Rural bank mergers pushed

Posted on June 20, 2011 08:52:26 PM

BY ANN ROZAINNE R. GREGORIO, Reporter

RURAL BANKS are urged to hasten mergers or consolidations to create stronger banks that will not only provide better products and services to clients, but more importantly, compete with commercial banks that have started to branch out to the countryside, the incoming president of the association of rural banks said.

Rural banks are urged to merge or consolidate in order to improve products and services to clients such as market vendors. -- JONATHAN L. CELLONA

 

“Five to 10 years from now, commercial banks are expected to fully saturate urban areas, so the next step for them is to enter the countryside to continue their business expansion,” said Ian Eric S. Pama, the incoming president of the Rural Bankers Association of the Philippines (RBAP), in an interview last Thursday.

Mr. Pama, also president of the Valiant Rural Bank, Inc. based in Iloilo, replaces Ma. Corazon Liamzon-Miller, whose term as RBAP president ends this month.

The central bank is encouraging rural banks to merge or consolidate to create stronger, more professionally-run institutions. Among the banks it supervises, rural banks are most prone to collapse.

Bangko Sentral ng Pilipinas data showed a total of 607 rural bank head offices as of December 2010, down from 631 in December 2009 due to mergers and consolidations and closure of weaker players.

The central bank, together with the Philippine Deposit Insurance Corp., has instituted the Strengthening Program for Rural Banks (SPRB), a P5-billion program that will run until next year, to spur mergers or consolidations among rural banks. It has also issued orders raising rural banks’ minimum capital requirement and requiring a capital adequacy ratio of at least 10% beginning 2012.

“Big commercial banks have not yet fully penetrated the countryside, they may still be studying how to build their business there,” Mr. Pama said. “But once they enter our market, they could capture some of our market share.”

The Rizal Commercial Banking Corp. (RCBC) and the Bank of the Philippine Islands (BPI), he noted, have launched their respective microfinance operations, encroaching into a business that used to be dominated by the rural banks.

“RCBC and BPI are among the big banks that have started to go into microfinancing in the countryside. Other big banks are expected to follow their footsteps in a few years,” Mr. Pama added.

RCBC conducts its microfinance business through subsidiaries President Jose P. Laurel Rural Bank, Inc. based in Tanauan City and Rizal Micro Bank, formerly Merchants Savings & Loan Association, Inc., based in Mindanao.

BPI has BPI Globe BanKO, Inc., which extends microfinance loans through Globe Telecom Inc.’s GCASH e-money platform.

The big banks can steal rural banks’ market share for one, Mr. Pama said, by giving lower interest rates.

“The big banks can ‘sacrifice’ one branch in the countryside just to capture the market. They make up for their loss in other areas where they can offer higher interest rates,” Mr. Pama said. “This will be the greatest challenge for rural banks, especially stand-alone rural banks.”

Mergers and consolidations among rural banks, he said, will result in a stronger capital base for the new bank, more branches and better technology, which will enable the banks to serve more clients as well as provide them with better credit facilities and products.

Rural banks are known for their expertise in serving the countryside, where they offer products such as micro-agri loans, micro-housing loans and micro-insurance.

“Rural banks have long been urged by the central bank and the RBAP to merge or consolidate to strengthen the rural banking industry, but some refuse to do so,” Mr. Pama noted.

“Usually, rural bank owners who are not amenable to the idea are those who have a stand-alone bank and yet are operating profitably,” he pointed out.

He said RBAP will continue to promote the SPRB program among its members through road shows to make rural bankers understand the “intricacies” of the industry, which he said, is operating within “a very competitive environment.”

Property bubble

June 17, 2011 | Manila, Philippines

Popular Economics

BY FRANZ JONATHAN G. DE LA FUENTE

 

WHEN REAL estate prices drop sharply after rapid price increase, causing a scramble among real estate owners to sell properties in an attempt to avoid greater losses, the market is said to be experiencing a property bubble burst.

The Bangko Sentral ng Pilipinas (BSP) defines a bubble as the overvaluation of asset prices, much higher than their fundamental values.

Economic growth, high inflation and high demand usually raise property prices. Financial liberalization during the term of President Fidel V. Ramos raised property prices by more than 60% between 1995 and 1997, only to drop by 18% from 1997 to 1998 during the Asian currency crisis, according to real estate services firm Colliers International.

During a real estate boom, buyers purchase properties on easy credit, but are usually forced to sell at lower prices when the market become unsustainable.

University of Asia and the Pacific economist Cid L. Terosa explained that buying property for investment, and not for actual habitation or usage, increases the possibility of a property bubble due to the instability created by rapid buying and selling.

Speculation worsens this instability. “Property speculators create the view that something—a property—will be profitable in the future. They do so knowingly or unknowingly,” said Mr. Terosa.

He said the Philippine property market is strong nowadays. Demand for residential and commercial real estate remains high as banks continue to offer attractive loan packages and lower interest rates to buyers.

Megaworld Group, one of the country’s largest real estate corporations, has developed over five million square meters of property, and projected to build at least 18,673 residential units this year. According to residential property database Global Property Guide, a Metro Manila condominium costs as much as $2,500 per square meter as of October last year.

“Banks know there is a market (Filipino property buyers) out there, and they fight to get that market,” Mr. Terosa said, adding that it is relatively easy for Filipinos to secure loans with little collateral.

But is a subprime crisis similar to the one that hit the United States in 2008 imminent in the country?

A 2010 BSP working series paper said no. “It is not far-fetched, but not so very likely,” said Mr. Terosa.

In the US, the capital market is more developed, credit is much easier to obtain, and loan amounts are much higher than in the Philippines, he explained.

The Philippines managed to avoid a property crisis during the Asian currency crisis despite having the biggest property price drop among affected economies, thanks to a cautious banking sector and a generally low real estate demand, Mr. Terosa said.

GSIS to review pre-need plan program

BY KATRINA MENNEN A. VALDEZ REPORTER

STATE-RUN Government Service Insurance System (GSIS) said it will review its policy on educational plans to improve the product offering.

Citing his dialogue with pension fund members, Robert Vergara, GSIS president and general manager, said that educational plans remain one of the major concerns.

“We decided that we will review the pre-need plan, and see whether there are ways we can make the service that we’re providing for those who hold these policies better,” Vergara said.

He said GSIS members have been complaining about the removal of the inflation-protection feature of the pre-need plan.

“Part of this investigation is to determine what is the potential maximum liability that we can get, if we actually pay it 100 percent?” Vergara said.

He said the study made the assumptions that everybody using the pre-need plans went to the most expensive schools in their respective categories, and tuition was growing at the highest rate of 25 percent over the last 15 years.

“That’s where the number P15 billion came from . . . that GSIS has P15 billion in educational loans. But we all know that not everybody is going to study in the most expensive schools, and with moderation in inflation, tuition is not rising by as much as 25 percent or 30 percent anymore. In fact they’re rising more like small single-digits now,” Vergara said.

He said that the review aims to determine the potential maximum drawdown and the different possible combinations of schools in the various categories.

“What we’re trying to do is, we’re trying to respond to the complaints that we hear, and you know that’s why we opened this issue about pre-need policies and we’re trying to look at ways to really come up with a proposal that our policy-holders might find to be fair,” he said.

“We’ll look at all these different combinations and we’re going to come up with an enhancement that might be more acceptable to our policyholders.”

The GSIS’ educational pre-need plans were sold to its members in 1993 and were priced in an environment in which school tuition was still regulated.

However, shortly after the pension fund issued the educational policies, tuition was deregulated, as a result of which rates increased by seven times in just a year. Thereafter, fees went up by 15 percent to 25 percent annually.

Hence, the GSIS stopped selling pre-need plans in 1998.

“We sold in that five years about 165,000 of these plans. Like everybody else active in this space, there were problems. But unlike most people who had problems who decided that they would just refund, or declare themselves bankrupt or unable to pay, we continued to service the educational plans,” Vergara said.

He said the previous administration decided to take certain policy steps to make the educational plans less of a financial burden to the fund.

“They looked at what they’ve collected, they looked at what it was earning, and then they interpreted the benefits in such a way that they put a cap on the amount of tuition that would be reimbursed,” Vergara said.

He said the previous administration categorized the schools and took the average tuition that the schools in the different categories were charging.

“So we had the exclusive schools like Ateneo de Manila, La Salle University, St. Scholastica’s College, University of the Philippine and Assumption College. Those were the exclusive schools when the policies were sold. Then you have the semi-exclusive schools, and then the government schools,” Vergara said.

For example, the average tuition for the exclusive schools category was P36, 000 a term, or P72, 000 for a two-term school year. This year, the amount for reimbursement in the same category would go up to P38, 300.

He said that contrary to other pre-need companies’ practice of recinding or walking away from their obligations, GSIS is still servicing the claims by paying the plan holders the average tuition.

“But because our members are still unhappy about what we’re doing, the board decided we’re going to re-open this issue, we’re going to study it, and come up with a plan, hopefully a better offer,” Vergara said.