"We must accept that the rural banking system remains under stress," Dr. Gunter Hecker, Asian Development Bank (ADB) Philippine country director said.
The high level of non-performing assets (NPA) of the rural banking sector strongly reflects the system’s weaknesses.
The rural banking industry reported an NPA ratio to total assets of 20 percent as opposed to the entire banking sector’s 13.1 percent by end 2000. "This is far too high by any measure," Hecker added.
This has suppressed the sector’s profitability while increasing the cost of financial intermediation.
Data gathered from the Rural Bank Association of the Philippines (RBAP) indicate that a higher-than-average level of bad loans of 19.7 percent was reported as past due as of mid-2000. This is higher than the prevailing ratio for commercial banks (KBs) placed at 16.69 percent as of end-March.
The ADB official said that the banking sub-sector should prioritize and improve basic asset quality. Hecker further urged rural banks to increase its loan loss reserves as the total provisioning represented only about a quarter of NPAs.
"Otherwise, this would be a severely limiting factor that could consign many rural banks into permanent low gear," he added.
On a brighter note, the rural banking system outperformed the KBs in terms of deposit mobilization. It reported a 16 percent increase from P35.6-billion in 1999 to P41.3-billion for the whole of 2000 while their "richer cousins" showed a mere nine-percent deposit growth.
Likewise, the rural bank’s asset base grew by 8.5 percent while the traditional high capitalization ratios of between 16 to 17 percent of total assets have been maintained. Return on assets (ROA) of 1.6 percent and a return on equity (ROE) of 9.4 percent was likewise reported.
Rural banks posted steady growth with total assets rising by 8.5 percent from P60.0-billion at the end of 1999, to P65.1-billion by end December 2000. Gross loans increased by 1.4 percent from P41.6-billion in 1999 to P42.2-billion last year.
In contrast, the universal banks (expanded KBs) and the KBs reported an ROA of 0.4 percent and a ROE of three percent in the period in question. The same sector gained P0.04 for every peso of assets and P0.03 for every peso in capital.
Recently, the Arroyo administration initiated studies to boost the rural banking sector in the hope that it would increase countryside productivity.
One of its initiatives is to introduce fiscal incentives such as exempting deposits from the 20 percent withholding tax on interest earned on deposits. This will further encourage savings and generate more capital for investments especially among the rural households, farmers, and fisherfolks.
Another incentive scheme is the exemption from dividends earned from investments in rural and cooperative banks from taxes. It is likewise looking to restore the collateral integrity of lands in the countryside, particularly lands covered by the Comprehensive Agrarian Reform Program (CARP).
In fact, the national government earmarked P350-million for the rural banking system for retailing and re-lending in the countryside.
The new administration promised that the proper allocation of resources will give particular emphasis toward rural areas and the agricultural sector, and that includes infrastructure development and credit resources. – Ted Torres