M&As seen improving rural banking sector’s growth prospects

Rural banks are upbeat about their growth prospects for 2012, expecting that consolidation in the industry will enhance their competitiveness against commercial banks that have been putting up branches in the countryside.

Industry players said the entry of various commercial banks in rural areas had made competition for rural banks tougher.

Tight competition, limited capitalization and management problems have led to the closure of a number of rural banks over the past three years.

The industry, however, believes that the sector’s consolidation through mergers will make rural banks more financially stable and will enable them to invest in more products and services for people in the countryside.

The Rural Bankers Association of the Philippines (RBAP) said it was supporting calls for industry consolidation, agreeing that it was a wise move to make members stable and able to deliver more products and services to the countryside.

“(Consolidation) will result in member-banks being more equipped in providing microfinance services to farmers, fisherfolk and small enterprises, especially with the banks’ continuing focus on the agri-agra sectors,” RBAP president Eric Pama said in a statement.

Regulators have been pushing for the consolidation of the rural banking sector to avoid closures to be brought about by weak capitalization and mismanagement.

The Bangko Sentral ng Pilipinas is urging stable and well-managed rural banks to acquire smaller industry players.

Bank closures are costly as these force government-owned Philippine Deposit Insurance Corp. to shoulder expenses related to shutdowns, such as deposit insurance.

To avoid more closures in the future, the government is encouraging mergers and consolidation.

The government is implementing a program called Strengthening Program for Rural Banks (SPRB) to encourage mergers and consolidation. Under this, banks that will serve as white knights to their troubled peers will be given incentives, such as regulatory relief and loans that can be used in the acquisition.

The rural banking sector, composed of more than 600 banks, has an average capital adequacy ratio (CAR) of 19 percent, exceeding the minimum requirement of 10 percent.

Regulators said the satisfactory average was due to the good performance of many rural banks. They noted, however, that many members were suffering from insufficient capital.

BSP Officials expect that the incentives offered will encourage more rural banks to pursue consolidation.

In response, the RBAP said the industry would continue supporting consolidation moves.

In the meantime, the rural banking sector is pushing for a law that will allow industry members to accept investments from foreigners. Rural bankers said foreign investments will help rural banks boost their capital and enable them to invest in more products, services and technology.