• Too high or just right

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    Rural banks have mixed opinions on whether the capital adequacy ratio (CAR) of 10 percent imposed by the Bangko Sentral ng Pilipinas is too punitive or just good enough to provide a safety net for rural banks and their clients.

    As the measure of a bank’s financial strength expressed by the ratio of its capital (net worth and subordinated debt) to its risk-weighted credit exposure (loans), CAR is basically the benchmark that determines a bank’s capacity to meet time liabilities and risks.

    In light of the financial crises that confronted the global financial markets over the last couple of decades, regulators may have deemed it necessary to prescribe a minimum ratio that banks should maintain should another crunch arise. By meeting this threshold, rural banks are provided with a cushion to negate any potential losses, while their clients are secured about their deposits.

    On one side of the coin, some rural banks opine that the required 10-percent CAR for rural banks is just right, and already proportional to the collective assets held by the industry in general.

    The thinking here is that the minimum ratio was imposed to help banks absorb potential losses in times of financial contingencies, thus protecting their depositors. It is also a sign of confidence by the BSP on the rural banking industry, in particular, to maintain the threshold. It is worth noting that the 10-percent CAR is even higher than the global standard of 8-percent CAR.

    Is this confidence justified?

    Over the last five to seven years, the CAR for rural banks has been treading way above the threshold, at an impressive 17-percent level. This mark has given the industry a very strong buffer against any potential risks, whether domestically or globally, and enabled rural banks as a whole to withstand the 2008 financial crisis and a number of closures.

    On the other hand, there are rural banks that find the current CAR requirement too high.

    For them, with more money allotted for risk management, (in meeting the 10-percent limit) fewer money are circulated that could have been used to drive countryside economic development.

    Some rural banks want the threshold to be lowered to 8 percent, just at par with global standards, especially amid the gradual imposition of more and increasing risk weights by the BSP, including the recent increased weight risk for real and other properties acquired.

    To retain the competitiveness of rural banks, other “compensating” measures must be introduced for rural banks, they pointed out, such as the lowering of the CAR requirement.

    Others are suggesting that the CAR should be adjusted based on the class of the municipality or city where the rural bank operates, as well as the asset size of the bank.

    Rural banks that either belong in lower class municipalities or have smaller assets should have a lower CAR requirement, some rural banks reasoned. For small single unit rural banks located in a 3rd or even 4th class municipality, having a CAR of 10 percent creates a challenge on whether to lend and stimulate business in the area or to keep the capital as the buffer. The 2-percent difference if one is talking about financial business lifelines, can make a huge difference. Maybe, given that the global CAR requirement is 8 percent, categories can be set on which rural banks can be determined to have lower CARs, taking into consideration the economic viability of their respective areas. Otherwise, if the smallest rural banks close in the poorest municipalities, the small and medium enterprises located in that area would just become victims of loan sharks and unofficial lenders that mostly belong to the underground economy.

    Whatever the case may be, one thing is certain: rural banks, as a whole industry, have no problem meeting the 10-percent CAR requirement imposed by the BSP. Hopefully, this dutiful compliance will be enough for the regulator to give the industry an audience should rural banks request for a dialogue on what threshold is right, not only for the banks but for their clients as well. The new limit, if there will be one, should be carefully deliberated upon.

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