Regulators have finalized terms of a new incentive package that would encourage mergers among small banks to address industry fragmentation, while promoting financial inclusion.
The Bangko Sentral ng Pilipinas (BSP) this week announced the formalization of the Consolidation Program for Rural Banks (CPRB), through a deal with Philippine Deposit Insurance Corp. (PDIC) and Land Bank of the Philippines.
The two-year program that begins this month offers financial and regulatory perks to groups of rural banks serving similar areas to combine operations and create larger, more efficient institutions.
BSP Governor Amando M. Tetangco Jr. announced plans to sign the deal last month. Terms of the final deal show groups of at least five banks that have a minimum combined capital of P100 million, would be eligible for the perks under CPRB.
“It intends to promote mergers and consolidation among rural banks to bring about a less fragmented banking system by enabling them to improve financial strength, enhance viability, strengthen management and governance, and expand market reach,” BSP Deputy Governor Nestor A. Espenilla said in an order issued this week.
He said mergers among rural banks would help “generate synergies and economies of scale through common infrastructure, systems and resources.”
Apart from having at least P100 million, bank groups applying for CPRB perks should also have an average capital adequacy ratio of at least 12 percent, or above the 10 percent minimum prescribed by the BSP for all local banks.
Capital adequacy measures the amount of equity a bank has relative to risk-weighted assets. This serves as an indicator of a bank’s ability to absorb potential losses from its loan book.
Banks that want the perks should also be located near each other, preferably in the same region of the country. Banks in nearby regions may also be included in merger plans, the BSP said.
In support of the merger, the BSP, PDIC and Land Bank will subsidize 80 percent of the financial advisory cost for banks. The three proponents will also provide technical support in several other areas to aid merging banks in consolidating their business processes.
The Land Bank may also invest in the surviving entity of the merging banks, providing additional cash for operations. For its part, the BSP said it would observe “full flexibility” in granting other incentives.
Rural and cooperative banks account for only a small fraction of the industry’s assets, but outnumber all other types of banks. The sector’s total assets reached P218.29 billion at the end of the first quarter or less than 2 percent of the total for the entire banking system.
Soured loans held by rural and cooperative banks also reached 12 percent of total outstanding loans, much higher than the entire banking industry’s level of bad credit at 2.47 percent.