The other victims

When the dust has settled in the Legacy mess, what should emerge is a stronger rural banking sector.

Rural banks are the least publicized victims of the scam allegedly perpetrated by Legacy banks and pre-need companies under Celso de los Angeles.

Though client jitters are subsiding, rural bankers still fret about the fallout from the sins of the Legacy group.

Unlike clients of larger banks, many of whom cannot keep all their cash under the mattress in case of a bank scare, the typical rural bank client is a micro-depositor or micro-borrower whose cash can be stashed under the pillow. The decision to withdraw deposits or close a bank account altogether comes easier to such clients.

If a rural bank has no monopoly in a particular area, it may also lose that jittery client to other types of banks, and lose the client forever.

In the continuing Legacy scandal, how do rural banks regain public trust?

“Client by client, branch by branch,” sighed Tomas “Mitch” Gomez IV, head of GM Bank, Inc. and president of the 52-year-old Rural Bankers Association of the Philippines (RBAP).

There ought to be a law, and punishment, for eroding public trust in the banking sector. But De los Angeles, who now faces a slew of criminal complaints and will face more, will not be directly punished for the harm he has brought to rural banking.

The best that the RBAP can do is work with government regulators led by the Bangko Sentral ng Pilipinas (BSP) to prevent a repeat of the Legacy fiasco and reassure clients that their money is still safe with rural banks.

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The country has 698 rural banks, with more than 650 of them RBAP members. They have a total of 2,083 branches nationwide, most of them outside Metro Manila. Seventy percent of RBAP members have assets below P200 million.   

It is a profitable industry. In 2007 the industry’s net income was P2.8 billion – 20 percent higher than in 2006. Gomez said that the minimum seed capital requirement for a rural bank is P3 million.

Rural banks play a key role in economic development particularly in poor countries, giving micro, small and medium enterprises access to financing. The banks lend to sari-sari or convenience store owners or housewives who want to start home-based businesses. Farmers can borrow money from rural banks to buy pesticides; fishermen can obtain financing even to repair their boats. The minimum loan is P3,000, with an interest rate of 2-1/2 to 3 percent.

Inspired by the Grameen micro-financing model, rural banks in the Philippines have provided financing mostly to women. Rural banks are currently providing financing to about 800,000 micro-enterprises nationwide, according to Gomez.

RBAP members have started providing electronic banking or ATM services in the countryside, allowing families of overseas Filipino workers to collect remittances through ATMs even in far-flung areas. The group has also partnered with Globe Telecoms through G-Cash and the United States Agency for International Development to provide mobile banking, allowing clients to conduct financial transactions through cell phones.

Most rural banks operate in areas that are not serviced by larger commercial banks, such as Lagawe in Ifugao, Jordan in Guimaras and Alabat in Quezon. Ideally, a rural bank has community-based ownership and management. 

This was not the case with Legacy. Its banks accepted money from certain communities and brought the money elsewhere, with De los Angeles even giving P100,000 a month, according to former Legacy executives, to Parañaque Rep. Ed Zialcita.

Gomez, son and namesake of Corazon Aquino’s former press secretary Buddy Gomez, is encouraging the public to be more discerning in choosing rural banks. He said the public can find out where a rural bank is investing its assets and who the owners are.

But he acknowledges that some micro-borrowers or depositors may be too shy to ask such questions.

Such efforts will also prove useless if a bank is owned by someone with the savvy to conceal his ownership, and whose true intent is to con depositors.

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De los Angeles, who was reportedly banned by the BSP from engaging in banking several years ago, apparently managed to conceal his ownership of the Legacy Group by buying into the companies and taking over other people’s board seats.

Rural bankers are backing the BSP’s proposals for amendments in banking laws. The central bank wants the authority to conduct background checks on the board members of banks. It also wants more teeth in monitoring the transfer of assets in bank ownership, as well as the power to rescind the transfer in case it sees something fishy in the deal.

There is a high degree of trust in rural banking. Gomez said the repayment rate even among micro borrowers is high.

That trust has been shaken by the Legacy fiasco. Rural banks in areas where the Legacy branches are located were the hardest hit, Gomez said, adding that depositors are just starting to calm down.

But without immediate reforms, the scandal could be repeated. And the next time client trust is shaken, it may never return.