PDIC nixes 'exorbitant' interest rates on deposit insurance claims

MANILA, Philippines - State-run Philippine Deposit Insurance Corp. (PDIC) is set to disallow interest overpayment including unusually exorbitant interest rates from deposit insurance claims as part of the government’s efforts to put an end to fraudulent get-rich-quick schemes.

PDIC president Jose Nograles said the agency’s Legal Affairs section is studying the possibility of treating interest paid by closed banks using unusually exorbitant rates as interest overpayment that represents the difference between the excessively high interest rates paid by the bank and the prevailing market rates at the time of placement. 

Nograles pointed out that the interest overpayment would be netted from the amount to be paid for deposit insurance claims to discourage depositors from placing their money in get-rich-quick schemes and at the same time safeguard the Deposit Insurance Fund (DIF) that currently stands at over P60 billion. 

He added that the rate reduction would start to apply at the time the deposits were place.

“This is a way to mitigate moral hazard and abuse to the DIF which is the funding source for deposit insurance payouts. Moral hazard occurs when an individual enters into very risky transactions — in this case, deposits in distressed banks in danger of closing or banks involved in fraudulent transactions and offering off-market rates — and transfers the risk to a third party, in this case, to the PDIC,” he explained. 

According to him, PDIC noted that “seasoned depositors” deliberately look for distressed banks offering excessive interest rates and are unmindful of the risks because when the bank closes their deposits are covered by insurance. 

He added that there are also instances wherein these depositors have already recovered their principals through excessive interest payments prior to closure and are just actually claiming their residual interests from the deposit transaction.

With this, Nograles said there is a need to further amend Section 10 c(8) of the PDIC Charter to enhance said authority to reduce interest rates. 

Under Republic Act 3591 PDIC is also authorized to exclude from deposit insurance deposit products found to have emanated from unsafe and unsound banking practices.

Nograles urged the depositing public to remain cautious against banks that offer deposit products with inordinately high interest yields, without corresponding assets to match. 

“It is very difficult to combat moral hazard but these proposed measures will prevent fraudulent get-rich-quick schemes from thriving,” he said.

He warned that the Bangko Sentral ng Pilipinas (BSP) has issued Circular 341 that classifies large and high interest rates offered by banks as an unsafe and unsound banking practice.

“This is because a bank cannot operate profitably for long if its interest payment for deposits is higher than its earnings from loans and investments. Under the amended PDIC Charter, a finding of unsafe and unsound banking practice triggers PDIC’s conduct of a special examination of the bank in order to identify remedial measures as well as risks to the DIF,” the PDIC chief stressed.