Regulators are set to issue new rules that would impose stricter corporate governance requirements on thrift and rural banks with complex operations, distinguishing from the “mom-and-pop” companies that make up most of the sector.
The Bangko Sentral ng Pilipinas last Thursday approved rules that would identify community banks that have diversified their operations which, while improving their profitability, exposed them to more risks.
“This formalizes our requirements for classifying certain thrift banks and rural banks as complex or simple,” BSP Deputy Governor Nestor Espenilla Jr. said.
“A thrift bank, or a rural bank for that matter, can go from simple mom-and-pop operation to very complicated operations,” he told reporters.
Thrift and rural banks differ from universal and commercial banks not only in size but in the types of services they are allowed to offer to customers.
For instance, universal banks are allowed to invest in businesses outside the financial sector. They are also allowed to act as investment houses. All other types of banks are barred from these types of investment activities.
In the new circular, thrift and rural banks with complex operations are required to put up internal risk-oversight and corporate governance committees to ensure compliance with local banking and corporate laws across all areas of their businesses.
The new circular was approved by the BSP’s Monetary Board at its weekly meeting last Thursday.
“The traditional perception of a rural or thrift bank, no matter how big it is, is that it is engaged in basic deposit taking and lending activities,” Espenilla said. Typically, banks that operate this way have internal audit committees and all other oversight functions are done by members of the board.
In most cases, members of these boards are members of the family that owns the bank.
But as banks diversify their revenue streams, many industry players have moved on to more complex services, Espenilla said. He said the BSP expected higher corporate governance standards from banks that operate in more complex ways.
“If you’re doing other things like (operating a) large-scale remittance network and doing a lot of cross-selling of products that are relatively complicated, we may take that as a possible reason to consider a bank as complex,” he added.
“Or if your operations span across Luzon, Visayas and Mindanao, you become more than just a community-based bank,” he said. So far, 15 thrift and rural banks have been identified as complex, Espenilla said.