The Bangko Sentral ng Pilipinas (BSP) and the Philippine Deposit Insurance Corporation (PDIC) is finalizing the implementing guidelines of the P5-billion Strengthening Program for Rural Banks.

In a statement over the weekend, PDIC president Jose C. Nograles said the incentives under the two-year program will enable rural banks to sustain countryside development and maintain financial stability.

In 2009, the BSP closed more than 50 rural banks.

Nograles said for this year, PDIC is also proposing with the BSP to work on the Countryside Financial Institution Enhancement Program to make it “more responsive to the needs of rural banks.”

“Another venue considered was to collaborate with the BSP in crafting a new program,” said Nograles. “PDIC encourages the rural banks to merge and consolidate. By providing the rural banks the appropriate and necessary incentives, it is hoped that the rural banks long-term viability will be enhanced.”

BSP and PDIC are providing P2.5 billion each to fund the program. The PDIC board approved the amount in September while the BSP gave its go-signal in November.

Rural banks that are eligible for the incentive program are those whose risk-asset-ratio are less than 10 percent and are merging or consolidating with an eligible strategic third party investor.

To be eligible, the strategic third party investor should have a CAMELS rating of at least "3," not under the prompt corrective action (PCA) program of the BSP and does not have findings of unsafe and unsound practices.

The P5-billion assistance was designed as a combination of preferred shares and direct loan to boost the capital of the bank.

These preferred shares are non-voting, cumulative and convertible to common shares. These shares are also redeemable on the fifth year but not later than the tenth year.

“The rural banks comprise the bigger chunk of the total number of banks in the system at about 86 percent and their contribution to countryside development should be supported by encouraging them to merge and consolidate to attain economies of scale, achieve higher lending capacities and improve the quality of their banking services particularly in their niche markets,” Nograles said in the press release.

“We are confident that our partnership with the BSP to assist rural banks will help ensure the efficiency and effectiveness of rural banks in mobilizing savings and investments toward a robust economy particularly in the countryside,” the PDIC chief added.

As of June 2009, there are 692 rural banks in operation and about 200 are in the BSP’s PCA program.