Making rural banks more relevant

If we really want inclusive growth, which means bringing more opportunities to the countryside for economic expansion, the government must put attention to making rural banks more relevant.

The objective of establishing rural banks which started in 1952 continues to be significant to this day: to open up credit to farmers, fisher folks, and small entrepreneurs outside urban centers so that economic growth can flourish through better income opportunities and more employment.

Even with all the stories we hear about floundering rural banks, this doesn’t mean this segment of the banking system has become irrelevant or outdated; it just needs to be tweaked to the new competitive banking landscape and needs of the countryside.

Lost intention

Somewhere in the 65-year history of rural banks, the original intention got lost. From 18 rural banks in 1953, the numbers grew to its peak of more than a thousand in 1981. But this didn’t mean money was being made available to those who were meant to benefit from them.

In the ’70s, the government channeled loans to rural banks at low interest rates purportedly to help boost economic productivity in the countryside. There was credit made available for rice, corn, fisheries, and many other agricultural production programs, but something went awry.

By the mid-1980s, the government was ready to call it quits on the program when the funds were obviously not doing what they were intended to. Farmers and fisher folks were complaining they could not get loans intended for them, while rural banks were saying that lending to farmers and fishermen was too risky.

Despite the eventual abolition of credit subsidies to banks and the shift to a credit guarantee fund system, particularly for small farmers who had no land to put up as collateral, loans still were not easy for the agricultural sector. Informal moneylenders and pawnshops, which charged higher rates, were more accommodating.

Starting cracks

The shift to a “deregulated” market for rural banks during the subsequent years eventually led to many rural banks unable to adjust to the new environment. The cracks started to show for those that abused the subsidies given by the government.

Decades of weak regulatory supervision by the then Central Bank of the Philippines, mismanagement of funds, and the poor repayment of loans by farmers, fishermen, micro-businesses and crony borrowers led to multiple closures.

A government-commissioned study reported that, “Out of 1,167 rural banks operating in 1981, only 856 were operational by 1986, of which 82 percent were in arrears with the Central Bank.”

A rural bank rehabilitation program was adopted, culminating in the Rural Banks Act of 1992 that provided measures aimed at nursing back ailing rural banks over a 15-year period. By 2010, the BSP ordered with finality the closure of more than a hundred banks that were unable to survive.

The culling continues, albeit at lesser numbers over recent years. There are now just about 500 left, but most of them have adapted to the new regulatory strictures, some by getting external financing and sprucing up their management structures.

Studies now show that lending may not be the only reason why rural banks are needed in the countryside. With so many regulatory requirements that have given rural and thrift banks better operating conditions, small people in towns and barrios can now trust these banks.

Focusing on small savings, something that most commercial banks regard as peripheral to their operations, is right up rural and thrift banks’ alley. It also allows farmers, fishermen, and small business owners to accumulate capital they do not need to pay interest on when needed for their operations.

For many successful Filipino businesses, the route to growing their markets has been through an acute sense of saving every centavo that was generated by the business. This almost always also involved adopting a truly frugal lifestyle not just for the owners, but also trickling down to the extended family members who often were hired workers.

Low financial literacy rate

A World Bank study shows that 69 percent of Filipinos do not possess a bank account, which is far worse than the global averages of 38 percent, developing economies of 46 percent, and the East Asia and Pacific countries of 31 percent.

The situation, according to the study, is even worse among the poorest 40 percent of Filipino households, where only about two out of every 10 adults have their own bank accounts.

The study also discovered the Philippines is one of a few countries around the world where more than 10 percent of adults seek loans from private informal lenders when the world average is only at five percent.

While many of the respondents cited poverty – or not having enough money – as a reason for not opening a bank account, this is belied by the lifestyles that many of them often have, especially in the cities.

This is the same situation with families of overseas Filipino workers before the government started a program on financial literacy. OFWs are becoming more keen on setting aside part of their salaries for savings and investments, as well as using the funds they have accumulated in small entrepreneurial ventures.

Now, if only this could be the case for the rest of the countryside where our rural banks would be able to educate farmers and fishermen to rely on their own savings as a means of improving their productivity. There is no better time than now when the economy is on a roll.

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