Incentives for co-op bank mergers revived

Regulators have approved the revival of a program that aims to weed out weak cooperative banks by encouraging mergers and acquisitions in the industry through financial and other incentives.

The Bangko Sentral ng Pilipinas (BSP), Philippine Deposit Insurance Corp. (PDIC) and Land Bank of the Philippines announced recently the revival of the Strengthening Program for Cooperative Banks (SPCB), which expired in August 2012.

The SPCB program was enhanced to make it more attractive to cooperative banks that are considering merging with other banks.

Perks under the revived program, now dubbed as SPCB-Plus, will be available to banks until September 2014.

“SPCB-Plus offers a variety of financial and regulatory relief and incentives to improve the prospects for success of new banking partnerships,” the BSP said in a statement.

The SPCB-Plus expands the definition of eligible strategic third-party investors or “white knights” to include well-managed rural banks and thrift banks. The older program allowed only mergers among cooperative banks.

“This program is envisioned to further strengthen the cooperative banking system, boost confidence in the banking system and improve the delivery of financial services to the countryside and rural communities,” the BSP said.

Under the SPCB-Plus program, banks may be given financial assistance by PDIC and LandBank to cover capital shortfalls and provide income support for surviving banks.

For its part, the BSP said it would relax its strict approval process for new branches for newly merged banks.

The BSP said it had received “strong” expressions of interest from banks interested in the perks under SPCB-Plus. The BSP said it was reviewing five mergers involving 19 cooperative banks.

A similar program for rural banks, known as the Strengthening Program for Rural Banks-Plus, is currently in place. Like SPCB-Plus, it aims to weed out weak banks from the industry. Sources of weakness for these small banks include the refusal of family-owned lenders to hire fresh talents who could professionalize their operations, or merely the lack of interest of shareholders to continue their businesses.

Cooperative and rural banks, which are the smallest types of lenders in the country, are also the weakest in the entire banking industry. Cooperative banks have the highest level of bad loans, at 12.38 percent of their total portfolio as  of the end of June 2013, among all segments of the banking industry. They are followed by rural banks, which have an average non-performing loan (NPL) ratio of 12.36 percent in the same period.

In contrast, the thrift banks’ NPL ratio stood at 5.94 percent in June, while universal and commercial banks, which make up about 90 percent of the financial system, had an NPL ratio of 2.68 percent as of the end of June last year.