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Rural banks are questioning international capitalization standards imposed on them, saying these standards are irrelevant to their limited and specialized roles and operations.

The Rural Bankers Association of the Philippines, a number of members of which are barely keeping their heads above water, said in a position paper submitted to the Bangko Sentral that the capitalization standards mandated by the Basel Convention run counter to their development mandate under rural banking laws,

RBAP said the primary objectives of Basel II, which is to stabilize the international banking system and to guarantee a level playing field for internationally active banks, differ fundamentally from the legislative mandate of rural banks.

"The rural banking sector believes that the Rural Banks Acts of 1952 and 1992, on the other hand, mandate the rural banks to promote comprehensive rural development by making available ready credit in the rural areas at reasonable terms," RBAP president Joseph Omar Andaya said in his letter to BSP governor Amando Tetangco.

Andaya said under the law, rural banks cannot engage in or compete in the international market.

"There is therefore a need to review whether Basel in its pure form is at all relevant. Several international studies have already shown that an un-modified Basel would result in banks concentrating their loan portfolio in the upper end of the market as this would save their capital. Certainly, this would dry up funds for the ‘high risk’ segments which rural banks are serving," Andaya said

Basel II regulations were put in place by the BSP in 2006, covering bigger banks and their subsidiaries.

These were meant as international standards on how much capital banks need to put aside to guard against the types of financial, credit and operational risks they face.

These rules were formulated by the Switzerland-based Bank of International Standards, which is considered as the bank of central banks.

Under the Basel II regulations, the BSP requires banks to maintain a capital adequacy ratio (CAR)—or the proportion of their capital to their assets exposed to risks—of 10 percent, higher than the international standard of 8 percent.

To cover operational risks, rural banks will have to put up additional capital to meet the 10 percent minimum CAR requirement.

On the average, rural banks have maintained a CAR of 18 percent, much higher than the BSP’s 10-percent requirement, but RBAP apparently is seeking to avoid a situation its members might be required to put in additional capital.

Based RA 7353 of 1992, it is the policy of the state to promote comprehensive rural development to raise the quality of life especially of the underprivileged.

A rural banking system is established and designed to make needed credit available and readily accessible in the rural areas on reasonable terms.

These loans are aimed at meeting the normal credit needs of farmers, fishermen or farm families and the normal credit needs of cooperatives and merchants.

In compliance with the mandate, rural banks have mainly focused their activities on helping micro and small entrepreneurs, agricultural farmers, fisher folks, small cooperatives and generally, the poor.

Andaya said these market segments represent those who are entitled to borrow but whose capability to pay are subject to risks that are not seen in bigger borrowers who can borrow from larger banks because they are able to secure such loans by pledges, corporate guarantees, mortgages over prime property, and other valuable assets.

These segments belong to the so-called base of the economic pyramid, the traditionally underserved and unserved markets that are considered "un-bankable" by bigger banks since they cannot offer similar pledges of stock, mortgages of prime properties, chattel mortgages of machinery and industrial equipment.

"When rural banking was established in our country, it is evident that the intention of our legislators was to organize and create a banking system that will cater to and address the needs of the small farmer, fisher folks, micro-businesses that are not normally serviced by the larger commercial banks," Andaya said.

Andaya said that the Basel II imposition of an Operational Risk Capital charge of 15 percent of the gross revenues generated from the segments belonging to the base of the pyramid would result in slowing-down the flow of funds going to these largely neglected vulnerable segments.

"The Operational Risk Capital charge is on top of the Credit Risk Capital charges which have already been implemented and found in heavy Portfolio At Risk (30-day, 60-day, 90-day) loan-loss provisioning requirements for rural banks engaged in microfinance. Really, it is hard to reconcile an unmodified Basel II to the Rural Bank Acts, considering that rural banks role are to be channels of equitable distribution of opportunities and wealth in the largely neglected countryside. And the end goal is to raise the quality of life for all, especially the under-privileged," Andaya added.

RBAP said the application of one set of rules and procedures, the same as that applied to larger commercial banks, will actually not only be penalizing the rural banks that do not have the same capabilities, personnel, and resources as the commercial banks, but more importantly be further marginalizing the effort to alleviate demeaning poverty in the countryside.

The BSP is giving rural banks until 2011 to begin complying with the stricter regulations.

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