When I learned that the under-capitalized Rural Bank of Parañaque (RBPI) has been placed under receivership and was taken over by PDIC last week, Barbra Streisand’s song “Some Good Things Never Last” came to mind. (I actually listened to the song via YouTube right before I wrote this piece.) The thousands of depositors of RBPI must have been thinking the same thing besides, of course, worrying to death if and when they can get their money back.

The “good” thing being referred to here is the high-yielding time deposit accounts that RBPI has been offering to the public for years. To most people there’s nothing better than an investment that guarantees earnings of 18%-20% per annum. With a screaming headline like “18% PER ANNUM, 5-YEAR TIME DEPOSIT WITH TAX-FREE INTEREST PAID MONTHLY” I’m pretty sure a lot of people were enticed to put their money into RBPI’s TD accounts. PDCs were even issued, obviously, to assure depositors that they will get paid.

I wouldn’t be surprised if there are depositors who will stand to lose hundreds of thousands if not millions of the money they deposited in RBPI. The bank has been very aggressive in marketing its high-interest TDs, paying non-bank agents to push the product to the general public. A close friend is, in fact, one such agent. Judging from the bank’s deposit liabilities of P5.4 billion to 37,000 depositors, their marketing was quite effective.

Curiously, I haven’t read or seen an advertisement that the bank itself published. All the RBPI ads I came across were made, presumably, by agents. You will see these ads all the time in a popular and widely circulated twice-weekly ad magazine. My email inbox also gets a weekly dose of such advertisements. Actually, these ads didn’t specifically mention that the bank is RBPI but the way they describe the bank (50 year old rural bank with a branch in Pasig City, for example), I bet my bottom peso they are referring to the Rural Bank of Parañaque.

Agents are so enthusiastic and aggressive in pushing RBPI’s TD accounts that they go to great lengths in defending the bank’s extraordinary money-making scheme when questions about its legality and sustainability arise. Here’s an actual special note included in the email I got from one of the bank’s agents:

“How can the Bank offer 20% annual when bigger banks can at best do 6%? Rural Banks have more diversity, flexibility, and ability to see opportunities - and together with lower overheads and government incentives (including lower taxes), they are able to generate income at much higher margins - and that translates to being more capable of giving higher interest rates. An analogy would be a large restaurant vs. a small eatery - the owner of the eatery easily multiplies his money within the day. He triples his money within a day - a phenomenon deemed impossible by large businesses - and yet we all know this is true.”

This may be true on a smaller scale but if you are already talking of billions of pesos, generating such high margins consistently over a long period is simply not possible, especially for a relatively small company like RBPI. So, what do you do if earnings from your operation can no longer pay the promised interests? You keep on soliciting deposits from the public to keep the money flowing. And when not enough deposits are coming in? The house of cards start to crumble.

You can’t blame me if I see some similarities in what has happened to RBPI to what befell Multitel several years ago. Both kept soliciting funds from the public and promising high returns even though it was obvious that their business operations couldn’t generate the necessary earnings to support such high interest payments. The big difference is, RBPI’s operation was legal and they had the authority to solicit funds from the public. And the bank could allay depositors fears because their money is insured by PDIC up to P250,000.

This is one reason why some quarters are worried that the planned increase in the maximum amount of insured deposit, from P250,000 to P500,000 or P1 million, may lead some banks to take unnecessary risks or become careless in growing their depositors’ money. The planned increase in deposit insurance coverage is good not just for depositors but also for the banking system as a whole. However, more stringent rules should be instituted and close monitoring implemented to protect the investing public and prevent more banks from tumbling down one after the other.

What happened to RBPI and two of its “sister” banks in Cebu, which also declared a bank holiday last week, should knock some sense into our heads and make us all more discerning and prudent in our investment decisions. Remember that some good things never really last. In fact they can even turn out bad. If you disagree, go talk to depositors of RBPI who couldn’t buy gifts and prepare for noche buena this Christmas because they can’t get their hands on their own money.

In less than two weeks it will be Christmas. Despite the economic gloom and financial hardships that have hit hard this year find time to enjoy and relax this holiday season so you can face the coming year with renewed vigor. To one and all, MERRY CHRISTMAS!

Posted: December 15, 2008
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