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RuralBanks:AimingHigh,ChartingaClearPath•

Mr.IanPama,PresidentoftheRuralBankersAssociationofthe Philippines (RBAP), Members of the Board and Officers ofRBAP, my friends in the rural banking industry, ladies andgentlemen,goodmorning.

It is my pleasure to join you in your 59th Annual National

ConventionandCorporateMeeting. It is anaddedpleasure thatthismeetingistakingplaceatwhathasbeennamedasoneofthebestbeachesintheworld.

I do not want to compete with the compelling call of the

powderwhitesandsandclearbluewatersoIwillonlytalkabouttwo issues that are important to the ever dynamic and evolvingruralbanking industry.First isthestrategicandvitalroleofruralbanks in financial inclusion.Andsecond is theconstantneed forqualitymanagementandgovernancethatwillenableruralbankstoeffectivelyfulfillthisimportantrole.

The rural banking was primarily conceived to serve the

needsofthecountryside. Asan industry, itaccountsforaround30%, of the overall physical footprint of the banking industry.More tellingly, your over 2,500 offices are mostly found in thecountryside where the big banks are not found. Rural banks,therefore,arethemostlogical,effective,andessentialpartnersinour new and worthy goal of achieving financial inclusion, ofbringingaccesstofinancialservicestoourcountry’sunbanked.

TheConsumerFinanceSurveyconductedbytheBSPin2009

whichwasrecentlypublishedshowedthat8outof10Filipinosdo

•DeliveredbyBSPDeputyGovernorNestorA.Espenilla,Jr.duringtheRuralBankersAssociationofthePhilippines59thAnnualNationalConventionon25May2012atBoracayIsland,Aklan.

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not have a savings account. In addition, less than 21% ofhouseholds said they take out loans from formal sources. Datawill also show that 40% of our country’s deposit accounts (and60%ofthevalue)areintheNCRalone.Geographically,weknowthat37%ofthecountry’smunicipalitieshavenobankingofficeatall. Obviously, we still have a long way to go in spite of all theprogress.

The challenge and the task are gargantuan but one that is

replete with many opportunities. Clearly, there is enormouspotential in this evidently untapped market. Many are alreadyseeing the potential in this space – international investors,technologycompaniesandyes,eventhebigbanks.

Some rural banks have expressed their apprehension that

the bigger players are entering their space, one in which theyhavelongbeencomfortablein.Thegoodnewsis‐youwereherefirst. You have first mover advantage. You know your marketsintimately and your markets know you. Capitalize on thisadvantage while also finding ways to further improve yourservices. With increasing competition, that advantage is at risk.Tostayinthegame,seizenewopportunities,createpartnershipsandusefullinkagesandinnovateintheproductsandservicesyouprovide and how you deliver them. This includes strategicpartnerships with government agencies like the Department ofAgriculture to create viable agricultural financial ecosystemswhereyouaretheleaders.

Trust that the Bangko Sentral stands ready to provide you

the necessary space to expand the scale and scope of yourbusinessactivities.Wehaveshownyouandwewillcontinuetoshow you in concrete ways our trust and confidence in the fullpotentialofourruralbanks.

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In termsof products,wehave craftedenabling regulationsthatallowyoutoprovideasuiteofusefulandresponsiveservicestoyourclients. Frommicrofinance loans for theworkingcapitalofmicroenterprises,tohousingmicrofinance(Circular678),microagri loans (Circular 680, amended by Circular 748) and mostrecentlymicrofinanceplus forgrowingmicroenterprises (Circular744). Apart from credit, we now have the basic framework tooffermicro‐deposits (Circular 694) that are geared toward smallsavers.Finally,youhavebeengiventheopportunitytodistributemicroinsurance(Circular683).Alltheseproductswillallowyoutobecome relevant and responsivebanksbybeing able to providethe broad range of financial products and services that yourclientsareactuallylookingfor.

We have also gained much ground in providing the

necessaryenvironmentforyourbankstoexpandyourdistributionnetworks and delivery channels via cost effective and efficientmeans.Through themicro‐bankingoffices (Circular694)and theretailpaymentsecosystempoweredbyelectronicmoney(Circular649and704),yourbankscantransactwithamuchwidermarketthanwhattraditionalconcrete‐and‐steelofficescanallow.Morerecently, the Monetary Board lifted the 5‐at‐a‐time limit onbranchapplicationssoyoucanexpandfasterdependingonyourabilities.

I take much pride and pleasure to see the best of you

seizing the emerging opportunities presented by these newground‐breaking BSP regulations. You may not know thatglobally,weareathoughtleaderininnovativefinancial inclusionpolicies.

Butnotallbanksarereadyandabletotakeonthesegolden

opportunities.And this leadsme tomy secondpoint. Youmustconstantly elevate the quality of the management and

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governance of your banks. Thiswill ensure your strength, yourstabilityandyourabilitybecometrueagentsoffinancialinclusion.

BobTricker,authorandcorporategovernanceexpert, said

“….that management is about running the business whilegovernance is about seeing it run properly…..” I agree. We seeboth components as equally important for rural banks as youcontinuetoworktoward increasingthevalueofyourbusinessesandyoursocialvaluetoyourclients.

Toward this end, we are undertaking multiple and

simultaneous initiatives to help you in your task. On the policyandregulationside, Iwill talkaboutthreespecific issuancesthatwill provide you with the necessary frameworks and tools tostrengthenyourinternalmanagementandgovernancesystems.

First is our recent Circular on Corporate Governance

(Circulars748and757)whichemphasizes the importanceof theleadership roleof theBoardofDirectors, itscapacity toexercisesoundjudgmentsaswellastheself‐disciplinetoensurethatthereisastrongsystemofchecksandbalancesinthebank.

Key provisions include an enhanced requirement for the

minimumnumberofindependentdirectorstoatleast20%ofthetotal number of directors but in no case lower than the legalminimum requirementof two. Independentdirectorsmust alsoconform to SEC rules prescribing a 5‐2‐5 term, wherein anindependentdirectorcanonlyserveassuchinthesamecompanyfor five (5) consecutive years. The term may be extended foranother five (5) consecutive years only after a two‐year (2)"cooling off" period. Further, if your independent director is amember of any committee that exercises executive ormanagement functions, he or she can not be a member incommitteesthatperformindependentoversightfunctions.Theserulesapplyprospectivelysoyoucanadjust.

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Youwillnoticethatmuchfocusisbeinggiventotheseissues

as many bank failures ultimately reflect the failure of goodgovernance. Ihope thatyoudonot see thesenewguidelinesasanaddedburdenofcompliancebutanopportunityforyourBoardofDirectors tobeenrichedbytheadditional insight,perspectiveandobjectivity thatanhonest‐to‐goodness independentdirectorcanprovide.

Another measure to ensure quality and avoid conflict of

interest is theexplicitprohibitionon theChiefExecutiveOfficer,Chief Financial Officer and/or Treasurer from being part of theaudit committee. In general, there are also specific rules andguidelines regarding the required Board Committees whichinclude audit, corporate governance and risk oversight. Inapplyingtheprincipleofproportionality,however,onlytheAuditCommittee is the required committee for small banks. Theoversight functions of the other mandated committees may bedirectlyconductedbytheBoarditself.

Goodcorporategovernance is integral toanytypeandsize

oforganization.Moresoforbankswhosefundingpredominantlycomes from the general public and whose loans serve thecommunity. Corporate governance principles aremade alive bythe objectivity, integrity, and competence of the Board, whichsetsthetoneatthetop.Thechallengetakesongreaterurgencyand importance in the context of family‐run and controlledbankswherethetemptationsforabusearemorebewitching.

Thefact issomanyofyouhavealreadydemonstratedthat

thisdisciplineandself‐controlareachievable.Thatiswhywearefirm in our conviction that the rural banking system today isfundamentally stronger than ever before in spite of sporadicnegativestories.Goodcorporategovernanceisaninvestmentinyourbank’sreputation,whichisofparamountimportanceinthe

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businessofbanking.Andthattraditionofgoodgovernancemustlive on and transfer smoothly to the next generation througheffectivesuccessionplanning.

The other regulation is our Circular on the Revised

ComplianceFrameworkforBanks(Circular747). Buildingonourinitial compliance system circular issued in 1997 in thewake ofthe Asian Financial Crisis. This new circular defines compliancenot simply as narrowly following to the letter of rules andregulationsastheyarewrittenbutmorebroadlyexpectsahigherstandardintheoverallhandlingofthebanks’businessthatitmayalways be perceived as a law‐abiding, responsible, andrespectablecorporatecitizen.

Inlinewiththisbroaderscope,letmepointoutsomeofthe

key amendments. Chief compliance officers, who possess thenecessaryskillsandexpertise,shouldideallybeafull‐timeseniorofficer with no line function and who has direct access to theBoard of Directors. This requirement underscores the crucialaspectsofcompetenceand independencethatarenecessary forsuchacriticalposition.

We realize that this requirement may be an obstacle for

smaller banks and have therefore allowed such banks todesignate a non‐executive member of the Board as chiefcomplianceofficeronconcurrentcapacity.

ThenewrulesarenotaboutjustsubmittingtoBSPyetagain

anothermanualthatwillgatherdustintheshelves.Instead,thebank must adopt and implement a compliance system dulyapprovedby itsBoard.Thisamendmenthighlightsourview thathaving an effective compliance system in place is ultimately forthe bank’s benefit and is, therefore, the responsibility of thebank’s leadership to ensure that such system is carefullydevelopedandimplemented.

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You will note that our approach in both corporate

governance as well as compliance veers away from a checklistrequirementapproachandinsteadrefocusestheresponsibilityonyourbankssinceitisultimatelyinyourinteresttoensurethatyouhavewellrunoperations.

In addition, you will notice our earnest desire to fully

appreciate the uniqueness of rural banks. While the generalprinciplesshouldbestrictlyapplied,werecognizethatajudiciousandproportionateapproachtoimplementationisbutproper.Letusdialogueandengagetoachievethathealthybalance.

The other issuance that aims to improve the quality of

governance of your banks is through enhanced transparency indealingswithyourclients.

WehaverecentlyissuedCirculars730onloantransparency

and disclosure to enhance the implementation of the Truth inLendingAct.Itisessentiallyafairnessinitiative.

In the initial stages of consultation, rural banks expressedtheirconcernthatsuchrulesmaycreateanunevenplaying fieldsinceyourbanksco‐existwithothertypesofcreditprovidersthatmay not be subject to similar rules. We heard you and have,therefore, issued succeeding regulations (Circulars 754 and 755)tocovernon‐bankfinancialinstitutionsandnon‐supervisedcreditgrantingentitieswhichincludeevenin‐housecreditproviderslikereal estate companies and auto dealers. We have alsocoordinated with the Securities and Exchange Commission,Insurance Commission and the Cooperative DevelopmentAuthority to issue parallel regulations. They have promptlyresponded and provided rules for credit granting entities undertheir jurisdiction. By casting a wide and comprehensive net, we

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assurethattherewillbealevelplayingfieldintheapplicationoftheserules.

We recognize that your banks will have to make

considerable changes and efforts not just in your systems andloandocumentsbutalso inassessingyourexistingproductsandtheir pricing as well as in educating your customers. We knowthat it isn’t easy. Yet, we hope that you realize that these areimportant steps that need to be taken by responsive aswell asresponsiblefinancialserviceproviders.

On this matter, let me take this opportunity to thank and

congratulate the RBAP and the RBAP Development FoundationInc. for being proactive in cascading this important initiative toyourmembers.YourroleisaninvaluablepartofourhopetohaveasmoothimplementationoftheserulescomeJulyandbeyond.

These issuances are further supported by other

developments thathave thepotentialof strengthening the ruralbankingsector.

One of which is the recently approved Strengthening

ProgramforRuralBanksPlusorSPRBPlus.Asyoumayknow,theoriginalSPRBwillendinAugustofthisyear.TheMonetaryBoardhas approved in principle the SPRB Pluswhich aims to continuethegainsmadetowardthestrengtheningandconsolidationofthesector.Earlier,thePDICapprovedtheinitiativeaswellsincethisis a joint program. New components and elements of theProgramarearesultofsomeofthelessonslearnedfromthefirstphase.TheseincludethewiderrangeofacceptableStrategicThirdParty Investors (STPIs)or so‐called“whiteknight”suchasstrongruralbanks, thriftbanks,universal/ commercialbanks,nonbankcorporations as well as even groups of companies. Apart fromthis,incentivestowhiteknightshavealsobeenexpandedsuchaswaiver of branch licensing fees to the extent of capital infused,

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amongothers.Ifthewhiteknightisaruralbank,branchescanbeestablished up to the same number of the branches of theacquired bank with the theoretical capital and processing feewaived. Once finalized, this new program will be in effect untilDecember2013.

WhatshouldbeclearisthatBSPandPDIChavenowputon

the table all the incentives it can thinkof and legally provide todecisivelyenlarge,onceandforall,thesolidcoreofasoundruralbankingsystem.

Anotherdevelopmentisthecurrentproposedbilladvocated

byRBAPthatisintheSenateandHouseofRepresentativesthatislooking at allowing up to 60 percent foreign equity into ruralbanks, similar to the policy on other banks. We support thisinitiative which provides the promise of game‐changinginvestmentsfromstrongandreputableforeigninstitutions.

With all these in place, I think we have fertile ground on

which rural banks can continue to blossom into strong, well‐managed, professionally run and responsible banks. The variousdevelopments that I just mentioned are converging to pave aclearerpathforaruralbankingsystemwiththegravitas to leadthewaytoatrulyinclusivefinancialsystem.

Whatever the nay‐sayers snidely remark, the objective

numbersareunmistakable.Thecoreoftheruralbankingsystemis vibrant and solid. Well‐capitalized. Very liquid. Highlyprofitable,head‐to‐headwiththebigbanksinperformance.

As I listened to the report card on theMABs program,we

canonlybemoreconvincedofwhathasbeendoneandcanstillbe done by the rural banks. Your core business has remainedsolid,with your gross total loan portfolio of PhP 110billion anddepositsofPhP113billion,bothanincreasefromthelevelsofthe

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yearprior.Butwealsoknowthatthesefiguresareofruralbanks,both strong and weak. We also know that while the system isgenerally strong, negative perceptions caused by pockets offailure can lead to ripples of uncertainty,whetherwarranted ornot. It is therefore in your collective interest to commit to theneeded reforms and take advantage of the many opportunitiesthatareavailabletoyou.

The two points that I started with: committing to quality

management and governance and taking your strategic place asdrivers of financial inclusion, align squarely with your theme of“Aiming High” in charting a clear path toward a vibrant ruralbankingfuture.

Icannotsayoftenenoughthattheruralbankingsystemisa

true and unique gem of our financial system. As the worldrealizes the transformative power of financial inclusion andembracesthatagenda inre‐connectingthefinancialsystemwiththerealeconomy,yourshiningmomentsarejustaheadofyou.

But like diamonds in the rough, onemust chip away , one

mustgrind,onemustcut,onemustpolish,onemustdesign,onemust cluster if necessary,with purpose anddetermination,withpatienceandskill,andwithtendercare,tobringoutthebrillianceandbeautyofpotential.

Maramingsalamatpo.Mabuhayangatingmgaruralbanks.

Mabuhay kayong lahat na siyang matatag at mahusay na taga‐pangalagangatingmgabangko.