On the anniversary of one of the most unnerving domestic financial scandals in recent times, while no real cures have yet been developed to address systemic ills plaguing the Philippine rural bank industry, here we attempt a few.
When controversy hit the Legacy series of rural banks last year the issues initially centered on capital adequacy. As of the fourth quarter of 2008, nothing was yet definitive from its yearly audits save for undercapitalization based on new requisites imposed on rural banks. Unfortunately, the Philippine Deposit Insurance Corporation (PDIC), whose own capitalization is threatened by such, reveals an alarming 25% of rural banks are similarly afflicted.
A few imperatives confront us.
Rural banking falls under the regulatory umbrella of the Monetary Board (MB) while the Insurance Commission (IC) covers its insurance products. Pre-need instruments, when considered securities, are covered by the Securities and Exchange Commission (SEC). Among the three, twines rarely meet albeit these can tangle into a Gordian knot. Worse, product permutations fall between desks where there is no central agency looking at all three simultaneously. There, vulnerability lies.
Because regulatory agencies can be parochial, even territorial given classic bureaucratic mentalities, a body with an omnipresent perspective is critical. Fortunately, while accusations of imprudence accompanied audits last year, -some, controversial only when instruments cross regulatory demarcations – these involved largely uncommon linkages. Not all rural banks have pre-need affiliations or credit card products. Not all service outside geographically-specific markets.
However one-off in the case of the Legacy banks, PDIC’s adverse findings on capital inadequacy is common to one of every four. That’s one too many. More so when statutes had originally limited one rural bank per municipality.
The first imperative to address weaknesses involves regulatory and audit bandwidth and frequency. When a bank is undercapitalized loan receivables impact negatively when regulatory cycles and parameters are uncoordinated among the three agencies.
Because rural bank audits are conducted only once a year and, in some instances, bypassed due to logistical constraints, curative measures are often delayed.
Bad loans readily turn into non-performing assets within ninety days thus endangering capital as risk covers deteriorate. Within an audit period, adverse DOSRI (directors, officers, shareholders and related interests) borrowing centered on a rural bank would have cycled unchecked three times.
As the capitalization requirement is strictly imposed only on the banking entity, what undercapitalization exists aggravate inter-company linkages.
The typical response is to require recapitalization. Unfortunately, the upgrading necessarily involves external infusions where DOSRI concerns turn critical. We’ve seen where afflictions graduate into systemic ills when these traverse regulatory borders. More so in a system that panders to delays and dilatory processes.
In the rural bank controversy in question, the adverse findings were the result of impositions where equity accounts were reclassified as liabilities. Debatable but understandable, per regulatory wisdom, pending approval, deposits for subscription cannot be considered equity as yet. Unfortunately, in its intention to recapitalize, banks preempt and aggressively consider those as equity.
Insulated from PDIC protection, on hindsight, it was not uncommon that some depositors viewed deposits as investments with returns consistent with high-return capital gains rather interest earned. When all hell broke loose, many realized their investments were not insured much less guaranteed.
As regulators take a more prudent perspective and reclassify subscriptions as liabilities, within that section of the balance sheet, these bloat total liabilities thus aggravating pre-existing undercapitalization. Suddenly, even at the equity levels after the subscriptions were made, capital seems sorely inadequate.
While accountants argue whether these are similar to tier two capital – a risky proposition where rural banks are concerned – the accounting treatment poses problems as what constitutes capital is debatable.
Recapitalization for a rural bank can be an extremely dicey process and incremental equity infusions, unless correctly seen as a fundamental strengthening process renders a bank vulnerable in the interregnum.
In a financial underbelly as vulnerable as the rural bank system, what afflicted the system was eventually a toxic chemistry of imprudence and dynamism. We’ve seen how rural bank bushfires easily graduate into systemic conflagrations that erode what little financial foundations are in the countryside. Desperate for additional capital, rural bankers had sought innovative ways to infuse capital utilizing affiliated businesses. Factor-in political issues such as infighting within rural bank associations, the parochial albeit potent political influences of rural creditors and an uneducated media frenzy that warps parochial concerns into a popular advocacy, and the system’s simple undercapitalization weaknesses easily ignite.
The PDIC is now a marriage broker where mergers and acquisitions between stronger banks and weaker entities are more acceptable than pursuing the tier two route. That makes sense. Having the PDIC as a broker should alleviate fears and provide the correct perspective where each of the MB, the IC and the SEC could not. It should also preempt paid hacks and the politically motivated from fomenting lies and popular misconceptions drawn from spinning the search for incremental capital as an early warning sign that a rural bank is in trouble.
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Dean is there a law or a BSP rule that states categorically that all loans that are non-performing for 90 days must be classified immediately as non performing assets of a bank?
Does the BSP regularly audit all banks every quarter?
Please note that the general public through the state gives these limited liability corporation a very special license. The power of issuing credit which is actually money!
This is all done with an implicit public guarantee.
Throughout out human history all man made economic disasters stem from financial or banking blowouts which stem from this power to create money.
How much regular oversight is done by the BSP? Self regulations has never worked in the financial and banking industry. .
Dear J_ag,
Unlike commercial banks which are audited on a quarterly basis, rural banks are audited only once a year. Unfortunately, rural banks carry more risk as their markets are the countryside and their capital base is limited. Also, most rural banks are family-owned (or owned by the local politician) and thus the quality of management is not as good as a commecrcial bank’s.
A loan is technically considered past-due or non-performing when it has been uncollectible for 90-days. Before that it is still consiodred an accounts receivable and does not “degarde” in a rural bank’s balance sheet.
If a rural bank is audited only ionce a year, then a 90-day past due would have cycled three-times and gotten worse. If the loan was extended to an entity who should not have been eligible (clean, uncollateralized, or with substandard securities, then, again, the anomaly cannot immediately be cured until an audit is made.
Regards,
Dean
BTW, am using some of your comments in my next article for the mainstream media. The one where you say that we’ve concentrated more on taxes and debts to feed our economy. Since I don’t know your name, I will simply refer to you as either a blogger or a reader. Unless of course, you want me to add an adjective like “The Great ….”, or ” J_ag the Merciless”?
Thanks for the heads up but J_ag would more than suffice.
But aren’t past-due reserves created and booked at periods shorter than 90 days, thus together with reserve requirements effectively curtail the financial institution’s ability to multiply money?
Indeed, the dreaded DOSRI prohibitions are most apt for this kind of financial institution.
Dear Amadeo,
Yes they are. Unfortunately, if there is an anomaly, or where reserve requirements are not followed (eg. reserves are in another affiliated co.ala Bangko Pilipino)and no one sees these until an audit is made, then nakakalusot.
Dean
As I recall you defended the Legacy banks against the big bad BSP and PDIC claiming that they wanted to close them only because the big banks were threatened by them and the claims of under capitalization were made up by BSP and PDIC.
So now why the change of heart?
Hi Jim,
Just trying to be fair. Delos Angeles was creative to say the least. But he was also being harassed. It was not the big banks behind it but the other rural banks. The infighting within rural bank associations.
Even some of the rural bankers know that the BSP was taking sides.
As for the PDIC, I’ve always been on their side.
Regards,
Dean
Unfortunately, based on your article that claimed the legacy banks were well capitalized, I deposited money with them. Now I find that PDIC is dragging their feet in paying and for most it could take two or more years to get their deposit insurance back, if they are lucky. They are also blaming depositors for not knowing better than to deposit in these sorts of banks and informed us we are responsible to insure that seven documents are on file at the bank for every transaction or we won’t be paid. The bank manager at my local BPI laughed at me when I told him what PDIC said and asked to look at his books. He refused and told me that was the responsibility of BSP and PDIC. So, the lesson learned, to me is to put money in banks in other countries where the deposit insurance is more reliable.
Dear Jim,
If yopu need help with the PDIC, please drop me a line and I will see what I can do to help.
Dean
BTW,
The undercapitalization was the result of booking deposits for subscription as liabilities and not under equity. Tama naman. I saw these in the balance sheet and so did BSP.
De los Angeles booked these as equity and so he felt that he was not undercapitalized.
But when media created a frenzy. sometime December, these were withdrawn and that aggravated the undercapitalization.
Dean
Thank you for your offer to help. There are thousands of us in the same boat, see http://deadbol.com/ . How do I contact you?
From a personal prospective I’ve been advised by friends, including bank managers, that waiting years to get paid is normal for PDIC as they all are waiting for two or more years themselves. My mistake was believing the statement on their web page that they wanted to be a “World Class Deposit Insurance Corp”. My experience in the US was that I got my money within 72 hours, even while living here and over the internet. What I found here was that I had to travel hundreds of kilometers simply to pick up a form so I could return hundreds of kilometers to give it back to them a month later. I was personally told the claim would be completed by the end of April when I turned it in. I’ve come to find that I can’t trust anything told to me by PDIC as they have now promised payment by the end of April, end of June, mid July, end of July and now end of October; if you cry wolf often enough nobody will believe you.
The group of depositors I belong to, above, share experiences and it appears that PDIC is not prepared to handle bank closures of any size, are not well organized nor make much use of automation. Some examples; when people call to ask for status the person has to put them on hold and go to another office and ask someone who presumably has to stop work and look through papers on their desk, when they ask to speak to the person working on their claim they are told they are not in the office. One individual was told their checks were pending signature but the one individual in the whole of PDIC that could sign checks had been off work for more than a month.
More than half of my emails to them asking for status go unanswered. Occasionally they will respond but with FFV. Then five weeks ago they said they were out of FFV and verified and I would receive checks in the mail but nothing as usual. Since then they have ignored every email and even ones I sent to BSP which they said were forwarded to PDIC for a response.
You offered to help with my PDIC claims but said to contact you. Can you provide me with the information on how to contact you if you want to help?
The vulnerabilities of the financial and banking system is when those
who are in the business are the ones who are the perpetrators of the
frauds. Like the CEOs in the U.S. Or like Celso de los Angeles of
the Philippines. Too much regulations is not good for business. Too less is not good either. We find a way whereby we have a workable
regulation.
What are your opinions on nationalizing rural banks?
In small rural areas, people are bound to know each other. If I can see big banks being made as financial arm or atm of the owners’ other companies, more likely that these rural banks are founded on the same purposes. Thus favoritism/padrino system is likely to occur. If they are nationalized then interests of the depositors are top priority and there would no longer be a conflict of serving different (self) interests.
Rural banks, in my opinion, can stay as they are. In Rural areas,
the bank serve mostly the agricultural, housing and some commercial sectors.I had never seen true industrial development in the rural areas, like in the industrialized countries. Industries create jobs, produce exports, and remove our importing of goods from other countries. This is the reason we have the Squatter problems in Metro Manila. People dont have good jobs in the Provinces. We concentrated
most of the industries in Metro Manila. So, people flock there and
produce serious housing problems.
What I meant was, is it preferable that the government gain control of the Rural banks? Since they have trouble regulating them, the government can tighten its grip. Rather than private owned for profit, the rural banks shall serve under government management. Same as GSIS and SSS.
The Land Bank was establsihed as a universal bank for the rural and agricultural sector. It is a government bank. Unfortunately, it is not insuklated from corruption and might even be more prone now given the recent quedancore and swine scam scandals where money from the Land bank was lent to fictitious pig growers only to end up in an election kitty as based on a COA audit.
Dean
BTW, GSIS members are freaking out with the way GSIS is treating them.