Regulators ready P5-B incentive program to push bank mergers

BANKING regulators are coming up with P5 billion in incentives to
encourage rural banks to merge and thereby create stronger and more
viable institutions.

In a statement, the Philippine Deposit Insurance Corp. (PDIC) said it is
establishing a P5-billion fund together with the Bangko Sentral ng
Pilipinas (BSP), of which the state deposit insurer would account for
half, and the central bank, the other half of the total amount.

PDIC President Jose C. Nograles told BusinessWorld the insurer would dip
into its deposit insurance fund, from which insurance payments are
sourced, to come up with the amount.

“The PDIC is committed… in strengthening the rural banks and ensuring
their long-term viability,” he said in the PDIC statement.

“By encouraging them to merge and consolidate, these merged institutions
will attain economies of scale, achieve higher lending capacities and
improve the quality of their banking services particularly in their
niche markets thus, help ensure the efficiency and effectiveness of
rural banks in mobilizing savings and investments toward a robust
economy particularly in the countryside.”

The PDIC has been put under strain by the series of rural bank failures,
the most notable of which were of those belonging to the Legacy Group.

Under the incentives scheme, regulators would provide funds either in
the form of direct loans or preferred shares to boost a bank’s capital.
The preferred shares shall be non-voting, cumulative and convertible to
common shares, the PDIC said.

The incentives, which would be available for two years, would be
available to banks with a risk-asset ratio of less than 10% and merging
or consolidating with eligible strategic third party investors (STPI).

An STPI, the PDIC said, must have a CAMELS (capital adequacy, asset
quality, management and board oversight, earnings, liquidity, and
sensitivity to market risk) of at least 3.

It should not be under the prompt corrective action program of the BSP
for having higher-than-normal risk of failure, and should not have
findings of unsafe and unsound practices.

The incentives scheme would be on top of the agreement signed recently
by the BSP and PDIC that speeds up the processing of applications for
mergers.

Central bank data showed that rural and cooperative banks’ assets
totaled P156.49 billion as of end-March, or 2.7% of the entire banking
system’s assets. While their resources cannot match those of universal
and commercial banks, rural banks comprise about 86% of the total number
of banks in the country and extend their reach up to fifth class
municipalities, the PDIC noted.

Tomas S. Gomez IV, spokesman of the Rural Bankers Association of the
Philippines, said the organization has been talking to the two
regulators on the matter since November last year.

“The RBAP is fully supportive of this policy to accelerate consolidation
in the rural bank sector,” Mr. Gomez said in a text message. — Gerard S.
dela Peña