MANILA, Philippines ? The Bangko Sentral ng Pilipinas said it was closely monitoring over 100 rural banks that were undercapitalized, directing them to seek ways to raise fresh capital and to meet at least the minimum requirement.

Another bank regulator, the Philippine Deposit Insurance Corp. found 103 rural banks to be undercapitalized as of the first half of the year. These banks, together with 76 others, have been placed under the central bank?s ?prompt and corrective action? (PCA) program.

?PCA is process to help strengthen banks,? BSP Deputy Governor Nestor Espenilla told reporters on the sidelines of the annual convention of the Rural Bankers Association of the Philippines held yesterday at Hotel Sofitel in Pasay City.

The regulator places a bank under the PCA program if it is either deemed to engage in unsafe and unsound banking practices, if it has governance problems or if it is capital deficient.

An undercapitalized bank is one whose capital adequacy ratio (CAR) falls below the 10-percent floor set by the BSP. CAR represents the proportion of a bank?s capital to its estimated amount of assets that are exposed to various risks, such as risk of loan defaults.

Banks under the PCA program are more keenly monitored by the BSP, which suggests various reform programs that the banks should adopt to graduate from the PCA program.

?If capital is not sufficient, then the banks should find ways to increase it. They could either ask existing shareholders to put in more capital, seek for [funds] from new investors or sell out the bank to stronger ones,? Espenilla said.

He said the BSP was one with the PDIC in pushing for consolidation in the rural banking sector. Espenilla said the central bank preferred to have fewer but stronger players in the rural banking sector.

The central bank official said regulators may give incentives to banks willing to acquire ailing smaller banks to encourage acquisitions.

The BSP and PDIC are planning to put up a P5-billion fund, which they may tap to provide financial assistance to banks that are willing to serve as ?white knights? that would acquire ailing banks.

The board of PDIC has already approved the earmarking of P2.5 billion as its share to the fund. The BSP, which is proposed to contribute the other P2.5 billion, is awaiting approval by its Monetary Board.

The 103 capital-deficient rural banks hold P11 billion worth of deposits from the public, accounting for about 10 percent of total deposits generated by the entire rural banking sector.

PDIC president Jose Nograles said the deposit insurer wanted these banks to improve their financial conditions to help avoid eroding the deposit insurance fund, which amounts to over P60 billion, Nograles said.

Although PDIC has enough money to service deposit claims in case of bank closures, Nograles said saving troubled banks from closing should be the objective.