As more cities across the country prosper, community banks that served these areas would do well to bulk up to cope with the growing needs of their clients, the central bank said.
Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. said rural banks should rely on more than just their familiarity of their markets.
“Familiarity—even as it is an advantage—may not be sufficient to guarantee operational viability,” Tetangco said in a speech.
“As the local community being served grows, so must the rural bank which is invested into that community,” he said. “The causality must go both ways. For the local community to grow faster, the rural bank must also continue to be the stimulus for the community,” he said.
This comes amid the regulators’ efforts to induce consolidation among small banks, some of which are considered the weak links in the country’s otherwise strong banking sector.
Latest data from the BSP showed that rural and cooperative banks had the worst asset quality among all types of banks, with nonperforming loans reaching 11.85 percent of their total portfolio at the end of last year.
The entire banking sector’s bad loans-to-total loans ratio stood at 2.31 percent in the same period.
Rural banks still outnumber all other types of lenders in the country. At the end of 2014, 543 of the country’s 648 banks were rural banks, with many having just one branch each.
Tetangco said rural banks’ dominance in the countryside might be under threat due to recent legislation that opened up the banking sector to more foreign investments.
Foreign firms are now allowed to own majority stakes in rural banks. Congress also recently relaxed restrictions on the entry of bigger universal and commercial banks.
Local lenders are also currently being encouraged by regulators to expand their reach in far-flung areas.
The BSP has offered financial perks, and has committed to be lenient in some regulatory areas for big banks that decide to open branches in previously-unserved cities and towns.
To spur consolidation among rural and cooperative banks, the BSP recently extended the availability of financial and regulatory incentives for new investors in the sector. Banks planning to acquire or merge with rivals are also eligible for these perks.