The Monetary Board of the Bangko Sentral ng Pilipinas (Bangko Sentral) and the respective boards of the Philippine Deposit Insurance Corporation (PDIC) and the Land Bank of the Philippines (Land Bank) recently approved a coordinated incentive program designed to support the development of a stronger cooperative banking sector. Dubbed as the Strengthening Program for Cooperative Banks (SPCB), the program encourages mergers, consolidations with or acquisitions of cooperative banks (CBs), particularly those that are capital deficient, by eligible Strategic Third Party Investors (STPIs) under a specific set of guidelines. The program was conceived in close consultation with the cooperative sector and responds to the call by its Congressional representatives for more support to the sector.
Mergers, consolidations, management and acquisitions under this program are aimed at rationalizing the cooperative banking sector to bring about larger and stronger cooperative banks whose management, more solid capital position, and wider branch network would enable them to improve their services to cooperative members, deepen their reach into the countryside, mobilize savings, and spur lending activities in the unbanked and the underserved areas. The SPCB offers a variety of incentives to cooperative banks and their partner STPIs, and these include targeted financial assistance to augment capital, credit facilities to support business expansion, and a package of regulatory relief.
The capital support component is to be made available through a financial assistance from the PDIC and the Land Bank. Through the SPCB, surviving banks, which should be cooperative banks or banks at least 67% owned by cooperatives, are expected to have a much improved capital position with a networth of at least P100 million and a minimum risk-based capital adequacy ratio (RBCAR) of 15%, that will place them in a better position to expand their lending activities and provide a wider variety of innovative financial services especially catered to primary cooperatives and their members.
Equity will be infused by the PDIC and Land Bank into the STPIs to neutralize the potential adverse impact of asset write-downs that are essential to clean up the books and ensure that surviving banks are strong and capable. Equity infusions will come in the form of perpetual, non-cumulative preferred shares, convertible to common shares at the end of 10 years. An exit mechanism provides for the buy-out of government shares after 10 years. In addition to equity infusion, credit facilities will also be made available by Land Bank to enable STPIs to further scale up their operations at an accelerated rate.
The complementary regulatory support package provided by the Bangko Sentral, on the other hand, would further enable the surviving banks to expand their operations. The regulatory support package includes flexibility in the opening, conversion and relocation of bank offices, including head offices, flexibility in ownership limits, more liberal guidelines that would allow staggered booking of required valuation reserves, waiver of penalties as may be appropriate, and the restructuring of existing rediscounting and emergency loans with the Bangko Sentral.
The SPCB will run until August 2012. Eligible STPIs may be cooperative banks, thrift banks, rural banks, primary cooperatives or federations of cooperatives provided such entities have a CAMELS rating of at least 3, are not under the Bangko Sentral's Prompt Corrective Action Framework and have not been cited by the Bangko Sentral or the PDIC to have engaged in any unsafe and unsound banking practice. Where the STPI is a rural or thrift bank, the bank should also be at least 67% owned by cooperative banks, primary cooperatives and/or federation cooperatives. In case the STPI are primary cooperatives or federations of cooperatives, a certification or endorsement of good standing from the Cooperative Development Authority will be required in addition to a proven good track record based on their audited financial statements. To qualify for the SPCB, one or more eligible STPIs should merge or consolidate with or acquire one or more cooperative banks or those banks that are capital deficient.
As of 31 March 2011, there are 40 operating cooperative banks in the country with resources aggregating P15.9 billion. While the assets of the cooperative banking sector accounts for only a small fraction of the assets of the entire banking system, it plays a vital role in the financial system since almost all of these 40 cooperative banks operate in the countryside, provide the much needed financial services to hundreds of primary and federation cooperatives and their individual members who usually face difficulties in accessing banking services. The same cooperatives and the large number of their individual members are the stockholders or owners of cooperative banks. Thus, there is much social benefit in revitalizing this particular segment of the banking system.
The SPCB is also not only about financial incentives. Beyond mergers, consolidations or acquisitions, the eligible STPIs are also expected not only to sustain and continue to improve the capital base, but also to further strengthen the quality of corporate governance and management systems thereby making such banks that serve the cooperative sector truly sustainable, viable and efficient.
The operating guidelines for the implementation of the program will be jointly issued soon by the Bangko Sentral, the PDIC and Land Bank. Already, even before the said guidelines are released, strong expressions of interest to participate in the program have been received from a number of players in the industry, indicating the strong buy-in of the cooperative sector. The SPCB is a clear manifestation of the recognition of the government, through the Bangko Sentral, the PDIC and Land Bank, of the important role that the cooperative banking sector plays in making our financial system stable and truly inclusive.