Increasing the absorptive capacity of rural banks

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RURAL banks have proven their contribution to the inclusive growth efforts of the government by having sufficient capital to provide banking services responsive to their clients’ needs and by reaching out to the unbanked and underserved population.

By design, rural banks operate very closely with their customers because they are situated right where their markets are—the rural communities.

This proximity has led to familiarity with the living conditions and hardships of rural families. In turn, this familiarity has translated to better responsiveness to the needs of the rural market.

With the approval of the law liberalizing the entry of foreign banks, some rural banks have expressed fear that stiffer competition from these foreign banks could mean losing market share to these big players.


However, Bangko Sentral ng Pilipinas (BSP) Deputy Governor Nestor Espenilla Jr. has allayed these fears by saying that rural banks have already established a deep relationship with their clients which new players cannot easily replace.

He added that the amended Foreign Bank Entry Liberalization Law would lay down the foundation for “healthy competition” which is expected to bring with it the transfer of know-how and expertise.

However, the BSP reminded rural bankers that since banking is a public franchise, there is an understood responsibility to be continuously capable in delivering useful banking services, capable to effectively manage credit, market, liquidity and operational risks using funds sourced largely from the public.

One clear way to handle this, according to the BSP, is having stronger capacity to absorb risks, which was introduced through the reforms on minimum bank capitalization that was issued under Circular 854.

According to Espenilla, the additional capital is required because the minimum scale needed to operate a bank has realistically increased as well.

The central bank official explained that the use of information and communication technology, maintaining client information, connecting to the BSP, generating then submitting required reports and, to the extent relevant, the clearing of checks and other payments, all require technology.

While this increase in capitalization initially poses a concern to some rural banks, it should be offset by its long-term benefits, particularly to the rural banking industry. Better capital accounts not only ensure banks’ viability as a business, it also protects the welfare of the depositing public because it lessens their funds’ vulnerability to shocks.

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