Depositors beware: Deposits derived from unsafe and unsound practices are not covered by deposit insurance. Philippine Deposit Insurance Corporation (PDIC) President Jose C. Nograles said that the amended PDIC Charter (Republic Act No. 9576) which took effect on June 1, 2009 contains specific provisions that exclude certain deposit products from the benefit of deposit insurance. Deposits sourced from unsafe and unsound banking practices are among those excluded from the PDIC deposit insurance coverage.

“Now we have a new Charter that supports our position that deposit insurance should not be exploited to support unsafe, unsound and fraudulent practices of unscrupulous bank owners, officers and employees,” PDIC President Jose C. Nograles said. “PDIC will adopt the guidelines in BSP Circular No. 640 on unsafe and unsound banking activities. This shall be supported by PDIC regulations on the matter.” Nograles added.

BSP Circular 640 dated January 16, 2009, lists 23 activities which may be considered unsafe and unsound banking practices. The list includes excessive reliance on large, high-cost or volatile deposits/borrowings. The BSP clarified that a bank is considered offering high-cost deposits/borrowings if the effective interest rate paid on said deposits/borrowings and/or cash incentives is 50% over the prevailing comparable market median rate for similar bank categories. Engaging in speculative and hazardous investment policies and paying excessive cash dividends in relation to the capital position, earnings capacity and asset quality of the bank are also among the practices listed in the Circular as U and U.

Under the revised PDIC Charter, deposit accounts or transactions constituting, and/or emanating from unsafe and unsound banking practice/s will not be covered by deposit insurance. The same rule applies for deposits that are unfunded, fictitious or fraudulent, and deposits that are determined to be the proceeds of an unlawful activity as defined by the Anti-Money Laundering Act of 2001 (Republic Act 9160 as amended). PDIC is now authorized under the law to issue a cease and desist order against such deposit accounts or transactions. This will also serve notice to other banks engaged in U and U and deter said practices which endanger depositors and the bank themselves.

“We championed this amendment to the PDIC Charter because it safeguards against the maneuverings of individuals and entities that victimize depositors who put their trust in the banking system. Given a strengthened Charter, PDIC is adequately equipped to combat fraudulent, unsafe,
and unsound enterprises that compromise the stability of our banking system and take advantage of the deposit insurance system provided by the government,” Nograles said.

The PDIC is at present preparing the relevant Regulatory Issuances (RIs) for the implementation of the new authorities provided for under its amended Charter. It is also studying new rules and regulations to strengthen PDIC’s regulatory oversight over banks.