Unsafe and unsound practices of banks

Banks have been the perennial option for Filipinos with regard to keeping their money. Aside from the fact that deposits are liquid — meaning you can go to a bank anytime during banking hours to request a withdrawal — there is also a sense of guarantee because deposits up to P500,000 are insured by the Philippine Deposit Insurance Corporation (PDIC).

But now that we’re seeing rural banks fail one by one, we wonder: Is our money really safe in banks?

A lot of us are not privy to banks’ internal information which means we don’t have access to useful information that can tell us if a bank is in trouble. But the following guidelines from the Bangko Sentral ng Pilipinas (BSP) can help identify red flags that can warn us if our bank may be the next to fail.

Under BSP Circular 640, banks offering deposit interest rates 50% higher than the comparable market rate will be considered as engaging in unsafe and unsound banking practice.

Normal savings account interest rate is around 0.5% to 1.0% per annum. So if a bank offers an interest rate of, say, 2.0% and above for savings accounts, then that might be a red flag. Of course, this is not always a solid rule. The business of some rural banks is in high-interest loans where they charge huge interests which compensates for offering a relatively high interest rate. The problem, however, is that we can’t check which banks are actually in this legitimate lending business so we won’t know if the bank can really afford to offer high interest rates.

Offering of incentives to potential depositors with an amount not commensurate with the worth of deposit.

We’ve seen it before: free iPhones, free trips abroad, free laptops, even free cars — in exchange for a certain amount of time deposit. Although these are valid marketing tactics, they increase the bank’s cost of borrowing which means banks have to earn more so that they can pay the promised rate.

Having a client base composed mostly of people with bad credit history.

Investing in real estate beyond prescribed levels.

Having high incidence of spurious or fraudulent loans.

Again, these are things regular depositors won’t have any knowledge of. Unless you have connections with a high-ranking official from the bank, you are unlikely to get financial statements (unless they are publicly listed) that you can scrutinize and analyze. Of course, you cannot simply approach the bank manager to ask if the bank has a high non-performing loans ratio or how much they invest in speculative assets .

The responsibility, then, of ensuring that depositors are protected ultimately goes back to the BSP. Although depositors can play a minor role in monitoring banks, the BSP is the one and only competent watchdog for banks in the country.

The BSP can probably set up a mechanism where depositors can easily report banks that may seem problematic so that the BSP can immediately make an investigation.

Better yet, savings and time deposit products that offer rates or incentives not comparable to “regular products” must be pre-approved (similar to DTI permits for business promos) before being offered to the public. If the bank can prove to the BSP that they can to pay the intended rate, then it’s a go for that product. Otherwise, the BSP can issue a warning to the public or, assuming the bank insists, the PDIC can step in and say they won’t guarantee that product.

Whatever the strategy is, it should all lead to one primary goal: making sure that the depositors’ money in banks are safe and will remain safe.

Join the discussion: All about Celso de los Angeles, the Legacy Group, and the collapse of rural banks and pre-need firms

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• practice to avoid unsafe and unsound banking practice
• unsound credit practices of banks