Wednesday, May 13, 2009

The Legacy Bank Mess: A Parting of Partners (Part 4)

PDIC has a Deposit Insurance Fund (DIF) of 61 billion pesos but has outstanding obligations of P72.5 billion to the BSP. To the layman, it would seem that PDIC is bankrupt. And it may very well be, except for the assurance of Jose Nograles that "All [loans] are in current status and matched with identifiable repayment sources." Most people think that PDIC borrowed all this money from the BSP to supplement and replenish its DIF. It is not so. It is the BSP that initially grants emergency loans to distressed and troubled banks for a period of 90 days, extendable for another 90 days. If the bank is unable to pay these loans within the statutory 180 days, then these loans are transferred to the PDIC, which has less stringent requirements (PDIC accepts real estate properties as collateral). The loans turn into a PDIC assistance when the bank signs an agreement with the state insurer for a rehabilitation plan.

So why didn’t the BSP approve the legacy banks’ request for emergency loans? Because the BSP already knew that based on its (and PDIC'S) 2005 examination of the banks’ books, it did not have the required amount of government securities as collateral. So it allowed all 12 legacy banks to declare bank holidays, and then asked the PDIC to move in early December, 2008 and put the banks under receivership, which it did. Then, late January, 2009, PDIC exercised its charter that allows the insurer to borrow from the central bank to pay claims of depositors of banks placed under its receivership. On February, 2009, BSP disapproves the P14 billion loan request of the PDIC stating that PDIC “have more than enough (DIF) reserves to cover it (deposit claims).” But did it have even enough? Or the question should be, does PDIC have any reserves left?

In 2002, the BSP lent UCPB P25 billion in emergency loans. In 2003, PDIC paid out P8 billion in cash for the bank’s non-performing assets (NPAs). By 2005, PDIC still had P12 billion in loans to the bank. It was only in April, 2009 that PDIC approved the conversion of the P12 billion loan into equity with Nograles noting that the capital notes of PDIC will be converted into convertible preferred notes once the Supreme Court rules on the ownership issue of UCPB. Then in March, 2004, PDIC absorbed the P7.64 billion loan of Philipine Bank of Communications (PBCOM) and converted this into a soft 10-year term loan as part of its “financial enhancement package” where it only charged one percent in interest per year. The pact involves the eventual sale of 67 percent of the bank’s capital stock five years from the infusion of the financial package for the then-bleeding bank. PDIC has a lien on a substantial number of the bank shares: designed this way to make sure that PDIC will be protected in its financial rescue of P7.64 billion, clearly way above the buying offers for the bank’s shares. But now PDIC has a big headache in making its timetable to get its hands on its money it advanced to PBCom because the two warring major shareholders cannot resolve its disputes. In 2006, PDIC paid P3 billion for Export and Industry Bank’s NPAs and granted the bank a six-year term loan of P7 billion, paying PDIC an interest of one percent on the first year of availment and five percent on the next five years. EIB, in turn, used the P7 billion to purchase high-yielding government securities, which will be held in escrow for PDIC. PDIC has tied up P25.6 billion of its DIF as long-term loans and equity into the three banks. Add another 10 billion it paid in cash for the banks’ NPAs, and PDIC has sunk in P35.6 billion of DIF into the three banks.

It is not hard to imagine that it may have tied up the rest of the P61 billion DIF into other banks, considering that as of 2008, PDIC owed the central bank P72.5 billion. The BSP would have known the illiquid position of pdic and that is why in September, 2008, it approved a P3-billion loan for the PDIC to pay insured depositors of the padlocked G7 Bank, a seven-unit rural bank based in Bicol. “The BSP and PDIC are co-regulators. It’s our joint responsibility,” said PDIC president Jose Nograles, when asked about the new loan. But five months later, the BSP disapproved PDIC’s loan proposal that it needed to pay the depositors of 12 banks with more than a 100 branches located all over the country. The BSP maintained that PDIC had acquired “more than enough reserves” to pay P14 billion of insured deposits. PDIC nets about P6 billion cash a year in bank assessments and interest income, and it is therefore impossible for it to have accumulated P14 billion in five short months.

Why had BSP turned down an otherwise routine loan request? Why had it become PDIC’s sole responsibility, and not BSP’s co-responsibility? And faced with this unexpected rebuff and rejection, what is the younger Nograles saying and doing that is now endangering public confidence in pdic and the rural banking industry?

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