Regulators at odds over how to rescue distressed rural banks PDF Print E-mail
Thursday, 21 October 2010 13:45

Regulators are at odds over how best to rescue financially distressed rural banks that qualify under the P5-billion Special Program for Rural Banks (SPRB).

The goal is to keep rural lenders from completely toppling over financial pressure by infusing equity or loan into them long before the banking public notices the banks were in distress.

The SPRB is also an offshoot of ongoing efforts to merge or consolidate the banking sector, particularly the 612 rural banks.

Official sources said the Bangko Sentral ng Pilipinas (BSP)favored infusing fresh capital into qualified rural banks in the form of tier-two debt, essentially a debt note that qualifies as capital without diminishing the shareholders' representation in the bank they own.

According to officials, BSP Governor Amando M. Tetangco Jr. favored the tier-two method of capital infusion to bring financially distressed rural banks or even banks just wanting to grow big on their feet.

A bank’s capacity to earn from its loan activities is directly related to its ability to put up capital. The smaller the capital, the lesser the bank’s potential to earn.

Officials said the Philippine Deposit Insurance Corp., on the other hand, favors extending financial assistant to rural banks in the form of redeemable preferred shares.

This method is more favorable to regulators as the assistance is in the form of equity rather than as debt, which is the nature of tier-two notes, the sources said.

“The BSP favors tier-two debt while the PDIC wants the assistance extended in the form of preferred shares,” they said.

Redeemable preferred shares are almost like common shares which have voting rights and served as equity rather than debt, officials said.