Nestor A Espenilla, Jr: Revisiting the role of rural banks in
countryside development and financial inclusion
Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central
bank of the Philippines), at the 65th Annual Convention and General Membership Meeting of the
Rural Bankers Association of the Philippines (RBAP), Davao City, 21 May 2018.
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Davao City Mayor Sara "Inday" Z. Duterte, Secretary of Finance Carlos G. Dominguez, PDIC
President Roberto B. Tan, Land Bank President Alex Buenaventura, RBAP President Giovanni D.
Gabriento, RBAP members, colleagues from the Bangko Sentral, fellow workers in government,
esteemed guests, ladies and gentlemen, a pleasant good morning to everyone!
I am honored to visit Davao again, for RBAP's 65th Annual Convention and General Membership
Meeting. It is always a pleasure to see and appreciate the city's beauty. I also look forward to
sampling some durian. And as Mayor Sara said, let us support Davao's Buy Buy Buy to support
the local economy.
I commend the outgoing set of RBAP officers and directors for their commitment and exemplary
performance to promote a sound rural banking industry. RBAP's milestones under your
leadership are vital to promoting broader countryside development through financial inclusion.
Your consistent service to our farmers, fishermen, and MSMEs has become RBAP's trademark
of service excellence.
I remember during last year's charter anniversary symposium in October, we talked about how
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rural banks have become customers' best financial friend or BFF . Now, we celebrate how rural
banks are #LODIs in bringing necessary financial services to the underserved, unserved, and
unbanked Filipinos.
This term "LODI" is Filipino millennial speak for "IDOL" and takes off from your theme, "Leading
onwards to development and inclusion #LODI." To me, this theme indicates the industry's
willingness to reposition itself to the growing needs of a new breed of financial customers and to
leverage on digital financial technology to advance economic development and financial inclusion
objectives. That you have one of the youngest RBAP presidents to steer the rural banking
industry into this direction is very promising.
Rural Banks as #LODIs for Financial Inclusion
Rural banks have proven themselves to be LODIs in their own right - exemplary models of
customer outreach, demonstrating a genuine commitment to bringing progress to rural areas.
Rural banks may be smaller in size compared to commercial and even thrift banks, but they
have proven their mettle and invaluable contribution to countryside development through
financing of rural communities.
With RBAP's extensive network of 2,745 banking offices nationwide, the industry is strategically
positioned to be a catalyst for greater financial inclusion. Your close ties and familiarity with the
rural communities you serve make you effective providers of rural financing and other corollary
microfinance products and services. Almost 97 percent of the industry's network is spread
across provinces. In fact, one in every three banking offices located in Davao Region and in
Mindanao is a rural bank.
However, there is much scope for expansion towards countryside development. 554 cities and
municipalities, or almost a third of the total, in the country are still unbanked as of December
2017. Moreover, the 2017 Global Findex by the World Bank showed that only 34.5 percent of
Filipino adults have formal accounts, ranging from bank deposits to e-money accounts.
Given RBAP's strategic role and familiarity with rural communities, it is crucial for the industry to
leverage on innovative technologies and liberalized branching rules that BSP has initiated. This
will further expand market reach and enhance existing service delivery channels in the rural
areas.
That rural banks enjoy public trust and confidence is evident in your deposit profile. Accounts
maintaining less than P10,000 make up 87.3 percent of your retail depositors.
As a conduit of rural financing, almost a third of your loans are granted to households. Most of
them are salary loans to the working class, with farmers and fisherfolks among the biggest
recipients of rural bank loans. No less important, these are quality loans. Because of this, your
return on equity was solid at 9.0 percent in 2017, when net profit stood at P3.4 billion for the year.
These strengths affirm your status as a dependable partner in helping rural communities and in
building a more dynamic and inclusive financial system - a system where there is effective
access to a wide range of financial products and services that are appropriate to the needs of the
local communities.
Consistent with the government's thrust under the Medium-Term Philippine Development Plan
(MTPDP) to spread economic development to the countryside, there are now more opportunities
for rural banks to grow and provide the financing needs of their clientele.
As the economy grew more than six percent for the last six years (6.7 percent in 2017), the latest
GDP data likewise showed that the National Capital Region (NCR), at 6.1 percent, grew less
than the national average. This certainly means that economic activities in the provinces are
expanding and growing.
In recent years, the Davao Region has consistently posted growth above the national average,
being the second fastest growing region of the country in 2017, at 10.9 percent GDP growth.
We are counting on our rural banks to assist in further bringing about economic progress to the
rural communities.
BSP's Reform Agenda for an Inclusive Banking System
For our part, the BSP remains strongly committed in providing an enabling regulatory
environment for the overall safety and soundness of the banking system. We always emphasize
the importance of prudent banking operations, highlighted by strong capitalization and adequate
liquidity position as buffers against unforeseen shocks. We also continuously encourage banks
to aspire to the highest standards of corporate governance and risk management; to go beyond
just complying with banking regulations so you can proactively respond to emerging banking
developments and challenges.
As part of continuing reforms, the BSP approved the adoption of minimum prudential liquidity
requirements (MLR) for stand-alone thrift banks, rural banks, cooperative banks, and
quasibanks. These requirements are designed to enhance covered institutions' resilience to liquidity
stress events and is a significant step in aligning our supervisory framework with international
standards. It also illustrates the BSP's commitment to the application of proportionality in our
approach to supervision.
We also wish to leave no banking institution behind. Together with the Philippine Deposit
Insurance Corporation (PDIC) and the Land Bank of the Philippines (LBP), we have re-launched
the Consolidation Program for Rural Banks. This will further strengthen the industry through
stronger financial condition, enhanced management and governance, more synergies and
economies of scale, and wider market reach.
The continuing prudential reforms have given us the confidence to further liberalize our rules to
allow more business with operational flexibility. Towards this end, we allowed banks to utilize
cash agents as cost-efficient service delivery channels. Rural banks can now establish
branchlite units to offer a defined set of services with less regulatory requirements. The framework for
basic deposit account further enhances the smooth onboarding of unbanked clients.
I am happy to share also that the BSP has made significant inroads with the implementation of
the National Retail Payment System (NRPS). The NRPS implements our commitment to
upgrade the country's retail payment system by promoting electronic retail payments and
facilitating inter-operability for faster settlement of transactions.
The NRPS will facilitate our transition from being a cash-heavy to a cash-lite economy. This will
eventually bring benefits to the economy - in terms of speed and efficiency of transactions,
reduced costs, improved transparency, enhanced security, and expanded access to financial
services.
Last April, we launched Instapay, the second automated clearing house under the NRPS
following the launch of PesoNet. Via InstaPay, Filipinos can enjoy safe and affordable
accountto-account electronic retail payments in real-time. Transactors may send and receive funds or
make payments in real time of up to P50,000 per transaction. The transferred funds are instantly
received in full as no fee is charged for the electronic crediting of funds to the receiving party's
account in InstaPay participating institutions. There is no reason why rural banks should not
want to be part of PesoNet and Instapay.
Leveraging on Technology and Value Chains
With the digital transformation of the banking system, we, at the BSP, are optimistic that the rural
banking industry can emerge as a strong and dependable delivery channel in the provision of
banking services. It can do so by taking advantage of available technology.
Opportunities for growth may be seized should you cater to the needs of the young generation.
Studies show that fintech has great potential to transform financial services given the country's
young demographic profile.
According to the World Bank Findex, 23.5 percent of our population are composed of young
adults (between 15 to 24 years old). The domestic digital money ecosystem certainly needs
players, big and small, to meet the exacting demands of this new breed of clients.
On this note, I am happy to report that one rural bank is already pilot-testing a cloud-based
banking solution in managing its day-to-day operation more effectively and serving its clients
more efficiently, thereby upgrading its competitiveness.
Meanwhile, several banks, including rural banks, and non-bank financial institutions are already
utilizing the Lendr platform to facilitate credit origination processes. Still others are hooked up
with a commercial bank on a block chain pilot.
Rural banks can also certainly leverage on technological innovations and value chains to
contribute to the growth of the agricultural sector. This sector certainly needs a helping hand
from its #LODIs.
Rural banks have been entrusted by the law with the vital and noble role of serving the financing
needs of farmers, fisherfolks and the people of rural communities to achieve inclusive economic
growth. We believe that with an increasing recognition of the necessity for innovation, coupled
with proximity to and intimate knowledge of the market, rural banks can now, more than ever,
reinvigorate and blaze new trails for agriculture financing in the country.
Innovations enabled by digital technology and value chain approach can not only make
agrifinancing more viable but also unlock new opportunities for rural banks to deliver a whole range of
financial services catering to the unique needs of farmers and their communities. Tapping these
opportunities and backed by a solid culture of governance, rural banks can evolve into these
valuable full-service community banks - a true pillar of countryside development.
Towards this end, we have been promoting value chain financing through guidelines and
incentives (as contained in Circular No. 908). The Agricultural Value Chain Financing Framework
provides an opportunity to improve the lives of 10.9 million Filipinos employed in the agriculture
industry, as well as MSMEs that are engaged in production and related activities such as
processing, distribution and trading. Furthermore, we have been supporting programs that build
awareness and capacity, including last year's 2-day agri-value chain conference and the
publication of an ongoing study, as funded by the Asian Development Bank. This study can
serve as an important reference and guide for banks wishing to implement agri-value chain
financing.
The areas where rural banks can incorporate fintech in their operations are wide open. Let us
embrace responsible use of technology and innovation to become better bankers.
Closing Remarks
In closing, I wish to express BSP's appreciation to RBAP for its enduring commitment to support
its members. It is this support that helps enable our rural banks to offer quality banking services
to their constituencies.
With this mission in mind, the next generation of RBAP leaders can further enhance the rural
banking industry's resilience to meet the challenges of a rapidly evolving financial services
industry. Congratulations to the new leaders of RBAP!
I trust that RBAP will remain as the BSP's proactive and staunch partner in expanding touch
points and in digitizing more products and services to onboard more of our countrymen into the
banking and financial system.
Maraming salamat. Mabuhay ang RBAP! Mabuhay ang rural banking! Mabuhay ang Pilipinas!