MANILA, Philippines - The Bangko Sentral ng Pilipinas and Philippine Deposit Insurance Corp. have agreed to contribute P2.5 billion each to establish a proposed fund that will be tapped to extend incentives to banks willing to acquire financially troubled rural banks.

This was according to PDIC president Jose Nograles, who told reporters that the fund was expected to be put up before the end of the year.

He said PDIC would source its contribution from the deposit insurance fund (DIF) that it manages. The DIF is the pool of funds that is tapped by PDIC to service claims of depositors of failed banks.

?Because the DIF is what we use to pay out claims related to closure of banks, we [PDIC] thought it was prudent to also use this for a measure aimed at preventing bank closures,? Nograles said.

The establishment of a fund to grant incentives to white knights is consistent with the policy of PDIC and the BSP to encourage consolidation in the rural banking sector. The coregulators prefer to have fewer but strong banks, he said.

The BSP and PDIC are finalizing the rules and regulations for the extension of incentives to acquiring banks. According to the initial draft of the IRR, however, the incentives may come in the form of loans or equity infusion to the investor-bank.

To qualify for incentives, the acquiring bank must be financially sound and the bank to be acquired must have a capital adequacy ratio below 10 percent, which is the minimum required by the BSP.

The amount of incentives to be given to the investor-bank will be based on the amount of capital deficiency of the troubled bank. PDIC and BSP will source from the fund up to 40 percent of the amount needed to make the troubled bank meet the capitalization requirement. The balance of 60 percent must be shouldered by the investor-bank.

?BSP and PDIC will only help in providing counterpart funding. The bigger share should be shouldered by the investor-bank,? Nograles said.

The move to put up a fund is intended to strengthen the rural banking industry.

Since the start of the year, there have been 15 rural banks placed under the receivership of PDIC. These are on top of the 13 rural banks owned by the Legacy Group that were closed late last year. The closure of the banks will require PDIC to shell out billions of pesos to settle claims of depositors.

?PDIC is committed to assist the rural banking industry in strengthening the rural banks and ensuring their long-term viability,? Nograles said.

Nograles said rural banks comprise about 86 percent of the total number of banks in the Philippine banking system, thus making them significant players in the industry.