Mismanagement often lead to bank closures

CEBU, Philippines – The president of the Cebu Bankers Club cited mismanagement as one of the reasons why rural banks closed down.

Maximo Eleccion made this comment following the recent rural bank closures ordered by the Bangko Sentral ng Pilipinas.

So far this year, the BSP has already shuttered a total of six rural banks, including the Lapu-Lapu Rural Bank in Carcar City, Cebu and Rural Bank of Bayawan and Rural Bank of Basay in Negros Oriental.

The BSP, being the country's banking system regulator, may order closure of problematic banks if they are found to have no enough liquid assets to cover its liabilities and to have become incapable of sustaining their operations without causing losses to depositors.

Under the law, all bank deposits are covered by a maximum insurance of P500,000.

Eleccion explained banks should be able to manage its financial intermediation well to maintain their financial health stable.

"Banks earn because of intermediation," the CBC official said.

Financial intermediation is a process done by banks of taking in funds from depositors and then lending them out to borrowers with specific interest rates.

There are rural banks that offer higher interest rates for long-term time deposits compared to bigger banks, and Eleccion said this could possibly be one reason why some turned bankrupt.

In December 2015, the central bank released guidelines for the Consolidation Program for Rural Banks (CPRB), which allow any group of at least five rural banks to apply for a merger to boost its financial standing with their assets and capital combined.

Earlier, BSP and the Philippine Deposit Insurance Corp. encouraged rural banks to avail of the consolidation program which runs until Aug. 25, 2017.

The PDIC said rural banks are important in providing essential financial services to their niche markets.

"Rural banks availing of the CPRB are set to benefit from several support services and regulatory incentives to improve their financial strength, enhance their viability, strengthen management and governance, generate synergies and economies of scale, and expand their market reach," PDIC said in an earlier statement. (FREEMAN)