Monday, June 11, 2007

High-risk bank promos alarm regulators

Reposted from:
Inquirer News Service

BANKING regulators are alarmed over high-risk deposit-taking schemes among a number of banks, which are now being investigated for possible violation of rules against unsafe and unsound practices.

In an interview at the sidelines of the recent Financial Sector Forum, Philippine Deposit Insurance Corp. president Ricardo Tan said: "This is a quasi-pyramiding scheme using the PDIC as the fall guy institution, so we're trying to do something about it." Tan said some banks that were offering "double your money" schemes--or about 20 percent a year for five years--might be putting themselves, and PDIC, at risk.

"We know definitely a number of banks that are doing this and we're concerned," he said.
"We're looking into the affiliates of banks that are doing the marketing because this may constitute unfair and unsound banking practice," Tan said.

Tan said that PDIC, the Bangko Sentral ng Pilipinas and even the Securities and Exchange Commission knew about the scheme and were trying to cooperate to find ways to curb these practices.

Asked why the PDIC thought it was similar to a pyramiding scheme, Tan said: "They will say, if you put in P2 million, then split it into several accounts, put them into time deposit and we'll give you goodies [in return]: give you a car, give 20-percent [a year] interest. And for them to sustain this, they have to get more customers."

"In order for them to sustain this kind of activity, they have to keep on getting more and more customers. When the pyramid [collapses] like a house of cards, they know the PDIC is there," he said.

Once a reckless bank collapses due to these risky practices, he said PDIC would be the one obliged to pay off the insured depositors.

"We can't say that we won't pay the insured depositors, but we can look into the practices that are unsafe and unsound and see what we may have against the institutions that are undertaking these irregular practices," Tan said.

The PDIC chief said banking regulators were now studying ways on how to address the looming problem that might be caused by these bank practices.

Tan has been saying that the shutdown of at least seven thrift and rural banks so far this year, for instance, was "no joke" as it had resulted in costly settlements even if these were mostly small lenders.

PDIC has mapped out a strategy to shore up its reserves by at least P50 billion to boost its capital adequacy following the recent spate of costly bank failures. Its current deposit insurance fund of P40 billion was deemed insufficient to cover long-term risk probabilities.

"We've put in place a new sector called financial resources management and comptrollership sector and one of the core functions of this sector is to manage the deposit insurance fund on a more focused and professional basis, going away from mom-and-pop kind of operations," Tan said.

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