural banks to at least P50 million from P10 million previously, as part of the Rural Bank Strengthening Program (RBSP).

BSP Governor Felipe M. Medalla told BusinessWorld that rural banks that want low capital requirements “should not be receiving deposits.”

“It’s very clear that if a rural bank is too small, it will barely earn enough just to pay salaries. So how will it run well? You need a certain minimum size to operate as a rural bank,” Mr. Medalla said on the sidelines of a central bank event on Friday.

Under the new rules, a rural bank with a head office and up to five branches needs to have a minimum capitalization of P50 million, regardless of location.

Rural banks with six to 10 branches are required to have a minimum capital of P120 million, while those with more than 10 branches should have capital of at least P200 million.

Ms. Tupasi-Saddul said the higher capital requirements would allow rural banks to grant bigger loans, as well as enhance risk management systems and prudential standards.   

However, she noted many rural banks operate in low-income municipalities where credit demand “is more than adequately met by existing rural bank resources.”

“The greatly disadvantaged are single unit banks established in unbanked areas, especially when the borrowing needs of the locality do not substantiate the capital increase,” Ms. Tupasi-Saddul said. 

According to the RBAP president, the higher capital requirements is counterproductive to the BSP’s financial inclusion drive, as rural banks may be forced to scale back the number of branches.

“Even assuming that universal banks are now able to reach these areas through digitalization, it is unlikely that they will serve the typical credit needs of farmers, fisherfolk, small and microenterprises, given the small scale of these needs. It was precisely to cater to these sectors, regarded as both marginalized and special, that rural banks were created,” Ms. Tupasi-Saddul said.

“Should some rural banks be unable to comply with the new requirements and be subject to sanctions, operations will be curtailed and so will their mandate of countryside development,” she added.

Rural banks whose capital falls below the new minimum requirements can refer to available options under the RBSP, and submit the capital buildup plan within six months to the BSP. They are given five years to meet the minimum capital requirements.

Mr. Medalla said the BSP is giving rural banks enough time to comply.

“We’re giving them time. And then we’ll give them other options like merging, infusing capital, so there are many options and there’s time,” he said.

However, Ms. Tupasi-Saddul said the BSP should consider that many lenders are still recovering from the pandemic, and that the five-year period is not enough to comply with the new rules.

“Once the BSP lays out a clearer definition and guidelines of the given tracks, we will plot out and simplify the options for our members,” she said.

The RBAP is also exploring possible partnerships with government agencies that implement social amelioration programs.

“We envision these comprehensive partnerships to include not only rural banks as access points and disbursement channels for government programs, but also direct investments by the implementing agencies in the capital of rural banks,” Ms. Tupasi-Saddul said.