Stability in finding the right size

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Before the previous year ended, the Bangko Sentral ng Pilipinas (BSP) announced yet again another extension of the Strengthening Program for Rural Banks (SPRB) Plus. The project, supposedly set to lapse last year, will now run until the end of December 2015.

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The SPRB Plus is an enhanced version of the program launched by the BSP and the Philippine Deposit Insurance Corporation back in 2010 encouraging mergers and consolidations among small banks, as well as acquisition by third party investors.

In line with the announcement, BSP reported that seven applications for merger and consolidations involving 14 banks have already been approved, while two other acquisitions are currently under review.

This strategy employed by the central bank—to provide smaller players a clean exit and allow fewer but bigger banks to remain—would certainly create a stronger financial system. However, while it is true that size is an advantage, it is not the only way to secure a business’ success and stability. Testament to this are the single-unit, family-owned banks that continues to thrive and get patronized in the localities they serve.

In December, the BSP reported that stand-alone thrift, rural and cooperative banks showed “general compliance” with the capital adequacy ratio (CAR) requirements of the Basel 1.5 Capital Framework, since its implementation in 2012.

Noting the status of single-unit rural and cooperative banks in particular, the BSP reported that the sector generally “showed stability” based on their reported solo basis CARs, which ranged from 17.98% to 20.67% over the March 2012 to December 2013 reporting period. These positive figures reveal that rural and cooperative banks, despite their size, enjoy the luxury of stability and soundness just as much as their larger peers.

While recognizing this fact, the BSP continues to advocate for a stronger system by implementing a series of reforms including the hike in the minimum capitalization requirements for all banks. The central bank has also moved to provide smaller banks more growth opportunities by granting them new authorities such as participating in foreign exchange.

In the end, remaining small or scaling up is a business decision that banks should carefully assess for it brings consequences that they must be fully prepared to tackle. Acquiring size through multiple branching allows banks to cover a larger share of the market but it also carries the risk from greater exposure and the possibility of mismanagement.

Sustainability, therefore, is not completely anchored on aggressive growth but on finding the right size.

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