1. NEXT GENERATION RURAL BANKING
Mr. Ian Pama, President of the Rural Bankers Association of the Philippines (RBAP),
members of the board and officers of RBAP, friends from the rural banking industry, partners
and colleagues, good morning.
It is a pleasure for me to join the RBAP today and celebrate with you your 54 th Charter
Anniversary. This date, 11.11.11 is undeniably an auspicious one. For those interested in
history, there is a famous event that happened on the 11th hour of the 11th day of the 11th
month nearly 100 years ago. This was the Armistice Day of 1918 when World War I officially
ended.
Though the context is entirely different, today is similarly a milestone for the rural
banking industry. As you take stock of where you have been, where you are and chart your way
forward, we should recognize that the industry had long passed a cross‐road. Traversing a new
and progressive direction after the first 50 years, I look at the future of the rural banking
industry which you have appropriately called the “next generation”, with great optimism and
much hope.
However, I would also be misleading if I failed to point out that many in the industry still
persist in traversing in the old direction, along a road that’s ever narrowing, ever darkening,
heading straight into a dead‐end. The warning signs are plain enough and grow louder and flash
with greater urgency.
If one looks at the broad industry numbers today, you will find generally positive
growth, be it in loans, in deposits, in profitability and in capitalization. However, the data masks
stark contrasts in the performance of the two groups traveling in the different directions I have
alluded to.
The “next generation” is growing at an impressive double‐digit pace in all key
performance areas. Loans are up by more than 20 percent; deposits by more than 14 percent.
Return on equity is nearly 16 percent. They are also rapidly expanding their physical network of
branches and offices and embracing new technologies to be as competitive as possible and tap
new markets and opportunities.
On the other hand, the “lost generation” is in sharp decline, losing markets, losing
customers and losing cash and capital. Most recent loan growth is barely positive. Deposits are
actually shrinking. Not a few are resorting to unsafe and unsound banking practices in a
desperate gamble for resurrection. And one by one, they are falling by the way side. I urge
these banks to act now, mustering either the will to reform by professionalizing management

Delivered by BSP Deputy Governor Nestor A. Espenilla, Jr. during the Rural Bankers Association of the Philippines
th
54 Charter Anniversary themed “Rural Bank Innovations: The Next Generation” on 11 November 2011 at the
Manila Hotel.
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2. and recapitalizing, or mustering the will to accept strategic investors and partners who can
help revive the business or mustering the will to exit gracefully by allowing acquisition.
The rural banking sector is fast evolving and clear indications of the continued
consolidation of the sector are increasingly evident. As of end‐September 2011, there are 582
rural banks with 2,009 branches and offices. While this is a decrease of 31 rural bank head
offices from end‐September 2010 and down by more than 40 percent from the 1981 peak level,
the branch networks continue to expand relentlessly leaving an absolute gain in the number of
rural banking offices that are actually serving the public. It is also interesting to note that the
total deposit base of the rural banking system in 1981 was just P2 billion at peak number of
head offices. Compare that to P115 billion today, a more than 50‐fold increase. The message is
clear – strong and well‐managed rural banks are thriving and retain the capacity to expand.
They will define the rural banking industry of the future.
Apart from the figures, the individual stories that actually drive these numbers are what
I find most meaningful. And these stories indeed show that the rural banking sector has the
capacity to gear up for the next generation or, as John Lloyd says, “to level up”.
One key driver is how rural banks have evidently embraced innovation and taken
pioneering efforts in the development and delivery of products. Rural banks have quickly taken
advantage of purposely enabling regulations to enhance the suite of products they are offering
or to improve their channels of delivery. For example, just last year we issued our Circulars on
housing microfinance (Circular 678), micro‐agri loans (Circular 680) and microinsurance
(Circular 683). Already, there are 21 banks with micro‐agri products, 24 with housing
microfinance and 49 that have indicated their intention to offer microinsurance products. The
responsiveness of the sector can also be seen in its quick adoption of technology such as mobile
banking and e‐money platforms with over 50 banks now utilizing these channels in their
operations.
Another powerful indicator of the continued dynamism of the industry is the recent
initiative of RBAP to develop a credit risk management manual. Since lending is at the core of
your banking business, having a clear credit risk management process in place is not only
beneficial but rather essential in ensuring the soundness of your operations. This is actually an
initiative that is a long time coming but as the saying goes, “its better late than never”. We
congratulate the bold initiative of the RBAP and the Rural Bankers Research and Development
Foundation (RBDFI) for taking on the difficult task of making this manual as a way of
disseminating reality‐tested sound management practices. It is ideal that this initiative is
coming from the rural banks, to be used by rural banks. You certainly know best the needs of
your business and there is already a wealth of good practices within your ranks that can be
emulated. We look forward to your adoption of the fundamentals shared in this manual while
customizing the same to fit your operations.
I laud this project particularly for its positive symbolic value, of progressive rural banks
sharing their knowledge to allow other rural banks to reinvent themselves and choose a better
path.
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3. This initiative will also change the dynamics of your relationship with BSP. We envision
that no longer will the regular examinations be the painful occasion for far too many banks to
belatedly know the quality of your loan portfolio and figure out the appropriate level of
provisioning as well as possible capital deficiencies. By being more pro‐active and self‐assessing
of your operations our job becomes more focused toward validation of the quality of processes
which you have put in place. The examination process therefore becomes a more productive
interaction that will promote honest‐to‐goodness analysis, open communications, and real
solutions.
So, you will see that even in our relationship, there will be a “leveling up”. We have
other tangible evidence of this positive change.
You will note our Basic Rural Banking Course or BRBC has been redesigned and renamed
as the RB Management Course. Even just by the course’s name you will see that there is greater
emphasis on the role of senior management in the rural banking business. You are the captains
that steer your ships toward growth and viability. The new course takes this perspective as the
main driver of its design. We also have greater confidence that the rural banks will then take it
upon yourselves to ensure that your operating staff have the necessary skills and capacities.
Our policy, regulatory and supervisory frameworks also reflect this evolving relationship
between the BSP and the banks. Our current drive to rationalize penalties and sanctions are
designed in a manner that they are more proportionate and appropriate. This approach hopes
to develop a more meaningful understanding and implementation of the rules and regulations
in place rather than seeing such rules as mere compliance objects.
The same approach will apply to the banks that have been placed under the Prompt
Corrective Action (PCA) framework. PCA should be seen not as a “point of no return” but rather
a strong “wake‐up call” on the areas in the bank that urgently need to be addressed. Even in
the context of PCA, we will remain open to maintaining or even granting new authorities that
generate business opportunities provided this can be shown to be integral to the rehabilitation
of the bank and that key risks are being controlled and the problem issues are being resolved.
You may also notice how we have committed to institutionalizing clear communication
lines even in the examination process. The feedback mechanism which we have set in place
allows you to directly communicate with the Supervision and Examination Sector top
management and bypassing examiners. We see this mechanism as an ideal way for honest and
open communication from which we can both mutually benefit. We request your support in
improving the quality of our banking supervision.
All told, we see that this relationship between the regulator and the regulated entities
as a progressive and productive one. Having said that, in any relationship, each party must do
its share.
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4. On the part of the BSP, our recent policy issuances send a clear message – we will
provide the enabling environment that will allow you to expand the scale and scope of your
operations. We are cognizant of the many opportunities that can be seized and we create the
environment for strong banks, regardless of size, to take advantage of said opportunities. Just
taking the regulations issued this year are clear evidence of this approach. From the expansion
of the activities for possible outsourcing to include servicing of onsite and offsite ATMs (Circular
739), to further phased liberalization of branching (Circular 727) to revolutionary amendments
to the anti‐money laundering rules and regulations (Circular 706), banks are given the
opportunity to expand their operations, increase their efficiencies and better serve their clients.
On the part of the banks, please continue to strengthen your balance sheets, seriously
commit to promoting and practicing good governance, vigilantly understand, and put in place
mechanisms to manage the various risks to your business and continuously improve, enhance
and innovate in your business models to better serve your clients in a safe, sound and prudent
manner.
I also challenge you to remain not only responsive but responsible. Why do I make this
emphasis? I have seen the significant power of rural banks to drive financial inclusion, or to
provide access to financial services to all especially those that are previously unbanked.
Already, you are making much headway in this regard. From your microfinance operations, your
micro‐banking offices, your e‐money applications, you have reached markets that were
traditionally left out of the formal financial system. But as you reach more success in this area,
there is greater urgency to become more responsive and responsible. You are now entering
new markets where customers may be less informed and therefore more vulnerable. There is
greater responsibility for you to adequately inform, deal fairly and otherwise protect your
customers. Practice greater diligence in transparency and disclosure and continuously uphold
principled behavior in banking. This will ensure that those that finally have access to financial
services, through your good efforts, are able to reap the real economic benefits from this access
and are able to improve the quality of their lives. At the end of the day, serving these clients
well will position your banks to reach a vast, previously untapped and profitable market, a
market that will come back again and again.
As we commit to our joint responsibilities, we are surely establishing a formidable
partnership between your banks and the BSP. Together, we have a bright future to look
forward to. The 11.11 of 1918 brought about the cessation of hostilities and ushered in a time
of peace which unfortunately did not endure. I hope that our own 11.11 of 2011 will be the
rallying point that commits us to a sound, stable, inclusive and responsible rural banking
system, a rural banking system that endures.
Thank you. May the rural banking system continue to prosper and rise to the
challenges!
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