What are Unsafe and Unsound practices of banks?

Banks have been the perennial option for Filipinos as regards 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.

Very high interest rates compared to market rates

  • 1. 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.

Deposit incentives not commensurate to amount of deposit

  • 2. 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.

Dubious customer pool, fraudulent loans and real estate investments

  • 3. Having a client base composed mostly of people with bad credit history.
  • 4. Having high incidence of spurious or fraudulent loans.
  • 5. Investing in real estate beyond prescribed levels.

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.

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14 thoughts on “What are Unsafe and Unsound practices of banks?”

  1. Hmmm… BDO offers 1.875% for deposits 10K above locked for 30-90 days; 2.75% for 180 days, while BPI Express Direct Savings gives annual rates of 1.875% if your savings reaches 100K and 2% if beyond 500K. Should we be alarmed?

    “Investing in real estate beyond prescribed levels.” I wonder what the prescribed levels would be. I suppose with the experience gained in handling/disposing their inventories of foreclosed properties, banks would somehow see the potential in real estate and try to make money out of it.

  2. our money is NEVER safe in the bank!!!

    you know why?

    it’s because we are actually losing money when we put it in the bank…

    its earning interest rate at 2% per annum. but that goes without saying that you are paying taxes on the interest so you are actually earning less than that… and here’s more, inflation is at 6% per year!

    you do the math…

  3. @ice_hot, you’re absolutely right. Which is why I would rather invest in real estate, particularly in foreclosures. I guess banks are good for emergency funds or for everyday expenses, which need to be accessible anytime.

  4. @Jay, I think BPI can afford to give those premium rates, especially since the spread between their loan borrowing rate (around 11-14% p.a.) and the interest rate they give depositors (1-2%) is large. The BSP was probably referring to rural banks that offer humongous returns such as 10-20% p.a. but are investing in risky loans with a high level of default. I agree that real estate is a good investment opportunity. If I only have lots of money, I’ll be buying lots of real estate properties!

    @ice_hot, that’s true. We actually are worse off considering that we have a high inflation rate. In school, Economics and Finance profs even say that it’s better to spend money right now than to keep it in the bank. “Time value of money,” that is. But if we’re not spending it, keeping it in the bank rather than under the bed would probably be the better option.

  5. i agree with ice_hot…our money deposited on banks on a regular term is actually an expense to us…for its value actually depreciates faster than we think…what it only provides us liquidity of which we can withdraw it anytime (even anywhere)

  6. wahehehe… the banking system is simply amazing… its one of those business models that i really find to be brilliant. just think about this:

    they are paying roughly 2 percent to depositors who are in actuality lending the bank their money. now when the bank turns around and lends that money to borrowers they are charging up to 19 percent! (well that’s depending on the economic conditions… but what the heck… economics is not the issue)

    you do the math…

    here’s more. banks are allowed by law to lend up to 10 times the amount deposited with them.

    that’s more complicated math right there…

    talk about maximizing the use of other people’s money!!!

    so what’s the point?

    LET’S START OUR OWN BANK!!! I am serious about this… We can actually group together guys and make an online bank or wot not…

    basta wag lang natin gayahin si angeles ha! hehehe…

    (haba naman ng comment ko… dapat may award na ako dito futuregizmo!!!) hahaha!!!

    the earning student

  7. Banks thrive on people’s trust. Banks are relying on people’s perceived notion that their money is safe. When this trust is broken by unsound practices, causing bank failures, the very foundation of the bank’s business is questioned. When you really think about it, banks don’t really offer any tangible products like McDo or services like a spa. Do we really need banks anyway? Or is it just an illusion?

  8. Hmmmm..maganda yung mga ideas nyo. Thanks for opening my mind, tama ang dugas talaga ng mga banks, pero tami ding itago mo nalang dun kesa naman sa bahay nyo na mas unsafe pa. Oo nga noh, mas malaki pa nga yata tax ko kesa sa nakatago sa bank..hehe

    Meron ba kayong ideya kung anong companies may kasamang 401 k na benefit dito sa Pinas? Sabi kasi ng tito ko mas ok yung kesa bank deposit. Any ideas?

  9. You’d rather invest your money on painting collections or jewelry collections/gold bundles as both of these stuffs’ value grows overtime. Just make sure you’ve got high-tech vaults under your pillow.

    And yes! I do agree with the GUY>Allan Inocente’s “BANK is an illusion”. It seems we are stabbed in the open.

  10. Money in th bank is still safe .. as long as you wont exceed the 250K maximum balance. Or invest your fund in government securities. Common Trust Fund??? you dont have control over the bank strategy in diverting the fund.

    Banking is for excess money lang naman so ang may problema lang dito ang mga rich.
    And most of the rich people naman ay angking talino/kaalaman/gulang na yan so they knew exactly what to do with their money. Wag naman sana yung mga retirement money or saving for schoolings ng mga anak ang mabiktima..Di bale liit kita basta balik puhunan at may tubo..Laki nga kita… bilis na naman wala… imbes na happy ending eh you might be stepping near to your ****** knock on wood

    SEC and BSP is created to regulate this line of business.. sana naman …

  11. unfortunately, the rural banks was supposedly a safe haven for excess funds, to gain interest to fight inflation and make use of it for daily needs. CDLA just made it a living hell after it closed down. Now PDIC is also a nightmare, because until now very few depositors have been paid.
    The government need to step in, otherwise, the rich depositors will no longer bank in the Philippines, and the OFW’s will stop using the banks.. Who is the losing end? Your guess is as good as mine.

  12. BSP and PDIC should step in before a collapses. Infuse capital and overhaul management dapat ! Closing a bank is a nightmare for everybody. If BSP can not do this..better limit banks to 5 only in the whole Philippines.

    Or better hide your money in dollars or gold …… then get a licensed firearm…its better to shoot robbers than let a bank run off with your money without any assistance from BSP !


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