Foreign equity boon to rural banks – BSP study

MANILA, Philippines — The rural banking sector—once called a “troubled industry”—may benefit from foreign capital infusions to improve their profitability and loan quality, researchers at the Bangko Sentral ng Pilipinas (BSP) said.

In a discussion paper, the BSP said rural banks that had received foreign investments since the enactment of a law relaxing foreign ownership rules in the sector registered greater profitability and improved asset quality.

But the study—authored by Hazel Parcon-Santos, Laura Fermo, Marie Edelweiss Romarate, Joan Christine Allon-Pineda, Carl Francis Maliwat and Jose Adlai Tancangco—pointed out that it had taken years for the foreign capital injections to pay off.

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The paper focused on 13 rural banks with foreign equity. Of that number, the researchers said five have experienced improvements in earnings, albeit with some lag after the capital infusion.

But the paper noted that the five rural banks were already financially healthy before the infusion, adding that the foreign capital may have helped them sustain their profitability.

“These improvements stemmed from changes that entailed large short-term costs but were expected to generate long-term benefits,” the researchers wrote.

“With the capital infusion, these banks underwent capacity building, such as upgrading business processes, information technology, manpower skills and data management,” they added.

After its enactment in 2023, Republic Act No. 10574 allowed the infusion of foreign equity into the capital of Philippine rural banks, permitting foreign ownership of up to 60 percent of their voting stocks.

The law also allows foreign individuals or corporations—not just banks—to acquire ownership of Philippine rural banks, thus opening a new source of capital for them.

But despite that development, BSP Governor Eli Remolona Jr. last year said the regulator wanted rural banks to “consolidate,” arguing that the “troubled” sector was not serving its key function of lending to agriculture.

Central bank documents showed that three rural lenders had lost their license last year, two of them were ordered shut by the BSP while one voluntarily surrendered its permit.

Moving forward, the BSP paper suggested that foreign equity infusions can help rural banks stay afloat.

“The findings suggest that rural banks could benefit from seeking foreign investment to enhance their performance,” the study read.

“It is recommended that the BSP continuously monitor the performance of rural banks with foreign equity to ensure they are benefiting from foreign capital. An annual survey, similar to the one conducted for commercial banks, could be carried out,” it added.

(2025/01/30-02:16)