Many lenders in the countryside have little capital buffer.
Rural banks in the Philippines face a shakeout over the next two years as tougher capital rules loom, a shift that could thin the sector but create bigger, more resilient lenders by 2027.
The Bangko Sentral ng Pilipinas’ higher minimum capital requirements, approved in 2022 and set to fully bite next year, are pushing smaller rural banks toward mergers and acquisitions (M&A), analysts said.
The consolidation matters for financial inclusion in the provinces, where rural banks play an outsized role in lending to farmers, small businesses, and households often underserved by big commercial lenders.
“Fewer but bigger,” Jose Paolo Palileo, chairman of Bayanihan Bank, Inc. and a former president of the Rural Bankers Association of the Philippines (RBAP), told Asian Banking & Finance in Filipino at the firm’s office in Manila.
Banks that fail to meet the deadline are likely to combine with stronger peers to shore up capital, he said.
Under the rules, rural banks with a head office only or up to five branches must hold at least $863,000 (PHP50m) in capital. Those with six to 10 branches need $2.1m (PHP120m), whilst banks with more than 10 branches must have at least $3.5m (PHP200m).
The average rural bank has capital of about $4.3m (PHP247m), according to RBAP Executive Director Rafael Francisco Amparo, suggesting that many of them have little buffer.
Digitalisation adds another layer of pressure. The central bank has linked capital thresholds partly to branch networks and digital capacity, but upgrading systems is costly.
Amparo estimates rural banks need to spend $345,000 to $518,000 (PHP20m to PHP30m) to offer basic digital services, a steep bill for smaller lenders.
Adoption remains limited. Of 370 rural banks, only 19 participate in InstaPay and 45 in PesoNet, the country’s main electronic fund transfer systems, Amparo said. That gap risks widening as customers shift toward cashless transactions.
Some rural banks are taking a more radical path. Lenders that aim to convert into digital banks must raise capital to almost $17.3m (PHP1b) by October 2027.
Foreign-backed or fintech-linked groups have already moved in. MariBank Philippines, Inc., Salmon Bank (Rural Bank), Inc., and First Digital Finance Corp., operator of Billease, have acquired rural banks with digital ambitions.
Of the three, MariBank plans to become a digital bank, according to Palileo and Amparo. The lender declined to comment.
Industry leaders say government support could soften the transition. The Rural Bank Act of 1992 envisioned capital support from state lenders such as Land Bank of the Philippines and Development Bank of the Philippines, but that backing has largely faded.
“LandBank would have reinforced the industry,” Amparo said, noting that talks in recent years failed to materialize. Without support, consolidation looks unavoidable.
For policymakers, the challenge is balancing stability with access. Fewer rural banks may be stronger, but how they serve far-flung communities as costs rise will shape whether consolidation strengthens or weakens the financial system in the countryside.