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February 01, 2011

Small Claims Courts Help Rural Banks Recover Loans and Expand Financial Services

February 2011

More than 750 Philippine rural banks with more than 2,000 branches around the country have been encouraging entrepreneurship through loans to local communities, including in conflict-ridden areas. Unfortunately, between 2006 and 2010, delinquent payments on these loans have increased by an average of more than 10 percent a year.

To address this problem, the central bank has initiated reforms to encourage rural banks to restructure their bad debts. While this initiative has helped, more needed to be done to improve the standing of the rural banks vis-à-vis most commercial and universal banks.

The Rule of Procedure for Small Claims Cases, which the Philippine Supreme Court implemented in March 2010 in collaboration with the ABA Rule of Law Initiative (ABA ROLI) and the U.S. Agency for International Development, supplements these efforts by providing a speedy and affordable procedure for small money claims amounting to 100,000 Philippine pesos (about $2,000 in U.S. dollars).

On January 24, ABA ROLI and the South Bicol Confederation of Rural Banks organized a roundtable on the role of the small claims courts in addressing bad loans. More than 30 members of the confederation attended the discussion on utilizing the small claims rules to manage delinquent accounts, recover written-off debts and amicably settle money claims expediently.

The courts have been hailed by banks as quick and efficient. In describing pre-small claims courts legal remedies, Arnold Ajero of Camalig Bank in Bicol said, “Under the regular procedure, cases take very long and litigation costs are expensive. On average, our cases take two years before the court orders execution of a decision.” He said that the long litigation time risked the banks’ survival, as it slowed the return on investments.

Camalig Bank has been utilizing the small claims courts to recover losses from delinquent clients. To date, the bank has filed 108 small claims cases and recovered more than 2.5 million Philippine pesos (about $56,000 in U.S. dollars)—a 54 percent collection rate of bad loans.

Ajero said that the fast and cheap small claims procedure benefits both plaintiffs and defendants. “The prohibition of lawyers during hearings makes it comfortable for litigants to plead their case to the judge,” he said. “The courts assist plaintiffs and defendants, explaining the rules and educating parties of the new procedure.” Ajero added that litigants consider the courts as “our partner”.

The courts have also had positive impact on the banks’ willingness to lend. Herbert Molina of the Rural Bank of Sorsogon said, “Because the small claims court procedure has proven to be an effective tool for loan collection, our bank is now more confident and has expanded its marketing to reach more clients.  Since the middle of 2010, we have tripled our loan portfolio.”

The Rural Bank of Sorsogon’s had filed 30 small claims cases, all of which were settled amicably, allowing the bank to collect 400,000 Philippine pesos (about $9,000 in U.S. dollars).

“The small claims court procedure is truly beneficial for the continued operations of rural banks,” said Molina. Borrowers “are now taking the initiative to settle their accounts and comply with their binding agreements.”

To learn more about our work in the Philippines, contact the ABA Rule of Law Initiative at <[email protected]>.