1. Rural Banks: Aiming High, Charting a Clear Path•
Mr. Ian Pama, President of the Rural Bankers Association of
the Philippines (RBAP), Members of the Board and Officers of
RBAP, my friends in the rural banking industry, ladies and
gentlemen, good morning.
It is my pleasure to join you in your 59th Annual National
Convention and Corporate Meeting. It is an added pleasure that
this meeting is taking place at what has been named as one of the
best beaches in the world.
I do not want to compete with the compelling call of the
powder white sands and clear blue water so I will only talk about
two issues that are important to the ever dynamic and evolving
rural banking industry. First is the strategic and vital role of rural
banks in financial inclusion. And second is the constant need for
quality management and governance that will enable rural banks
to effectively fulfill this important role.
The rural banking was primarily conceived to serve the
needs of the countryside. As an industry, it accounts for around
30%, of the overall physical footprint of the banking industry.
More tellingly, your over 2,500 offices are mostly found in the
countryside where the big banks are not found. Rural banks,
therefore, are the most logical, effective, and essential partners in
our new and worthy goal of achieving financial inclusion, of
bringing access to financial services to our country’s unbanked.
The Consumer Finance Survey conducted by the BSP in 2009
which was recently published showed that 8 out of 10 Filipinos do
•
Delivered by BSP Deputy Governor Nestor A. Espenilla, Jr. during the Rural Bankers Association of the
th
Philippines 59 Annual National Convention on 25 May 2012 at Boracay Island, Aklan.
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2. not have a savings account. In addition, less than 21% of
households said they take out loans from formal sources. Data
will also show that 40% of our country’s deposit accounts (and
60% of the value) are in the NCR alone. Geographically, we know
that 37% of the country’s municipalities have no banking office at
all. Obviously, we still have a long way to go in spite of all the
progress.
The challenge and the task are gargantuan but one that is
replete with many opportunities. Clearly, there is enormous
potential in this evidently untapped market. Many are already
seeing the potential in this space – international investors,
technology companies and yes, even the big banks.
Some rural banks have expressed their apprehension that
the bigger players are entering their space, one in which they
have long been comfortable in. The good news is ‐ you were here
first. You have first mover advantage. You know your markets
intimately and your markets know you. Capitalize on this
advantage while also finding ways to further improve your
services. With increasing competition, that advantage is at risk.
To stay in the game, seize new opportunities, create partnerships
and useful linkages and innovate in the products and services you
provide and how you deliver them. This includes strategic
partnerships with government agencies like the Department of
Agriculture to create viable agricultural financial ecosystems
where you are the leaders.
Trust that the Bangko Sentral stands ready to provide you
the necessary space to expand the scale and scope of your
business activities. We have shown you and we will continue to
show you in concrete ways our trust and confidence in the full
potential of our rural banks.
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3. In terms of products, we have crafted enabling regulations
that allow you to provide a suite of useful and responsive services
to your clients. From microfinance loans for the working capital
of microenterprises, to housing microfinance (Circular 678), micro
agri loans (Circular 680, amended by Circular 748) and most
recently microfinance plus for growing microenterprises (Circular
744). Apart from credit, we now have the basic framework to
offer micro‐deposits (Circular 694) that are geared toward small
savers. Finally, you have been given the opportunity to distribute
microinsurance (Circular 683). All these products will allow you to
become relevant and responsive banks by being able to provide
the broad range of financial products and services that your
clients are actually looking for.
We have also gained much ground in providing the
necessary environment for your banks to expand your distribution
networks and delivery channels via cost effective and efficient
means. Through the micro‐banking offices (Circular 694) and the
retail payments ecosystem powered by electronic money (Circular
649 and 704), your banks can transact with a much wider market
than what traditional concrete‐and‐steel offices can allow. More
recently, the Monetary Board lifted the 5‐at‐a‐time limit on
branch applications so you can expand faster depending on your
abilities.
I take much pride and pleasure to see the best of you
seizing the emerging opportunities presented by these new
ground‐breaking BSP regulations. You may not know that
globally, we are a thought leader in innovative financial inclusion
policies.
But not all banks are ready and able to take on these golden
opportunities. And this leads me to my second point. You must
constantly elevate the quality of the management and
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4. governance of your banks. This will ensure your strength, your
stability and your ability become true agents of financial inclusion.
Bob Tricker, author and corporate governance expert, said
“….that management is about running the business while
governance is about seeing it run properly…..” I agree. We see
both components as equally important for rural banks as you
continue to work toward increasing the value of your businesses
and your social value to your clients.
Toward this end, we are undertaking multiple and
simultaneous initiatives to help you in your task. On the policy
and regulation side, I will talk about three specific issuances that
will provide you with the necessary frameworks and tools to
strengthen your internal management and governance systems.
First is our recent Circular on Corporate Governance
(Circulars 748 and 757) which emphasizes the importance of the
leadership role of the Board of Directors, its capacity to exercise
sound judgments as well as the self‐discipline to ensure that there
is a strong system of checks and balances in the bank.
Key provisions include an enhanced requirement for the
minimum number of independent directors to at least 20% of the
total number of directors but in no case lower than the legal
minimum requirement of two. Independent directors must also
conform to SEC rules prescribing a 5‐2‐5 term, wherein an
independent director can only serve as such in the same company
for five (5) consecutive years. The term may be extended for
another five (5) consecutive years only after a two‐year (2)
"cooling off" period. Further, if your independent director is a
member of any committee that exercises executive or
management functions, he or she can not be a member in
committees that perform independent oversight functions. These
rules apply prospectively so you can adjust.
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5.
You will notice that much focus is being given to these issues
as many bank failures ultimately reflect the failure of good
governance. I hope that you do not see these new guidelines as
an added burden of compliance but an opportunity for your Board
of Directors to be enriched by the additional insight, perspective
and objectivity that an honest‐to‐goodness independent director
can provide.
Another measure to ensure quality and avoid conflict of
interest is the explicit prohibition on the Chief Executive Officer,
Chief Financial Officer and/or Treasurer from being part of the
audit committee. In general, there are also specific rules and
guidelines regarding the required Board Committees which
include audit, corporate governance and risk oversight. In
applying the principle of proportionality, however, only the Audit
Committee is the required committee for small banks. The
oversight functions of the other mandated committees may be
directly conducted by the Board itself.
Good corporate governance is integral to any type and size
of organization. More so for banks whose funding predominantly
comes from the general public and whose loans serve the
community. Corporate governance principles are made alive by
the objectivity, integrity, and competence of the Board, which
sets the tone at the top. The challenge takes on greater urgency
and importance in the context of family‐run and controlled
banks where the temptations for abuse are more bewitching.
The fact is so many of you have already demonstrated that
this discipline and self‐control are achievable. That is why we are
firm in our conviction that the rural banking system today is
fundamentally stronger than ever before in spite of sporadic
negative stories. Good corporate governance is an investment in
your bank’s reputation, which is of paramount importance in the
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6. business of banking. And that tradition of good governance must
live on and transfer smoothly to the next generation through
effective succession planning.
The other regulation is our Circular on the Revised
Compliance Framework for Banks (Circular 747). Building on our
initial compliance system circular issued in 1997 in the wake of
the Asian Financial Crisis. This new circular defines compliance
not simply as narrowly following to the letter of rules and
regulations as they are written but more broadly expects a higher
standard in the overall handling of the banks’ business that it may
always be perceived as a law‐abiding, responsible, and
respectable corporate citizen.
In line with this broader scope, let me point out some of the
key amendments. Chief compliance officers, who possess the
necessary skills and expertise, should ideally be a full‐time senior
officer with no line function and who has direct access to the
Board of Directors. This requirement underscores the crucial
aspects of competence and independence that are necessary for
such a critical position.
We realize that this requirement may be an obstacle for
smaller banks and have therefore allowed such banks to
designate a non‐executive member of the Board as chief
compliance officer on concurrent capacity.
The new rules are not about just submitting to BSP yet again
another manual that will gather dust in the shelves. Instead, the
bank must adopt and implement a compliance system duly
approved by its Board. This amendment highlights our view that
having an effective compliance system in place is ultimately for
the bank’s benefit and is, therefore, the responsibility of the
bank’s leadership to ensure that such system is carefully
developed and implemented.
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7.
You will note that our approach in both corporate
governance as well as compliance veers away from a checklist
requirement approach and instead refocuses the responsibility on
your banks since it is ultimately in your interest to ensure that you
have well run operations.
In addition, you will notice our earnest desire to fully
appreciate the uniqueness of rural banks. While the general
principles should be strictly applied, we recognize that a judicious
and proportionate approach to implementation is but proper. Let
us dialogue and engage to achieve that healthy balance.
The other issuance that aims to improve the quality of
governance of your banks is through enhanced transparency in
dealings with your clients.
We have recently issued Circulars 730 on loan transparency
and disclosure to enhance the implementation of the Truth in
Lending Act. It is essentially a fairness initiative.
In the initial stages of consultation, rural banks expressed
their concern that such rules may create an uneven playing field
since your banks co‐exist with other types of credit providers that
may not be subject to similar rules. We heard you and have,
therefore, issued succeeding regulations (Circulars 754 and 755)
to cover non‐bank financial institutions and non‐supervised credit
granting entities which include even in‐house credit providers like
real estate companies and auto dealers. We have also
coordinated with the Securities and Exchange Commission,
Insurance Commission and the Cooperative Development
Authority to issue parallel regulations. They have promptly
responded and provided rules for credit granting entities under
their jurisdiction. By casting a wide and comprehensive net, we
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8. assure that there will be a level playing field in the application of
these rules.
We recognize that your banks will have to make
considerable changes and efforts not just in your systems and
loan documents but also in assessing your existing products and
their pricing as well as in educating your customers. We know
that it isn’t easy. Yet, we hope that you realize that these are
important steps that need to be taken by responsive as well as
responsible financial service providers.
On this matter, let me take this opportunity to thank and
congratulate the RBAP and the RBAP Development Foundation
Inc. for being proactive in cascading this important initiative to
your members. Your role is an invaluable part of our hope to have
a smooth implementation of these rules come July and beyond.
These issuances are further supported by other
developments that have the potential of strengthening the rural
banking sector.
One of which is the recently approved Strengthening
Program for Rural Banks Plus or SPRB Plus. As you may know, the
original SPRB will end in August of this year. The Monetary Board
has approved in principle the SPRB Plus which aims to continue
the gains made toward the strengthening and consolidation of the
sector. Earlier, the PDIC approved the initiative as well since this
is a joint program. New components and elements of the
Program are a result of some of the lessons learned from the first
phase. These include the wider range of acceptable Strategic Third
Party Investors (STPIs) or so‐called “white knight” such as strong
rural banks, thrift banks, universal/ commercial banks, non bank
corporations as well as even groups of companies. Apart from
this, incentives to white knights have also been expanded such as
waiver of branch licensing fees to the extent of capital infused,
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9. among others. If the white knight is a rural bank, branches can be
established up to the same number of the branches of the
acquired bank with the theoretical capital and processing fee
waived. Once finalized, this new program will be in effect until
December 2013.
What should be clear is that BSP and PDIC have now put on
the table all the incentives it can think of and legally provide to
decisively enlarge, once and for all, the solid core of a sound rural
banking system.
Another development is the current proposed bill advocated
by RBAP that is in the Senate and House of Representatives that is
looking at allowing up to 60 percent foreign equity into rural
banks, similar to the policy on other banks. We support this
initiative which provides the promise of game‐changing
investments from strong and reputable foreign institutions.
With all these in place, I think we have fertile ground on
which rural banks can continue to blossom into strong, well‐
managed, professionally run and responsible banks. The various
developments that I just mentioned are converging to pave a
clearer path for a rural banking system with the gravitas to lead
the way to a truly inclusive financial system.
Whatever the nay‐sayers snidely remark, the objective
numbers are unmistakable. The core of the rural banking system
is vibrant and solid. Well‐capitalized. Very liquid. Highly
profitable, head‐to‐head with the big banks in performance.
As I listened to the report card on the MABs program, we
can only be more convinced of what has been done and can still
be done by the rural banks. Your core business has remained
solid, with your gross total loan portfolio of PhP 110 billion and
deposits of PhP 113 billion, both an increase from the levels of the
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10. year prior. But we also know that these figures are of rural banks,
both strong and weak. We also know that while the system is
generally strong, negative perceptions caused by pockets of
failure can lead to ripples of uncertainty, whether warranted or
not. It is therefore in your collective interest to commit to the
needed reforms and take advantage of the many opportunities
that are available to you.
The two points that I started with: committing to quality
management and governance and taking your strategic place as
drivers of financial inclusion, align squarely with your theme of
“Aiming High” in charting a clear path toward a vibrant rural
banking future.
I cannot say often enough that the rural banking system is a
true and unique gem of our financial system. As the world
realizes the transformative power of financial inclusion and
embraces that agenda in re‐connecting the financial system with
the real economy, your shining moments are just ahead of you.
But like diamonds in the rough, one must chip away , one
must grind, one must cut, one must polish, one must design, one
must cluster if necessary, with purpose and determination, with
patience and skill, and with tender care, to bring out the brilliance
and beauty of potential.
Maraming salamat po. Mabuhay ang ating mga rural banks.
Mabuhay kayong lahat na siyang matatag at mahusay na taga‐
pangalaga ng ating mga bangko.
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