Whenever a bank collapses, the banking system is disrupted. Confidence in the system is strained and depositors’ anxiety is heightened. This disruption has a rippling effect on the economy. Investors become wary and potential investors in particular pause to take a second look.
The role of monetary officials in the government is to monitor closely the operations of the banking system and to act as quickly as possible to prevent the collapse of the system or part of it. But if for some reason the inevitable happens and a particular bank does go bust, the government’s urgent role is to mitigate the deleterious consequences of the bank closure.
Primary consideration should be given to small depositors whose life savings were entrusted to the shattered bank, and this is where PDIC comes in. My son and daughter were once victims of a failed bank, and our experience with PDIC in recovering the small amounts that were insured by PDIC was frustrating to say the least. It took almost three years before my son and daughter were able to recover their small savings from PDIC.
Opportunity to overcome bureaucratic delays
The case of the recently closed Export & Industry Bank (EIB) is a good opportunity for the government of P-Noy to show depositors and investors that this administration is prepared to cut bureaucratic red tape in order to lessen the small depositors’ inconvenience and anxiety and pave the way for the restoration of normal banking operations.
Monetary officials should not wait for the end of the prescribed 90-day period of rehabilitation. If there is a willing white knight ready to take over and meet the needs and demands of EIB depositors and creditors, they should act urgently to process the takeover.
If the monetary officials, however, think that other banks should be given the opportunity to offer much better terms and conditions, then they should immediately start the process of bidding and make the award to the best offer.
The point is action should be done now to settle the status of EIB so depositors, particularly the small one, could have the choice of either withdrawing immediately their money or letting it stay with the new bank.
Inaction on the part of monetary officials will mean the government will cough out through PDIC as much P6 billion to cover the insured depositors. But more damaging would be the inconvenience and sense of loss of confidence on the part of depositors as they wait for their hard earned money from PDIC. More so if it takes years for the payment to be processed.
Some backgrounder on EIB case
As backgrounder, EIB, with the full knowledge and approval of its Board of Directors and management, voluntarily surrendered control of operations to the Bangko Sentral ng Pilipinas last April 27. The Philippine Deposit Insurance Corp. was then given control of the bank.
The bank’s story is one that has fallen prey to a system of judicial irony, in particular, a case filed by William Gatchalian’s company in early 2004 against EIB Securities demanding for payment of shares in DMCI that were bought on behalf of the Chinese-Filipino businessman.
Alleging that the DMCI shares were not paid for, EIB subsequently “sold” the bought shares. Even if there were confirmations by officers of the Gatchalian conglomerate to sell the unpaid equities, the Supreme Court in early 2011 ordered EIB to pay the amount of P135 million representing the amount of DMCI shares bought and subsequently sold.
When EIB could not produce the amount, Gatchalian’s representatives filed another suit, this time demanding for P1.5 billion representing the current appreciated value of DMCI shares bought in 2003. This supposedly caused a loss of confidence resulting in a bank run of sorts at EIB even if the Court of Appeals later ruled in favor of the bank.
White knight in waiting
In 2009, even while the case involving Gatchalian was continuing, EIB had already entered into a binding agreement with Banco De Oro Unibank Inc.’s (BDO) for a rescue package that was subsequently approved by both PDIC and BSP.
But there was a caveat: The agreement would only be executory with the resolution of all legal cases involving EIB. And with the 2011 decision of the SC in favor of the Gatchalian group and the subsequent inability of both parties to settle the case, time had run out and circumstances proved to be untenable for EIB to continue operations.
The BDO offer was the best that EIB could have had in its long years of struggling to survive in a highly competitive commercial banking sector. It would also have been the best protection for EIB’s 50,000 depositors and their combined P14 billion deposits.
As things now stand, the original BDO offer needs to be modified to suit current conditions. There is a proposal that seems to be shaping up involving two phases that at best will save PDIC from shelling out funds to settle insurance claims.
BDO’s modified rehabilitation proposal
The proposed first phase of the rehab plan covers payment of the insured depositors by BDO in exchange for assuming the non-delinquent customer loans of about P0.4 billion.
BDO will then assume the current secured PDIC loan that is set to mature in 2016 including the collateral that secured it. As a sort of quid pro quo, BDO will be given the current BSP branch incentives on all existing EIB licenses plus the granting of 30 new “restricted” branch licenses.
The second phase, one which BDO may or may not agree to undertake, will involve its takeover of EIB’s remaining assets and recorded liabilities. This would entail the extension of PDIC’s subordinated debt of P2 billion to a 25-year zero-coupon note.
Furthermore, the 25-year rescue package earlier agreed between BDO and EIB and approved by PDIC and BSP will replace the first phase agreement in 2016, and will include the right to trade all collateral government securities.
Also, the second phase will call for the Development Bank of the Philippines to purchase EIB’s MRT bonds at market price approximately valued at P850 million. Lastly, uninsured depositors will be asked to accept a deferred payment schedule at zero interest over five to 10 years.
Urgent action needed
Perhaps now is a good time for P-Noy to step in and instruct PDIC and BSP to quickly act on a new rescue plan to deal with possible uncertainties and system risks to the country’s banking system.
Whether BDO or some other qualified bank will be the successful white knight is the least of worries of depositors and creditors. What is important is that normalcy, order and confidence are restored and business goes on undisturbed.
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