Philippine Deposit Insurance Corporation (PDIC) President Jose C. Nograles said that the Corporation’s Legal Affairs Sector is studying the possibility of treating interest paid by closed banks using unusually exorbitant rates as interest overpayment.

The amount of overpayment represents the difference between the excessively high interest rates paid by the bank and the prevailing market rates at the time of placement. This will be netted from the amount to be paid for deposit insurance claims. The rate reduction will start to apply at the time the deposits were placed. Corollarily, PDIC is mulling the amendment of Section 10 c(8) of the PDIC Charter to enhance said authority to reduce interest rates.

Nograles said that this move will discourage depositors from placing their money in get-rich-quick schemes as well as safeguard the Deposit Insurance Fund (DIF). “This is a way to mitigate moral hazard and abuse to the DIF which is the funding source for deposit insurance payouts”, Nograles stressed. 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.

Recent experiences point to the existence of “seasoned depositors” who deliberately look for distressed banks offering excessive interest rates, unmindful of the risks, because when the bank closes, their deposits are covered by insurance. In some instances, 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.

Under its amended Charter, PDIC is also authorized to exclude from deposit insurance deposit products found to have emanated from unsafe and unsound banking practices. Nograles clarified that the proposed measures are not aimed at punishing depositors. “It is very difficult to combat moral hazard but these proposed measures will prevent fraudulent get-rich-quick schemes from thriving”, he added.

The PDIC President urged the depositing public to remain cautious against banks that offer deposit products with inordinately high interest yields, without corresponding assets to match. Generally, the higher the interest rate, the greater the risk. In fact, if a bank relies excessively on large, high interest deposits, this is considered an unsafe and unsound banking practice by the Bangko Sentral ng Pilipinas (BSP) as contained in its Circular 341. 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.

In a related development, PDIC had earlier launched a nationwide advocacy for safe and responsible banking under its “Be a Wise Saver” campaign. This aims to educate depositors so that they will be able to make informed financial decisions. The campaign promotes the 7 Habits of a Wise Saver namely: 1) Know your bank, 2) Know your bank product, 3) Know your bank’s services and fees, 4) Keep your bank records safe and updated, 5) Transact only inside the bank with authorized bank personnel, 6) Be informed about PDIC deposit insurance and 7) Be cautious. The 7th habit calls on depositors to simply walk away from offers that are too good to be true.

PDIC’s campaign is in collaboration with the BSP and the major banking groups namely, the Bankers Association of the Philippines, Chamber of Thrift Banks, Rural Bankers Association of the Philippines and the Bank Marketing Association of the Philippines. Various roadshows in colleges and universities nationwide have been conducted to actively promote the Be A Wise Saver campaign.