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Small banks can withstand COVID-19 – BSP

The rural and cooperative banking sector can cope against the adverse impact of the COVID-19 pandemic up to three months, based on the Bangko Sentral ng Pilipinas (BSP) stress tests and simulation exercises.

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BSP Governor Benjamin E. Diokno said both simulation exercises and stress tests done on rural and cooperative banks indicated its capability to tolerate write offs and losses due to the public health crisis, even losses of up to 20 percent on their net interest income.

The small banks, he said, can “withstand and assume simultaneous write off of interest income on total loans and non interest income from fees and commissions up to three months and this is expected as banks recorded high pre-shock capital adequacy ratios (CAR).”

Both the rural and cooperative banks have above 10 percent CAR which is the minimum, after being subjected to stress tests, according to the BSP chief.

Diokno  said that they did simulations – using end-March 2020 data — on the small banks’ profitability if they incur a five, ten or even 20 percent net interest income losses for the first, second and third lockdown months.

“This scenario is tested against the banks baseline CAR whereas the use of net interest income in this exercise enables us to capture the impact on interest income from both loans and other financial assets as well as on interest expenses from all deposit liabilities and other sources of funding such as bonds payable, bills payable and unsecured subordinate debts, among others,” said Diokno.

He noted that the results of these tests showed the CAR of rural and cooperative banks “remain comfortably above 15 percent over the first, second and third month period of the quarantine even under a 20 percent assumed reduction in net interest income.”

Rural and cooperative banks’ latest CAR was at 19.5 percent, more than the 10 percent minimum. “These banks have profitable operations and ample liquidity,” said Diokno, adding that “rural and cooperative banks are poised to continue supporting rural economic  activities as the industry faces the COVID-19 pandemic.”

Based on a BSP survey, small banks were able to return to normal operations after adopting to the requirements of community quarantine restrictions, partly with the help of technology.

At the end of the first quarter, rural and cooperative banks have total assets of P265.7 billion, up 5.9 percent year-on-year. This is about 1.4 percent of total banking resources, with the big banks accounting for 92.7 percent.

Loans and deposits were also up by 6.1 percent and 4.8 percent year-on-year to P188.2 billion and P151.7 billion, respectively. As of end-March, the loan quality also improved as its non-performing loans ratio fell to 11.2 percent from 11.6 percent in 2019.

The BSP has been performing simulations to test for CAR to determine the hits of the pandemic on all banks, specifically the impact of the “Bayanihan to Heal As One Act”.

Generally and so far, results indicate that all banking groups from the large commercial banks, thrift, to rural and cooperative banks have the capability to meet the required minimum CAR of 10 percent.

“COVID-19 may exert pressure on the quality of bank loan portfolio, but we expect the impact to be manageable,” said Diokno.

To help the  small banks during the pandemic, the BSP implemented measures such as reducing the reserve requirement ratio (RRR) for rural and cooperative banks by 100 basis points, to increase its lending to micro, small and medium enterprises (MSMEs).

As of July 23, Diokno said 66 rural and cooperative banks have released about P1.5 billion loans to MSMEs as alternative compliance with the RRR.

The BSP is supervising 419 rural banks and 25 cooperative banks as of end-July this year.

Source: Manila Bulletin (

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