Rural banks support P5-billion facility for consolidations

MANILA, Philippines - There are a lot of “white knights” in the rural banking system willing to consolidate or acquire smaller or weaker rural banks in a bid to strengthen the country’s rural banking system. The so-called white knight is an acquiring bank or the lead consolidating bank.

“If there are incentives being offered by the regulators, that would be better. The white knights can surely take advantage of the incentives,” Joseph Omar Andaya, president of the Rural Bankers Association of the Philippines (RBAP), said. Andaya is also the president of Green Bank, a Mindanao-based rural bank.

One of the incentives being mentioned is the proposed P5-billion financial assistance and regulatory support facility spearheaded by the Philippine Deposit Insurance Corp. (PDIC).

The PDIC does not only insure bank deposits. It likewise offers loan facilities for troubled banks. So far, it has concentrated on commercial banks.

“The loan facility such the one being proposed by the PDIC is one incentive that acquiring banks can take advantage of. It will allow white knights financial flexibility,” Andaya said.

A considerable number of relatively large RBAP members want to consolidate while have express interest in acquiring other rural banks. However, they were seeking incentives from government.

The RBAP president said that the rural banking system was strong and competitive registering better annual growth rates better than the commercial or thrift banking systems. However, achieving scale and capital growth increases its competitiveness.

Meanwhile, PDIC president Jose C. Nograles said the proposed financial assistance not only helps the white knight but also protects the deposit insurance reserves of the government financial institution.

“It is really preventive in nature,” Nograles said.

PDIC estimates that it will cost government more to close a bank rather than extend financial assistance to a white knight.

In the past experiences, financial assistance was extended to white knights acquiring troubled commercial banks, it had not only protected the banking public, not to mention the troubled bank. PDIC after all slaps a reasonable interest rate on the loan facility.

The amount to be tapped by a white knight depends on the capital adequacy ratio (CAR) of the bank being acquired. When the amount required is determined, government will extend at the most 50 percent and the white knight must should the remaining 50 percent.

“They, after all, must have a stake in the acquisition process,” Nograles stressed.

The proposed financial assistance can also be in the form of preferred shares. These preferred shares would likely be non-voting, cumulative and convertible to common shares. It would be redeemable at the end of the fifth year, but not later than the 10th year.  

 Rural banks that are eligible for the incentive program are those whose risk asset-ratio (RAR) is less than 10 percent.

In turn, those who want to be eligible as a white knight or the STPI should have a CAMELS rating of at least “3”, not under the prompt corrective action (PCA) program of the BSP, and does not have findings of unsafe and unsound practices.

 The PDIC said that by encouraging rural banks consolidate, the merged or consolidated institutions can attain economies of scale, achieve higher lending capacities and improve the quality of their banking services particularly in their niche markets thus, help ensure the efficiency and effectiveness of rural banks in mobilizing savings and investments toward a robust economy particularly in the countryside. 

“We are confident that our partnership with the BSP to assist rural banks through the proposed rural bank strengthening program will result to a more accessible and resilient banking system,” Nograles said.

According to the BSP, the rural banking system can continue to service the banking public in the agricultural and countryside sector even if it consolidates to 400 or so strong players.

There are an estimated 726 rural banks as of last count.