Strengthening Program for Rural Banks (SPRB) Plus

January 27, 2014 BSP MEMORANDUM NO. M-2014-003 TO : All Banks and Non-Bank Financial Institutions under BSP Supervision SUBJECT : Strengthening Program for Rural Banks (SPRB) Plus The Bangko Sentral ng Pilipinas (BSP) and the Philippine Deposit Insurance Corporation (PDIC) have approved the following amendments and enhancements to the Strengthening Program for Rural Banks (SPRB) Plus to encourage more mergers, consolidations and acquisition of eligible rural banks (RBs) and thrift banks (TBs) by strategic third party investors (STPIs): a) Extension of the SPRB Plus until 31 December 2014; b) Increase in the Program Fund from P5 billion to an amount to be determined by the Philippine Deposit Insurance Corporation (PDIC) and BSP, once the Fund reaches a level where both agencies agree to augment the Fund; c) Revision of the required ownership control in an Eligible Bank by an Eligible STPI to at least 60% (from at least 67%) of the outstanding capital stock of the Eligible Bank to align with the provisions of Circular No. 809 dated 23 August 2013 on the rules and regulations implementing R.A. No. 10574 (An Act Allowing the Infusion of Foreign Equity in the Capital of Rural Banks, Amending R.A. No. 7353, Otherwise known as "The Rural Banks Act of 1992"); d) Amendments to the following terms and conditions of the PDIC financial assistance (FA): i) PDIC FA shall be in the form of either: a) a combination of Preferred Shares (PS) and Direct Loan; or b) Direct Loan (DL) only; EHTISC ii) Increase in the amount of the PS component of the SPRB Plus FA from 50% to 100% of the required additional capital to bring the Eligible Bank's risk-based capital adequacy ratio (RBCAR) to 10% for Eligible Banks located in areas affected by typhoon Yolanda. For this purpose, the banks located in areas affected by typhoon "Yolanda" shall be based on the official list of the National Disaster Risk Reduction and Management Council (NDRRMC) and/or the official list of Provinces, Cities and Municipalities with declaration of State of Calamity. For all other Eligible Banks, the PS component shall remain at 50% of the required additional capital to bring the Eligible Bank's RBCAR to 10%; iii) The principal amount of and interest rate on the DL component shall be equivalent to such amount and rate, respectively, that will provide an accumulated net interest spread (NIS) over the tenor of the DL equal to the PS for FA under item d.i (a) above or equal to 100% and 50% of the capital deficiency to bring RBCAR to 10% for Eligible Banks affected by "Yolanda" and other banks, respectively, for FA under item d.i (b) above; and iv) The revision of tenor of the DL to a maximum of 10 years (from a fixed tenor of 10 years). Shown in Annex A is the SPRB Plus framework with the amended/enhanced features. For guidance and implementation. (SGD.) NESTOR A. ESPENILLA, JR. Deputy Governor ANNEX A Approved Amendments to the Strengthening Program for Rural Banks (SPRB) Plus Framework Existing SPRB Plus Framework SPRB Plus Framework with Approved Amendments Program Strengthening Program for Rural Banks (SPRB) Plus Strengthening Program for Rural Banks (SPRB) Plus, Title as Amended Legal Basis RBs and TBs generally serve the same niche markets, Same mostly catering to the financial needs of the countryside. Hence, the legal basis for SPRB-Module 1 may likewise be used for SPRB Plus, as follows: The SPRB Plus is in recognition of the importance of thrift and rural banks in providing financial services to the community particularly in their specialized or niche markets, and in maintaining financial stability in the economy pursuant to Sec. 17d of RA 3591, as amended (the PDIC Charter). Rationale Viability of TBs and RBs is threatened by any or all of the Viability of TBs and RBs is threatened by any or all of following: the following: a) current slowdown in the economy brought about by a) governance issue/lack of competent management the global financial crisis; team/succession problems; b) erosion of confidence of depositors due to recent b) erosion of confidence of depositors due to recent spate of bank failures; spate of bank failures; c) a number of TBs and RBs are facing high c) a number of TBs and RBs are facing high probability of closure due to their serious probability of closure due to their serious financial condition. financial condition, especially in the light of typhoon "Yolanda", which totally devastated a The crucial situation of TBs and RBs, if not properly number of provinces in the Visayas and other addressed, could lead to disruption in delivery of nearby areas; essential financial services to the communities they serve, seriously erode confidence in the thrift and d) the devastation of areas wrought by typhoon rural banking sectors, and could have general or Yolanda underscores the need for the systemic consequences. continuous availability of banking services in such areas, thus promoting financial inclusion. The crucial situation of TBs and RBs, if not properly addressed, could lead to disruption in delivery of essential financial services to the communities they serve, seriously erode confidence in the thrift and rural banking sectors, and could have general or systemic consequences. Objectives The SPRB Plus is intended to encourage mergers, Same consolidations and acquisition of weak RBs and TBs which generally serve the same niche markets to strengthen said banks via grant of FA by PDIC and/or regulatory reliefs/incentives by BSP. Existing SPRB Plus Framework SPRB Plus Framework with Proposed Further Amendments Program The SPRB Plus shall be effective upon approval by both The SPRB Plus, as amended, shall be effective upon Period PDIC and BSP and shall be available until 31 December approval by both PDIC and BSP and shall be 2013, subject to extension if necessary. available until 31 December 2014 , subject to extension if necessary. Program The P5Bn SPRB Fund shared equally by PDIC and BSP The P5Bn SPRB Fund shared equally by PDIC and Funding BSP. The Monetary Board and the PDIC Board approved the increase in the Program Fund from P5 billion to an amount to be determined by the Philippine Deposit Insurance Corporation (PDIC) and BSP, once the Fund reaches a level where both agencies agree to augment the Fund. Eligibility 1. Basic criteria for Eligible Banks: Same a) RBs with risk based capital adequacy ratio (RBCAR) of less than 10%; TBs with RBCAR of less than 10% and must be serving-the countryside and/or low income sectors 2. Basic criteria for Eligible STPIs*: Universal and Commercial Banks (UKBs), TBs and RBs a. BSP CAMELS rating of at least "3"; b. Not under BSP's Prompt Corrective Action (PCA); and c. No findings of unsafe and unsound banking practice by the BSP or PDIC. Non-Bank Corporations a. Financially strong corporations of good reputation * STPIs may be a single entity or group of entities Mode of Entry Eligible STPIs which seek to merge, consolidate, acquire Eligible STPIs which seek to merge, consolidate, through P&A mode, or acquire not less than 67% of acquire through P&A mode, or acquire not less than the total outstanding capital of an Eligible Bank 60% 1 of the total outstanding capital of an Eligible shall qualify under the SPRB Plus Bank shall qualify under the SPRB Plus. As amended The STPI may be allowed, subject to BSP approval, to It is understood that the acquisition of 60% or more of convert the status of the acquired bank from RB to TB, the total outstanding capital of an Eligible Bank consistent with the STPI's overall business plan and shall be subject to ownership limits provided strategy. under existing laws. The STPI may be allowed, subject to BSP approval, to convert the status of the acquired bank from RB to TB, consistent with the STPI's overall business plan and strategy. Financial The FA shall be extended only to STPIs which are The FA shall be extended only to STPIs which are Assistance TBs and RBs. Non-bank corporations which are not TBs and RBs that are not subsidiaries of UKBs or not subsidiaries of UKBs or not part of banking groups part of banking groups . Non-bank corporations may also be extended FA when circumstances which are not subsidiaries of UKBs or not part of strongly warrant as allowed under Section 17.d of banking groups may also be extended FA when R.A. 3591, as amended. circumstances strongly warrant as allowed under Section 17.d of R.A. 3591, as amended. FA will be a combination of: FA will be either: a) Preferred Shares (PS) intended to provide 1) a combination of: additional capital to bring eligible bank's RBCAR to 10%; and a) Preferred Shares (PS) intended to provide additional capital to bring eligible b) Direct Loan (DL) to build up sinking fund (SF) bank's RBCAR to 10%; and to provide an automatic payment mechanism for PS b) Direct Loan (DL) to build up sinking fund Provided however, that pursuant to Sec. 17d of RA 3591, (SF) to provide an automatic payment as amended, (the PDIC Charter) the total cost mechanism for PS. (in present value terms) of providing the above combination of FA (PS and DL) should not exceed OR the cost of closure of the eligible bank. 2) Direct Loan only intended to provide income support to the surviving bank A. Features/Terms of PS will be as follows: Provided however, that pursuant to Sec. 17d of a) Non-voting, cumulative, convertible to RA 3591, as amended, (the PDIC Charter), the common total cost (in present value terms) of providing the above FA (either a combination b) Redeemable starting at the end of 5th year of PS and DL or DL only) should not exceed the but not later than the 10th year cost of closure of the eligible bank. c) Put option to be exercised by PDIC as follows: The combination of PS and DL under FA#1 will have the following features: in the event of any default on the part of the bank to comply with its covenants Features/Terms of PS will be as follows: under the rehabilitation plan a) Non-voting, cumulative, convertible to SF is equal to the amount of PS common d) Amount up to 50% of the required b) Redeemable starting at the end of 5th additional capital to bring the eligible bank's year but not later than the 10th year RBCAR to 10% c) Put option to be exercised by PDIC e) Dividend rate equal to prevailing 5-year FXTN as follows: B. Terms of DL in the event of any default on the part of the bank to comply with its covenants a) Purpose to purchase Government Securities under the rehabilitation plan (GS) SF is equal to the amount of PS b) Principal equivalent to such amount that will allow the annual Net Interest Spread (NIS) d) Amount up to 100% or 50% of the required from GS to accumulate over the tenor of DL additional capital to bring the eligible bank's to such amount equal to the PS using the RBCAR to 10% for eligible banks located following formula: in areas affected by typhoon Yolanda 2 and other eligible banks, respectively. Principal = (PS/Tenor of DL)/NIS rate e) Dividend rate equal to the prevailing c) Interest rate per annum prevailing 10-year 5-year FXTN (gross basis) at the time FXTN (net of final tax) less NIS rate of 3% of the release of the FA d) Tenor 10 years, due and demandable upon redemption of PS or exercise of put option e) Collateral/Security Pledge of GS to be Terms of DL purchased using proceeds of DL a) Purpose to purchase Government Securities (GS) b) Principal equivalent to such amount that will provide an accumulated net interest spread (NIS) over the tenor of the DL to such amount equal to the PS. c) Interest rate per annum equivalent to such rate that will provide the bank with an annual NIS that will accumulate over the tenor of the DL to such amount equal to the PS d) Tenor maximum of 10 years e) Collateral/Security Pledge of GS to be purchased using proceeds of DL The terms of the DL under FA#2 will have the following features: a) Purpose to purchase Government Securities (GS); b) Principal equivalent to such amount that will provide an accumulated NIS over the tenor of the DL to such amount equal to 100% and 50% of the capital deficiency to bring the eligible bank's RBCAR to 10% for eligible banks affected by typhoon Yolanda and other eligible banks, respectively; c) Interest Rate per annum equivalent to such rate that will provide the bank with an annual NIS that will accumulate over the tenor of the DL to such amount equal to 100% and 50% of the capital deficiency to bring the eligible bank's RBCAR to 10% for eligible banks affected by typhoon Yolanda and other eligible banks, respectively; d) Tenor maximum of 10 years; e) Collateral/Security Pledge of GS to be purchased using proceeds of DL Major Terms Major terms of the conditions of the SPRB FA will be as Same and Conditions follows: a) Quasi-reorganization and/Capital restructuring b) Compliance with the FA agreement terms and conditions as follows: Financial Covenants - payment terms and conditions - achievement of rehabilitation plan performance targets Non-financial covenants - submission of required reports - improvement of bank operations and governance - conduct by PDIC of periodic on-site inspection and review - appointment of consultant's and/or nomination of representative in the bank's board of directors c) Compliance with PDIC regulatory issuances and banking rules and regulations. Other Terms Applications approved but not yet implemented or in process under the existing SPRB Plus shall qualify under the amended SPRB Plus. Regulatory/ In addition to the incentives/regulatory reliefs granted Same Branching by BSP under the SPRB Module 1 as listed in Annex B, Incentives STPI banks can avail of additional branching incentives as follows: The branch licensing fees* to be waived by the BSP shall be equivalent to the amount of capital contribution of the STPI banks to bring the eligible banks' RBCAR to 10 percent. Under Circular No. 728 dated 23 June 2011, a bank applying for a branch license in restricted areas shall be charged a licensing fee of P20 million for UKBs and P15 million for TBs. Hence, if an STPI bank's capital contribution in a TB is P50 million, said STPI bank is qualified to establish 3 branches (P50 million/P15 million = 3.33 branches) in restricted areas for free. As additional premium, STPI UKBs and TBs shall be granted one (1) additional license in restricted areas while STPI RBs shall be granted one additional branching license in areas outside Metro Manila, for every three (3) distressed banks resolved under the Program. In the case of RBs which are not eligible to establish branches in Metro Manila, they can establish branches outside Metro Manila equivalent to the number of branches of the acquired bank/s. Branch processing fee applicable to RBs of P25,000 shall be waived and the following theoretical capital requirement under Circular No. 738 shall not be imposed, provided that subject branches shall be operational during the lifetime of the Program: Location of Branch Date of Theoretical Implementation Capital Metro Manila Up to 30 June 2012 5.0 Cebu and Davao From 18 Jan. 2006 5.0 1st to 3rd Class Up to 30 June 2012 2.5 Cities 4th to 6th Class Up to 30 June 2012 1.5 Cities 1st to 3rd Class From 18 Jan. 2006 1.0 Municipalities 4th Class Up to 30 June 2012 0.5 Municipalities 5th to 6th Class From 18 Jan. 2006 0.5 Municipalities Note: Please refer to Cir. No. 728 for applicable theoretical capital requirement after 30 June 2012. In case the capital contribution of an STPI in the acquired bank is less than the amount of branch licensing fees under Circular No. 728, that is, P20 Mn for UKBs and P15 Mn for TBs, the STPI can still avail of one (1) branch license in restricted area for free. For STPI-RBs which have availed under Module I of the SPRB, the above proposed branching incentives for RBs under SPRB Plus may be granted subject to the same conditions. * This is different from the branch processing fees under Section 6 of Circular No. 728. Branch processing fees will still be charged from the STPI UKBs and TBs. Footnotes 1. To align the program's mode of entry with the provisions of BSP Circular No. 809 (series of 2013) relative to ownership of banks. 2. For this purpose, the banks located in areas affected by typhoon Yolanda shall be based on the official list of the NDRRMC and/or the official list of Provinces, Cities and Municipalities with declaration of State of Calamity.