BSP moves to encourage mergers among rural banks

Regulators have expanded incentives to encourage countryside banks to form larger institutions through mergers amid perceived “fragmentation” in the industry.

The Bangko Sentral ng Pilipinas (BSP) this week announced the creation of the new Consolidation Program for Rural Banks (CPRB), which complements an existing incentive scheme with similar goals.

A joint project of the BSP, Philippine Deposit Insurance Corp. (PDIC) and Land Bank of the Philippines, CPRB aims to trim the number of rural banks, which stands at 512 today.

“It intends to promote mergers and consolidations among rural banks to bring about a less-fragmented banking system by enabling them to improve financial strength, enhance viability, strengthen management, and governance,” BSP Governor Amando M. Tetangco Jr. said.

The new program wants fewer but stronger banks with wider networks, which spreads out risk.

BSP, PDIC, and Landbank also launched a P25-million seed fund, dubbed the Countryside Financial Institutions Enhancement Program, which will be used to provide various types of aid to banks qualified under CPRB.

The amount, the BSP said, would support financial advisory, business process improvement, and capacity-building services for merging banks.

For its part, the BSP said it would observe “full flexibility” in granting regulatory and other incentives allowable under existing banking laws and regulations.

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. Illustrative of the sector’s weakness, all eight banks ordered shuttered by the BSP’s Monetary Board since the start of the year were rural or cooperative lenders.

CPRB complements the existing Strengthening Program for Rural Banks, which rewards “white knight” investors that plan to take over local banks.