Right-sizing and risk management

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Amid the evolving business landscape, the common mindset of enterprises is to go big to compete. This approach, however, cannot be held true for all cases because in some, finding the right size—one that is feasible and sustainable—is the better choice.

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In a speech in front of bankers in July, no less than Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. stressed the importance of right-sizing vis-a-vis rapid and aggressive growth.

“The game is less about increasing size and more about finding the right size,” he said.

The existence of rural banks and their resilience for the past 62 years attest to the truth of such mentality. They may not be the biggest players in the market but their impact on the lives of many Filipinos is overwhelming, especially for the low-income groups whose primary sources of living are agriculture and fishery.

To date, the industry—composed of over 2,500 banking offices—accounts for the biggest coverage among the banking categories, serving in almost 60 percent of the country’s total municipalities and cities.

Internally, rural banks are also showing positive signs of growth. BSP data showed that total industry assets stood at P196 billion as of March, up 10 percent from P178 billion in the same period in 2013. Similarly, total loan portfolio grew 9 percent, hitting P127.941 billion, as of the first quarter, from P117.837 billion in 2013.

While indeed their ultimate goal is to scale up and expand, rural banks are more focused on managing their risks to keep their balance sheets healthy. At the end of the day, a small but healthy balance sheet is better than a big but problematic one.

In line with this, the Rural Bankers Association of the Philippines—through its technical arm Rural Bankers Research and Development Foundation—assist its member banks by continuously offering and developing risk management and corporate governance seminars and workshops.

With good corporate governance and credit risk management taking the front seat, rural banks were able to minimize bad loans in their portfolio and the possibility of defaults in their operations.

Central bank data showed that as of the first three months of the year, non-performing loans held by rural and cooperative banks made up only 13.13 percent of their combined total loan portfolio. This is already a feat considering that three typhoons hit the country in the same period, two of which (typhoons Agaton and Basyang) wreaked havoc causing hundred millions of pesos worth of damage in the provinces where rural banks are located.

The BSP, on the other hand, has been pushing for mergers and consolidation among rural banks as a way to address the scale issue in the industry. It has partnered with Philippine Deposit Insurance Corporation for the Strengthening Program for Rural Banks Plus, a project that encourages the sale, consolidation or merger of rural banks by giving incentives to interested parties.

Besides strengthening banks, the initiative has also given rural banks a chance to exit the industry without endangering their clients’ funds. The BSP earlier said it received seven applications for merger-and-consolidation involving 15 banks, as of the first semester.

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