Why rural banks failed? A reader's response

It has been a month since the rural banks belonging to the Legacy Group collapsed and the only news we got came from the Philippine Deposit Insurance Corp. (PDIC) was that they would service the depositors who have less than P250,000 in savings deposit with those 12 ill-fated rural banks. As of this writing, we still didn’t get any reply from anyone from the Bangko Sentral ng Pilipinas (BSP) on the question we asked as to why these 12 rural banks failed almost simultaneously. If BSP officials think they are blameless for this incident, they better think twice as their silence is deafening! 

Meanwhile, someone e-mailed me a letter in response to my Jan. 19 article when we raised a lot of unanswered questions on why these rural banks failed. I was requested to withhold the name of my source as he used to work in a rural bank. But since his letter is lengthy and self-explanatory, I will only put in the most telling details of his letter. 

“Dear Mr. Bobit, This letter is in connection with your article entitled ‘A Lot of Unanswered Questions on Rural Banks’ published on 1/19/09. I had worked in a rural bank based in my province for 22 years, prior to my immigration to the US. As a loan appraiser/credit investigator, I mingled with Bangko Sentral ng Pilipinas examiners every year during the annual audit performed on our bank. I guess, I can give you some answers to your article as to why rural banks fail in their mission to help the poor farmers and small-scale entrepreneurs on their financial needs and to safeguard the deposits of lowly depositors.

“If the examiners under the Department of Rural Banks of the BSP (Bangko Sentral ng Pilipinas) honestly do their assigned task to check the compliance of said RBs with the accepted banking rules and policies of the BSP, there is no way that they cannot detect the mismanagement of these RBs before their financial collapse. The truth is, there is an unholy alliance or if you may, collusion between the examiners and the management of troubled banks. It is a fact that when a rural bank is suffering from liquidity problem its management will wine and dine these examiners to buy their silence and even extend expensive gifts and sometimes cash in exchange for a better report to their head office. I was designated by our bank to have the duty to buy the loyalty of these examiners.

“The mismanagement of the RBs normally involves excessive or unauthorized expenses by their directors, officers, stockholders, and related interests or DOSRI. There is no way that an honest examiner cannot detect the violation of such guidelines by the BSP as they audit the book of accounts of every RB. Also, another area where there is a glaring collusion between the BSP examiners and the management of RBs is the granting by the RBs of fictitious and/or indirect loans whose beneficiaries are people managing them.

“During the confirmation of loans to have undertaken by examiners, they are supposed to confront and determine the names of the borrowers, the amount of loan proceeds and how these were utilized, as recorded in the books of the RB. I used to accompany the examiners during such loan confirmation and they knew that there were borrowers who were relatives or friends of the manager/president of the RB and were granted loans whose amounts were not equitable with the capacity of the borrowers to repay such loans.

“As a loan appraiser/credit investigator of an RB though I refused to recommend the granting of such loans, but I could not disobey the verbal order of the manager/president lest I would be fired from my job. I explained such situation to the examiners but to no avail. Take note that these BSP examiners have their own allowances for board and lodging and gas for their vehicles provided by the government and so it is people’s money. Most of the time, during my exposure to these scoundrels, they even asked for gasoline and hotel receipts. I am sure that such receipts will be charged to their offices or cash reimbursement and they would end up pocketing the proceeds.

“The corruption in RBs does not end with the BSP examiners under its Department of Rural Bank Sector. Even the people of the BSP at the regional offices also demand gifts during Christmas and during their occasional visits to the RBs’ offices. RBs should accede to their persuasion since their help are needed for the RBs’ rediscounting privileges to have smooth sailing in their regional offices. In exchange for such bribes, the examiners will play blind and dumb and even teach the RBs’ accountants and bookkeepers on how to book such illegal charges. Mr. Bobit, take note that most RBs, which are family-owned or controlled with dummy directors/stockholders, can easily manipulate the records of the RBs and in the end go bankrupt when they can no longer cover cash deficiencies. As they say, ‘It takes two to tango, leaving the depositors blind.’” 

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For e-mail responses to this article, write to [email protected]. Bobit Avila’s columns can also be accessed through www.philstar.com. He also hosts a weekly talkshow, “Straight from the Sky,” every Monday, 8 p.m., only in Metro Cebu on Channel 15 of SkyCable.