To protect the deposits of the public, the Bangko Sentral ng Pilipinas (BSP) supervises all banks not only according to its own strict guidelines but also according to international standards. When the performance of banks deteriorates and remedial measures fail to correct the situation, the concerned banks are closed.
By having the largest number of banks, it only follows that rural banks will also have the highest possibility of closures. To date, there are 534 rural banks providing basic banking services to mostly rural-based Filipinos nationwide.
In 1952, capable families in every locality were tapped to set up rural banks to provide banking services. It was then that rural banks thrived mainly due to the policy of allowing only one rural bank per municipality. Today, this situation has immensely changed.
We have seen that there exists a free market wherein bigger banks are branching to the rural banking sphere and rural banks are spreading outside their original areas. Also, there exists increased competition from industry peers (commercial and thrift banks) and other market players (non-government organizations and corporations) and the increased costs of doing business, which have indeed eroded the profitability of some rural banks. Apart from these, many other forms of lenders, both private and public, have eaten into the market of rural banks.
One of the many performance measures to gauge the stability of a bank is the non-performing loan (NPL) ratio. Naturally, as the total loan portfolio of rural banks grew to P121.92 billion in 2013, its NPL level also increased.
A major factor that likewise contributed to the increase in NPL ratio was the devastating effect of Typhoon Yolanda (Haiyan), which severely battered the central part of the country, particularly Eastern Visayas and neighboring provinces.
Another is the fact that rural bank clients are subjected to more financial stress, having less cushion against uncontrollable factors such as climate change, price fluctuations (especially for farmers), disease, and security concerns.
Lastly, rural bankers tend to delay foreclosures, especially of clients who live in the same communities as they do. This social aspect is more pronounced in rural banking, where dealings, although made under a commercial setting, are founded on personal bank-to-client relationships.
Moreover, rash foreclosures — while reducing the NPLs — force clients to turn to informal channels like loan sharks, generally resulting in more poverty for the community.
Despite these figures, no less than BSP Governor Amando M. Tetangco, Jr. said that the rural banking industry remains on track in terms of growth, as indicated by key performance indicators including consolidated assets, deposits and loans.
As of March 2014, the total resources of rural banks stood at P209.4 billion, representing a year-on-year growth of 8.8 percent. The industry’s total loan portfolio also increased by 6.5 percent to P138 billion, while deposits climbed 10.6 percent to P145 billion.
If deteriorating performance or a change in business focus best require that a rural bank be given up, the BSP and the Philippine Deposit Insurance Corporation (PDIC) have developed the SPRB/SPRB Plus program which aids the sale, consolidation, or merger of a rural bank with another bank. Doing so provides a seamless transition of the business and its clients to the new entity.
The process is understandably paced because of banking prudence on the part of prospective buyers and takers.
Despite the reduction in the number of operating rural banks from over 1,500 at its peak, there are more than 2,500 rural banking outlets today due to the increasing branch expansion of many rural banks. With
much simpler operations, the BSP applies the same international banking standards to rural banks, especially on regulations related to loans, capital, and overall governance.