(First of four parts)

MANILA, Philippines—A number of province-based financial institutions were becoming a source of worry for officials at the country’s central bank Bangko Sentral ng Pilipinas (BSP) and Philippine Deposit Insurance Corp. (PDIC) as early as 2005.

Back then, Ricardo Tan recalled that he was alerted by former Prime Minister Cesar Virata—who was then president of the Bankers Association of the Philippines—to the growing proliferation of “double-your-money” schemes that were being used to attract investors into putting their money in little-known financial institutions and rural banks.

“[Virata] called me up and told me that there were people soliciting deposits all over the country, offering double-your-money [schemes] and cars as incentives,” said Tan, who was at that time the president and CEO of PDIC, the government agency tasked mainly with insuring the people’s deposits in failed banks.

A probe of the banks that offered these schemes led to one name: Celso de los Angeles Jr., an Ateneo de Manila University and Asian Institute of Management graduate who already had previous entanglements with regulators in the 1980s.

Battery of lawyers

“We invited him (De los Angeles) to our office to learn more about his business, and to my surprise, he showed up with a battery of lawyers,” Tan said.

The Philippine Daily Inquirer tried repeatedly to contact De los Angeles—who is now mayor of Santo Domingo, Albay—through his legal counsel, publicists, political allies, and at his offices to get his side, to no avail.

What followed and preceded this meeting was a chain of events that was directly linked to the BSP decision to close 13 small rural banks across the country just a few days before the long holiday break of December 2008, according to the former PDIC chief.

Fictitious deposits

“We conducted a probe based on the complaints of depositors,” Tan said.

“What we found were fictitious deposits, [rotating] collateral from one bank to the other, unsafe and unsound [banking practices] and improper documentation.”

However, a weak regulatory and legal system—and the alleged involvement of high-profile politicians—also meant that PDIC would shell out 250 percent more to cover the banks’ insured deposits three years later.

“When I left PDIC [in April 2006], our exposure to [De los Angeles’] 12 banks [in terms of insured deposits] was P4 billion,” Tan said in an interview with the Inquirer. “Since then, PDIC’s exposure has risen to P14 billion.”

This represents an increase of 250 percent in the banks’ deposits in two years, or 125 percent per annum—a phenomenal rate of growth that not even the best banking brands anywhere in the world could match.

Taken over by PDIC

More surprisingly, these deposits were drawn to small banks which, according to the central bank, were found to be insolvent—bankrupt—in its annual examination only a year later.

These banks linked to the Legacy Group are Rural Bank of Parañaque, Rural Bank of San Jose (Batangas), Rural Bank of Carmen (Cebu), Pilipino Rural Bank, Philippine Countryside Rural Bank, Rural Bank of Calatagan (Batangas) [now Dynamic Rural Bank], Rural Bank of DARBCI, Rural Bank of Kananga (Leyte) [now First Interstate Rural Bank], Rural Bank of Bisayas Minglanilla [now Bank of East Asia], San Pablo City Development Bank, Bicol Development Bank, Nation Bank and Rural Bank of Bais.

These banks closed voluntarily in late 2008 and were taken over by PDIC early this month.

PDIC president Jose Nograles said these banks held a combined P14.032 billion in insured deposits in 132,642 bank accounts—all holding amounts at or below the P250,000 limit of the deposit insurer.

Regulators could only shake their heads in amazement at the “aggressive marketing methods” that allowed 13 undercapitalized banks representing less than 1 percent of the country’s 1,359 rural banks, to attract a total of 12 percent of the rural banking system’s P116.5 billion in deposits.

Amazing

“It’s amazing how [De los Angeles] has been able to get away with this,” Tan said.

Yet, according to records of the central bank, this is not the first time that De los Angeles has shown up in its cross hairs and emerged unscathed.

Could the Filipino people have been spared billions of pesos that the government must pay to tens of thousands of bank depositors had regulators acted earlier against alleged malpractices in the so-called Legacy Group of rural banks?

More importantly, could bank regulators have acted more effectively in protecting depositors’ funds without politics interfering in their official functions? (To be continued)