Rural banks do the nation a great service that people in the cities seldom give a thought to. They serve a market segment big banks don’t want to be bothered with.

The money of the farmers, rural businesses and agricultural and fishery entrepreneurs that make up that market segment is too small—and therefore too expensive—for the large commercial banks to attend to.

Individually, rural businesses, farmers, piggery and poultry owners, and retail and service establishments in the countryside make smaller deposits and borrow smaller amounts than the commercial and universal banks’ urban-based clients. The paper work, contact hours and account supervision that the farmer client and his transactions worth only a few thousand pesos require are about the same as those required for an urban client’s multimillion-peso transactions.

Also, commercial banks are turned off by the risks they see in micro, small and medium enterprises’ (MSMEs) so the loan applications by owners and managers of these businesses are most often turned down—especially if they have no collateral to back up the loan they seek.

A commercial bank branch in a really rural area often ends up catering only to the largest businesses and the wealthiest people. It is the rural bankers who serve—see, visit, talk to and deal with—the normal and ordinary rural residents and the micro, small and medium enterprises of the community to which they all belong.

Doing what they do, the rural banks have helped much to reduce poverty in the countryside. And they have made it possible for farmers and agri-entrepreneurs to enjoy the use of modern things—like ATM cards.

There are more than 2,000 rural banks in the countryside. They service clients with loans as small as P2,000—which an entrepreneur needs to start up his micro-enterprise. Most rural bank clients are people who would otherwise have borrowed the funds they need from the usurious 5/6 lender.

Rural banks have served millions of small entrepreneurs all over the country—even in conflict-ridden areas. With the rural bankers’ help hundreds of thousands of micro-enterprise businessmen have been able to enlarge their businesses, employing more than their original crew of relatives.

Rural banks account for only about 3 percent of total Philippine bank deposits. Outside Metro Manila, however, rural banks account for 8 percent of the total deposits. In some provinces and regions, rural banks’ share of deposits sometimes exceeds 20 percent.

Rural banks in 2008 had a loan portfolio of P8 billion for the micro-enterprise sector. In 2009, they released some P2.7 billion every month to micro entrepreneurs for their use as working capital. This represents more than 30 percent of the total number of micro entrepreneurs served nationwide and also accounts for 50 percent of the value of total loans to this micro-entrepreneurial sector.

Rural banks can do a lot more good if more capital were invested in them. But few of the banking industry’s giants are putting some of their money in rural banking because of the low yields and what they see as the big risks.


Allow foreign equity in rural banks

Why not tap foreign investors to boost the capitalization and widen the reach of Philippine rural banks?

This is what the members of the Rural Bankers’ Association of the Philippines (RBAP) want to happen. The RBAP is made up of 650 out of the country’s about 700 rural banks.

But the Rural Bank Act of 1992, which governs the operations of the sector, forbids foreign capital infusion. So, RBAP’s leaders are preparing their presentation to the next Congress (which will be formed after the May 2010 election) to seek congressional action to amend the law.

They want the law to allow foreigners to own equity of up to 40 percent of any rural bank in the country. Philippine banking law allows foreign investments only in thrift, commercial and universal banks.

The good news is that the Bangko Sentral ng Pilipinas (BSP) is open to allowing foreigners to invest in rural banks.

In fact, BSP wants to strengthen the rural banking sector’s weaker members. The BSP recently, together with the Philippine Deposit Insurance Corp. (PDIC), put up a P5-billion fund under what is called the “Strengthening Program for Rural Banks (SPRB)” to encourage mergers, consolidations and acquisitions among rural banks and with bigger banks.

Funds from the SPRB will be available to strategic third party investors desiring to merge with or acquire rural banks that are troubled with capital deficiency. These troubled rural banks make up 15 percent of all the country’s rural banks.

The financial assistance under SPRB will be a combination of direct loans from the BSP/PDIC and subscription to preferred shares to reinforce the investors’ capital position.

Most—85 percent—of the rural banks are very healthy. The average capital adequacy ratio (CAR) of these rural banks was 18.3 in 2009 or almost double the 10 percent CAR requirement. These rural banks that have no capitalization deficiency and are in fact most profitable want to expand and open more branches.

They are the ones that wish to attract foreign investors.

We urge the next Congress to amend the Rural Bank Act.

And we hope and pray the RBAP’s wish comes true—that foreign investors will be more appreciative of the rural banks than are our country’s commercial banks and universal banks.