Will Duterte continue the BSP-PDIC bias against small banks?

President Duterte’s thrusts to wipe out drugs, crime, corruption and poverty are noble goals, but it’s high time he learns the machinations of the banking system and the seemingly systematic staggered closure of small rural banks by the Bangko Sentral ng Pilipinas (BSP) and the Philippine Deposit Insurance Corp. (PDIC), while unfairly bailing out big commercial banks.

Yearly closure of small banks

From 2000 to June 2017, wwwbanksphilippines.com reports over 310 small banks, mostly rural banks, were shut down by the BSP and PDIC.

In 2000 23 small banks were closed by the BSP and taken over by PDIC; in 2001 19 rural banks, including four cooperative rural banks; 2002, 12 banks; 2003, nine rural banks, including two cooperative banks; 2004, two savings and two rural banks; 2005, 10 banks (eight rural, two savings); 2006, 11 banks (10 rural and one development bank); 2007, 17 banks (16 rural and one  savings);

In 2008 24 banks were closed and put under PDIC receivership ( 22 rural banks, one co-op and one thrift bank); 2009, 31 banks (27 rural, two  savings , two co-ops); 2010, 25 banks (21 rural, one savings, three co-ops); 2011, 29 banks (25 rural and four  savings); 2012, 24 banks (22 rural, one commercial and one co-op);

In 2013 18 rural banks, including one big co-op rural bank in Bulacan with eight branches; 2014, 15 banks (13 rural, one co-op, one savings); 2015, 14 rural banks; 2016, 22 banks (20 rural, three thrift banks and one savings bank). For 2017, as of June, five rural banks have already been closed.

But bail out of big banks?

Lopsidedly, while smaller banks are systematically being closed, bigger banks are bailed out from liquidity, or maybe from near insolvency, problems.

One classic example is the P7.6- billion bailout by PDIC of the Philippine Bank of Communications (PBCom) sometime in 2002. By 2004 Lucio Co, of Puregold chain fame, together with Roberto Ongpin bought PBCom. For Lucio-Ongpin to save PDIC indirectly from its P7.6-billion questionable PBCom bailout, PDIC may have offered sweeteners. Ongpin later bolted out for whatever reason, but he finished first the transaction.

If PDIC can extend P7.6 billion to PBCom, why can’t it bail out rural and cooperative banks, which extend credit to agriculture that really create physical wealth, benefiting millions of farmers?

Awash with funds, but little for the poor

Perhaps, it is time banking reforms are pushed, starting with a Senate probe on why credit is not flowing to the countryside, where two-thirds of those living below the poverty line reside.

Banks are still awash with funds and never had it so good. Records show the domestic savings rate in 2015 was 30.3 percent of gross national income, but gross capital formation rate was only 19.8 percent. This means surplus savings are held unproductively with banks, which could have been invested in rural investments matched with government guarantees to enable banks to lend more liberally.

Under the agri-agra loan law, banks are required to allocate 25 percent of their loan portfolio for agriculture projects, but the BSP ostensibly allows them an escape clause by buying T-bills as a form of paper compliance. Banks obviously prefer safer paper investments in government securities over loans to agriculture, which is vulnerable to the vagaries of nature and other risks.

But you cannot blame banks in the absence of solid guarantees for lending to agriculture, while the BSP also allows them to circumvent but ironically comply with the agri-agra loan law. Banks are therefore awash with cash, while trickles go to rural areas.

Capital siphoning worsens rural poverty?

AS rural banks are increasingly shut down, the more credit will not flow to the countryside as the commercial banks replacing them are still allergic to agricultural lending.

A commercial bank branch manager in Ilocos revealed many years back that he retained only 2 percent of funds to meet withdrawals and loans, and remits 98 percent to Manila headquarters. Ilocos banks may be an exception as Ilocano overseas migrants continue to send money to their families, who are fairly frugal for saving more and shying away from spending or investing that will boost the local economy.

Moreover, the Comprehensive Agrarian Reform Program (CARP) has forced most landowners to abandon agriculture and siphon out their capital away from agriculture, thus explaining why agriculture stagnated for many years, making us more dependent on imports on many agricultural products.

Neighbors show way to reduce poverty

While we often brag to have the highest growth rate in the region, we are the worst in reducing poverty and must learn from our more humble, but hardworking Asean neighbors.

Thailand pumped credit into agriculture and reduced rural poverty by 73.2 percent in 12 years, from 51.5 percent in 2001 to 13.9 percent in 2013; Indonesia’s rural poverty dropped to 13.8 percent in 2014; Vietnam, 17.4 percent in 2010; and Malaysia to 8.4 percent in 2009.

Worst, an Asian Development Bank (ADB) study on 51 developing countries reveals that for every 1 percent increase in income, poverty drops by 1.5 percent or even 2 percent in Asia, except the Philippines. From 2004 to 2009, for instance, Philippine GDP grew by 4.9 percent, but poverty even increased to 26.5 percent in 2009.

In short, we brag of high growth, which is more financial growth, while the physical economy is actually collapsing, at least in agriculture, thus explaining massive rural poverty and rural-to-urban migration that breeds slums, criminality, drugs, prostitution, social unrest and other social issues like insurgency and the overseas Filipino workers phenomenon. And the policy bias against small banks may be a major factor.


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Michael Makabenta Alunan

Michael Alunan was for many years a full time business journalist tasked to mind other people’s businesses, but he tried venturing later into business going left and right, up and down, zig and zag till he broke down with heart surgeries for aortic valve replacement and two cases of aneurysm. He is now busy with pro-bono coop organizing and social entrepreneurship development for basic sectors and just keeps a weekly column for the love of writing and to have fun and make pun, while contributing to policy reforms and program development.