THE PHILIPPINE DEPOSIT INSURANCE Corp. is pushing for greater consolidation in the local banking sector, saying it was key to making the industry stronger.

PDIC and the Bangko Sentral ng Pilipinas had recently signed a memorandum of agreement to help ease the process of mergers and acquisitions among banks. Under the agreement, applications for mergers submitted to PDIC and BSP will be processed simultaneously by both regulators instead of sequentially, PDIC said.

The two regulators are also setting up a fund of as much as P5 billion, which they may tap to provide loans or other incentives to banks that will acquire financially troubled or smaller banks.

In a statement, PDIC president Jose Nograles said such efforts were aimed at encouraging consolidation, which in turn, would help lessen cases of bank failures. As the country?s deposit insurer, PDIC is tasked to service claims of depositors of banks that were ordered closed by the BSP.

?When financial institutions like banks merge or consolidate, they attain economies of scale, achieve higher lending capacities, diversify risks, and improve the quality of their services. Stronger banks are in the position to provide better financing products and services to their clientele,? Nograles said in a statement.

PDIC said it wanted to see more mergers and acquisitions on top of the ongoing consolidation in the local banking scene over the last few months, especially among rural banks.

According to data from the central bank, the number of banking institutions of all types in the country dropped to 804 as of end-June this year, lower than the 841 as of the same period last year.

?[The drop] indicated continued consolidation of banks as well as the exit of weaker players in the banking system,? the BSP said in its latest financial sector report.

Of these banking institutions, rural banks accounted for the biggest number at 692. Thrift banks followed at 74, while the number of universal and commercial banks stood at 38.

Since the start of the year, 19 rural banks have been closed by the central bank and placed under PDIC receivership.

The Rural Banking Association of the Philippines [RBAP] earlier said members that folded up were those that could not compete with bigger banks operating in the same geographic areas. The group said, however, that rural banks? failures remained isolated cases, and that the rural banking industry as a whole was in good shape.

Like the PDIC, the BSP is also pushing for consolidation in the industry.

BSP Deputy Governor Nestor Espenilla Jr. earlier said the central bank had opted for a policy of encouraging a smaller number of banks that are backed by stronger finances.