Wednesday, April 11, 2007

Interest Rate of 20%pa on Peso Time Deposit!

When most Commercial Banks are currently offering Interest Rates of under 6%, it is good to discover some Rural Banks, in the Philippines, are offering 20%pa, with the Interest credited Monthly.

Most people's first reaction, on hearing about a Bank offering an Interest Rate of 20%pa, when most Banks are offering considerably less than this, is one of scepticism.

This is understandable -
As you rationalise that the Commercial Banks are not offering Interest Rates anywhere near as high as that, there must be a reason for it, surely? If these Rural Banks are offering such high Interest Rates as 20%, then there must be a catch to it, or it is extremely risky, or something?

First off all Banks in the Philippines come under the Control & Regulation of Banko Sentral ng Pilipinas.

Banking Supervision
The Bangko Sentral has supervision over the operations of banks and exercises such regulatory powers as provided in the New Central Bank Act and other pertinent laws over the operations of finance companies and non-bank financial institutions performing quasi-banking functions.
BSP Unveils Basel II Implementing Guidelines
The Monetary Board approved on 2 June 2006 major revisions to the risk-based capital adequacy framework which will take effect on 1 July 2007, to align the existing Basel I-compliant framework with the new Basel II standards. As approved, the MB decided to maintain the present minimum overall capital adequacy ratio (CAR) of banks and quasi-banks at 10 percent. However, consistent with Basel II recommendations, the MB approved major methodological revisions to the calculation of minimum capital that universal banks, commercial banks and their subsidiary banks and quasi-banks should hold against actual credit risk exposures. This significantly amends BSP Circular No. 280 dated 29 March 2001 (for banks) and BSP Circular No. 400 dated 1 September 2003 (for quasi-banks). Stand-alone thrift banks, rural banks and quasi-banks will, however, continue to be covered by existing regulations (i.e., Circular Nos. 280 and 400) insofar as credit risk measurement is concerned.

OK, so the Rural Banks, are also controlled and Regulated, but some of them still seem to fail -

"Wont I lose my savings in the Deposit, if the Bank gets closed down?".

There is a Government Financial Institution (GFI) by the name of Philippine Deposit Insurance Corporation (PDIC)

PDIC is a government-owned and controlled corporation created in 1963 by virtue of Republic Act 3591 for the purpose of insuring bank deposits. The latest amendments to RA 3591 are contained in RA 9302 enacted on July 27, 2004, which provided enhanced depositor protection through increased deposit insurance coverage up to P250,000 and strengthened PDIC's risk management capabilities through the restoration of PDIC's authority to examine member banks with prior approval by the Monetary Board. The new law also enhanced PDIC's receivership and liquidation powers.

The PDI's 'Mission Statement' being:-

"We as, Deposit Insurer, Statutory Receiver and Co-Regulator of Banks, safeguard the interest of the depositing public and thereby contribute to the promotion of financial stability in the economy.

What are the functions of PDIC?

  1. Insurance
    The PDIC assesses and collects insurance assessments from member-banks to insure member-banks’ deposit accounts. In case of bank closures, the PDIC processes and services claims for insured deposits. Deposits are insured up to a maximum coverage of P250,000 per depositor.
  2. Bank Examination
    Under the new law, PDIC's authority to examine its member banks, with prior approval by the Monetary Board, has been restored.
  3. Bank Rehabilitation
    The PDIC may grant financial assistance to distressed banks if it is proven to be a less costly alternative than closure.
  4. Receivership of closed banks
    Once a bank is ordered closed by the Monetary Board (MB) of the Bangko Sentral ng Pilipinas, the PDIC is designated as statutory receiver. The PDIC upon receipt of the MB resolution ordering the closure of a bank, immediately physically takes over the closed bank. Receivership is the stage within which the PDIC manages the affairs of the closed bank and preserves its assets for the benefit of creditors.
  5. Liquidation of closed banks
    After it is determined that the closed bank can not be rehabilitated, the PDIC shall recommend the liquidation of the assets of the closed bank. Liquidation refers to the recovery and conversion of assets into cash for distribution to all creditors in accordance with the order of creditor preference pursuant to law.

"OK, so there is this PDIC deposit insurance thing up to Php250K per depositor/bank"

"What's the point in placing a Deposit with Banks, that might get closed down? Even if such Deposits are insured, I will still have to then go through all the 'hassle' of submitting a Claim and waiting for it to be processed. Surely I will be losing interest on my Deposit, while the claim is being processed?".

Yes that is true; should a Bank get into financial problems, the 'MB' will issue the official closure of said Bank. The PDIC will then step in as statutory 'Receiver', and if such Bank can't be 'Rehabilitated', the PDIC will 'Liquidate' the assets of the closed Bank, and initiate the Claims procedure for the insured Depositors. The Depositors will not be receiving any additional Interest from the date the Bank is declared closed.

Depositors will be advised through the national and/or local media and posters at the premises of the closed insured bank and other public places within the locality on the schedule of claims servicing and the prescriptive date of filing claim. The PDIC states - "The claim for insured deposit should be settled within six (6) months from the date of filing". In practise however the PDIC has been processing claims a lot quicker than this.

It might be a pain, and some 'hassle' ,of submitting a claim with all the required documents to ensure ones claim for insured deposit is processed ASAP before ones Deposit will be returned. And yes one will have lost the Interest on such Deposit for up to 6 months.

But look at it this way - is the reward of 20%pa, not worth the Risk and the inconvenience?

Let us take a look at this a bit closer:-

If you check the PDIC website, you will see there are currently some 746 Rural Banks listed.

The PDIC records some 382 Rural Banks as having been closed (between 13 June 1961 and 19 January 2006 = 44.5 years).

This is an average of 8.58 Rural Banks getting closed per year, which is 1.15% of the Total. (assumes Total Rural Banks, over period = 746)

Suppose you placed Php100K in a Rural Bank - 5 Year Time Deposit. You picked 1 of 12 Banks, offering 20%pa to put your deposit in. That particular Bank happens to be one that fails and gets closed some 6 months after you placed your Deposit. You will only have received 6 monthly Interest payments (Php100K x 20/12 x 6), Php10K. It then takes 6 months before the PDIC returns your 100K Deposit./ So in 12 months you only received Php10K (10%).

That 1 Bank (out of 12), just 0.134% of the Total Rural Banks, just happened to be that closed, six months later. Pure mathematical odds of that happening must be pretty slim. Pick a good Bank with a long 'track record', and good Capital investment, and the odds reduce considerably more?

But provided the Bank was in business for at least 6 months, you still made 10%pa Interest, (even waiting 6 months to get your Deposit back).

Compare that with any other Bank offering Peso Time Deposit over 364 day period
(e.g. BPI Family Savings Bank Php100K, 360-364 days = 2.875%).

Php2,875, compared to Php10,000, (and you were unlucky to select a Bank from the 1.15% that fail, on average, each year)! What would you rather end up with after 12 Months?

Every month that Rural Bank stays in business, paying you 20/12% Interest, you are making more and more money over what you could get in a Commercial Bank.

After 60 Months, you will be considerably better off - anything for 2, or 3 times to 5 times better off. Your Deposit will have at least Doubled (perhaps more, if you re-invested, your Monthly income, in other Savings products).

This is fundamentally why I considered the RISK, fairly low (given the PDIC insurance, and only 1.15% Banks failing, on average. Yet the REWARD is HIGH, making it too good an investment NOT to consider seriously.

It also beats the Philippines inflation (6.2%* officially last year) , by a comfortable margin.
*Average annual Headline Inflation Rate - National level, 2006

If you are earning less than 6.2%, after Tax, your spending power is being eroded.

So do you still want to dismiss these 12 x Rural Banks?

  • 20%pa Interest
    Credited Monthly
    Tax Free Payments (5 year minimum saving accounts, exempt the 20% Withholding Tax)
  • Each Deposit insured by PDIC (up Php250,000, per Deposit, per Bank)
    Joint Accounts, carry separate PDIC Insurance (up to Php250,000 also)

So perhaps they are worth looking into after all?

NB: There is also the 6 Year 'Hybrid' Time Deposit/SSD, you might care to consider?

This is essentially the same as the 5 Year Time Deposit, except having Term of 6 Years (72 Months), AND there also being an Advance 20% Interest payment *
(* Interest for months 61-72, paid up front, in lump sum - tax free).

If terminated, for any reason, prior to the Maturity Date, there will be 'claw backs' and deduction (from the Deposit). Notably:-

  • Reduction in Interest Rate (applicable for length Deposit held) the
  • Advance 20% Interest up to month 61 (pro-rata, thereafter), 6 Year 'Hybrid Deposits only
  • Payment of Withholding Tax
    (depends how long the deposit was held, prior to termination - e.g. 3 Years = 12% Tax rather than 20% )

A friend of mine, needing additional funds (to complete the building of his house), and not finding cheap loans, decided to terminate his 6 Year 'Hybrid' Time Deposit. He was able to get hold of the money within 2 days, and the amount was higher than he expected?

Certainly he was pleased to have placed such Time Deposit, and happy with 'net' proceeds , and received the 'Cash' very promptly, after requesting the Termination.

He said it was still considerably more than any shorter Term savings deposit in any other Bank, would have produced.

If you would like to consider such a 6 Year Hybrid Time Deposit/SSD, or a 5 Year Time Deposit/SSD, that me and my friends invested in, contact me, via e-mail.

If you don't fully understand something that I posted, or have a question that I have not yet covered with an explanation/answer, or simply disagree with what I wrote - post a Comment (or send me an e-mail).


Brit in Cebu


Anonymous said...

Hi there Brit in Cebu,

I've been reading your blogs with interest and I would like to know if you still have these 5 or 6 Year Time Deposits at these Banks. I am currently living in the UK and I too placed a 5 Year 'Double Your Money' TD at Accord Savings Bank over 3 years ago. The said bank was recently acquired by Philippine Farmers Bank of which I know very little about. What do you know of this bank? Is it stable? I'm beginning to worry because of the economic situation around the world.
I'm thinking of retiring to the Philippines when my accounts have matured by I'm losing sleep at the moment.....

David Whittall said...

My first Rural Deposit was in March 2005, into a 5 Yeast Peso CTD.

I have received (20/12)% for 40 of the 60 Month Interest payments. So 2/3 complete, and 1/3 to go.

To discover more about 'Farmers Bank' why not follow the Thread on that Topic on PMT Forum?

Anonymous said...

hi i've read your blogs..can i get your e mail address? I would like to ask a few question..thanks

David Whittall said...

You can send an e-mail to me, by clicking on my 'profile', but as you are 'anonymous' no way fop me to contact YOU?