Rural banks feeling heat of competition

MANILA, Philippines–The entry of large banks into the Philippine countryside, the traditional stronghold of rural banks, poses a threat to the health of smaller financial institutions, most of which have difficulty finding the wherewithal or talent to offer better services.

Heightened competition means rural banks need to start thinking big and abandon their old practices, which enabled them at one time to thrive in markets they monopolized.

“We continue to suffer from a poor reputation brought about by the large number of rural banks being closed,” said Jose Misael Moraleda, newly installed president of the Rural Bankers Association of the Philippines.

In his inaugural address Tuesday evening in Manila, Moraleda noted that many in the industry found themselves operating on survival mode.

“The effort and costs in order to survive, compete and meet the demands of the market, including the regulatory requirements, are greater than before,” he said.

The biggest threat to rural banks is the competition brought by universal, commercial and thrift banks, which have started to expand to far-flung areas of the country—areas that rural lenders used to corner.

“Even getting the right talent is becoming increasingly difficult and costly,” Moraleda said, noting that this competition has eroded profits. Rural banks’ capital positions have also taken a hit.

Industry data showed the gross non-performing loans ratio of rural banks and cooperative banks rose to 13.13 percent at the end of 2013 from 12.93 percent at the end of the third quarter of that year.

Bangko Sentral ng Pilipinas (BSP) Deputy Governor Nestor A. Espenilla Jr. said in the face of bigger rivals, smaller banks need to evolve.

“What it means to many of them is, they cannot rely on the old business models. You have to evolve as well. They have to professionalize and look for markets actively,” he said.

Last year, Congress approved new legislation that allowed foreign firms to own stakes in rural banks. Espenilla said California’s Bridge Advisory Group already started to invest in several rural banks in the Philippines.

“It’s not taking majority stakes in these banks. These are strategic investments. That’s good because management stays with the original owners, but they still get exposed to new technologies,” he said.–Paolo G. Montecillo

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