BSP Memorandum No. M-2014-003 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 GovernorBangko Sentral ng Pilipinas

ANNEX A

Approved Amendments to the

	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 over-all 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 over-all 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.