Banking and Finance Industry

[kiretoce]

Filipinos turn to pawnshops instead of banks for quick cash

A woman in a T-shirt and sandals wanders into a pawnshop in the busy shopping district of Pasay city in the Manila metropolitan area.

She pulls a blue piece of paper from her pocket and hands it to the store clerk along with 3,000 pesos (about 7,080 yen).

A few minutes later, the clerk returns and hands her back her gold necklace. The pawnshop had been keeping it as collateral for a loan.

"I had to hand over the necklace because I did not have enough money to pay my house rent. I couldn't wait until the day when my husband, who works in South Korea, got money to me," she said.

The necklace comes and goes between her and the pawnshop several times a year. The woman has no qualms about the exchange.

"I bought it to use as collateral. I pawn my own stuff, so I don't feel guilty."

In less than five minutes, another customer shows up. She hands over a necklace and receives 1,800 pesos (about 4,250 yen).

"My daughter is sick. But I bought a personal computer. (So now I need some extra cash)," she said.

The store is an outlet of Ablaza, a pawnshop chain operating in the Manila metropolitan area. The store is one of the busiest pawnshops in the area.

Many of the customers borrow about 1,000 pesos each, said 38-year-old clerk Marilou Fajardo, who has worked at the store for 18 years.

She says she gets an insight into the lives of her customers when they pawn their articles.

One man comes to her throughout the year to pawn his wedding ring. Each time, he comes back several days later to return the money and take back the ring.

A female customer comes to pawn an item and begins weeping as she starts talking about her personal life.

Fajardo smiles as she says that when she appraises the value of her customers' goods, she does not think about the memories attached to the items or hardships of their lives.

But she also says, "When I think that I'm useful to the customer, I feel that this job is worth doing."

The pawnshop business is said to be the oldest financial service in humankind's history. In recent years, it has been growing rapidly in the Philippines.

According to the Bangko Sentral ng Pilipinas (BSP), the central bank of the Philippines, as of December 2006, there were about 13,000 registered pawnshops across the nation--three times more than in 1995.

The money lent by the pawnshops also grew to 10 billion pesos (23.6 billion yen) in 2004 from 5.5 billion pesos (13 billion yen) in 1995.

One of the reasons the business has grown so much is because of the convenience and immediacy in which customers can receive loans.

The average turnaround from the appraisal of items to lending money is only about 20 minutes. It is much shorter than those required by banks, which implement complicated examinations and procedures.

The interest rates stand at around 5 percent compounding every 30 days, much lower than those of loan sharks.

Despite the common perception, the borrowers are not necessarily poor. Rather, many of the customers are middle-class people who have family members working abroad.

In the Philippines, more than 10 percent of its gross national product (GNP) comes from people working abroad. Many family members depend on this money to survive.

Also Filipinos have little interest in saving money.

A survey shows that families with members working overseas save only 1 percent of the money they get from overseas. When they spend all their cash, they are forced to pawn items such as pieces of jewelry, to get funds to survive. They use the cash until the next lot of money arrives from overseas.

Marc Ablaza, 40, an executive of Ablaza, said that about 60 percent of its customers come back in order to return money and take back their belongings. It was about 30 percent 10 years ago.

"The sharp rise implies that people who will probably be able to return the money are increasingly using pawnshops," he said.

Meanwhile, at a gem appraisal school in Manila, about 80 percent of the students are pawnshop employees, including those who want to open pawnshops themselves.

While listening to their lecturer, they stare at the 0.5 carat diamonds they hold with their thin tweezers.

"Recently, demand for gemologists who can appraise the value of diamonds has been strong," said the school principal, Lucille Bocobo.

She said most pawnshops have their own in-house training systems to teach their employees how to appraise gems. Recently, however, more expensive gems have been increasingly brought to pawnshops making a higher level of appraisal skills more necessary. That's why they are sending their employees to the school.

According to Ablaza, the image of pawnshops used to be dark. Many of their customers were those who had gone broke. Some of the items brought to the shops were stolen ones.

In the 1990s, a growing number of families with members working abroad began using pawnshops. The stores began revamping their interior designs and processes to make it easier for customers to borrow money.

The Ablaza chain painted all of its outlets in light blue and opened shops with female-only clerks so that women could borrow money without anxiety.

The largest pawnshop chain operator, Cebuana Lhuillier, began to air TV commercials in 1994. Since last year, the company has used a catchphrase which emphasizes its higher appraisal rates compared to other pawnshops.

Competition among pawnshops is increasingly becoming fiercer. And the Philippines is not the only country where the popularity of pawnshops is growing. In other countries, such as Indonesia and Sri Lanka, banks are also opening pawnshops.

According to Nimal A. Fernando, a researcher at the Asian Development Bank (ADB), only state-run companies can operate pawnshops in Indonesia. There are now 722 pawnshops throughout the country. About 15 million people used the shops in 2001.

"The number of customers shows that the pawnshops are now a part of the people's lives," said Fernando.

About 40 percent of them borrow less than the equivalent of $4.5 (about 520 yen) each time.

A local bank in Sri Lanka extended 40 percent of its loans by accepting pawned items in 1999.

Pawnshops still have a negative image with some considering their management style dubious or feeling they are exploiting poor people.

But Fernando said: "If you check the actual situation surrounding pawnshops, you will see that pawnshops are a financial service that is necessary for many people.

"You should put away your prejudice against pawnshops and reconsider their roles," he said.

[jgacis]

Seems like a pawnshop is the Philippines version of microlending....

[kyle@1008]

kaya pala ang yaman ng mga Lhullier...

[-TC-]

Rural Banks and Double Your Money Schemes
By Dr. Johnny Noet Ravalo
INQUIRER.net
Last updated 12:59pm (Mla time) 05/10/2007

What can you say about the 20% interest per annum paid by some rural banks? Interest is paid monthly, covered by the PDIC, tax exempt, with five years maturity. In five years, a time deposit of P1 million will double to P2 million plus? -- Geno Real

A rural bank in my place offers an interest rate of six percent for a regular deposit and as much as 10% for a time deposit. Is the risk worth taking? I will only deposit the amount covered by the PDIC, Where can I check the strength of a rural bank to evaluate the risk I may be taking? Chester Barcenas

Geno, Chester, your respective inquiries are quite similar so let me just take them together.

What is probably being offered to you Geno is a double-your-money type of deposit. This takes advantage of a provision in the law that exempts 5-year deposits from the final withholding tax. With this tax break, you would only need an interest rate of 14.8 percent to double your money in five years.

What are the risks to these? The same law that exempts you from the withholding tax says that if you withdraw before the five years are up, you have to pay the tax. The risk here is whether you have enough resources elsewhere to keep you from withdrawing the money you put in the potentially 5-year deposit. If liquidity is an issue, the chances of doubling-your-money in five years are quite remote.

Oh, just to be safe Geno, please make sure that the bank is indeed offering you a deposit instrument that is duly covered by the Philippine Deposit Insurance Corp.

In both of your questions, the deposit rate being offered is something you should think about. For banks to continue operating, its lending and investment operations have to earn a premium over the deposit rates it pays out.

Under present reserve requirements (that’s the portion of funds banks are required to keep as reserves), this premium would be roughly 27 percent. That means a 10 percent deposit rate translates to a 12.7 percent loan rate to fund itself. This is before taxes, before administrative costs, before regulatory fees and before any premium for taking the additional risks.

Make a judgment if the deposit rates these rural banks are offering seem reasonable to you given its environment and business because, no matter how you spin the calculations, these are the hurdle rates the bank must face to continue doing what it is doing.

The insurance provided by PDIC is a safety net. It should not be counted on as a first way out. The insurance should not give you a false sense of security. The point here is a commonly cited tenet in risk management: 100 year wars do not happen often but they do happen. And when they happen, the chances of you outlasting the war aren't too bright either.

When all have been said and done, the ultimate issue goes back to something Chester asked. It would still be part of your due diligence to judge the stability of your potential bank. It is your money so take the pain to make an informed choice of which bank you can trust with your money.
It all boils down to "trust". Thankfully, this does not have to be a leap of faith since there are clear tangible issues that you can consider and evaluate. But it is also not an exact science. Ask around the place what people think of the bank. Some will like it, others will have their own gripes here and there.

Rafael B. Buenaventura, the former Governor of the Bangko Sentral ng Pilipinas and an internationally seasoned banker was often heard saying: if it sounds too good to be true, it probably is.

Take heed. That is very wise counsel from a man who I consider to have very, very few equals.

(Noet Ravalo is the first Filipino to earn a PhD in Economics from Boston University and is a macro-financial economist by practice and profession. He was chief economist of the Bankers Association of the Philippines until 2002 and has since been doing consulting work for multilateral and foreign agencies. His current engagements are with the Bangko Sentral ng Pilipinas and the PDS Group. Over the past 12 years, he has been asked to provide technical inputs to both the Senate and the House of Representatives on various economic and financial legislation, some of which will have big impact on Filipinos’ personal finances.)

[ravenhawk]

PNB used to have that same package several years back. My aunt placed her money in that account. Pero in todays booming market parang lugi ka. Since entering the Stockmarket October last year my portfolio investments had increased by as much as 300% though bulk of which came from some very succesfull IPO's and very risky stockmarket moves like putting all your funds in single company. Which I did twice at TUNA and GEO and investing in third liners. I guess if you have more time to research and study I think it's better to invest the money yourself than let your banker do it for you. Narealize ko din yan sa UITF's parang feeling ko mas matino pa akong fund managers kesa sa kanila. So I decided to pull out and do all the investing myself. Yun nga lang I have to take all the risk and made extra effort to research.

[Risk Taker]

Originally Posted by tcchua

Rural Banks and Double Your Money Schemes
By Dr. Johnny Noet Ravalo
INQUIRER.net
Last updated 12:59pm (Mla time) 05/10/2007

What can you say about the 20% interest per annum paid by some rural banks? Interest is paid monthly, covered by the PDIC, tax exempt, with five years maturity. In five years, a time deposit of P1 million will double to P2 million plus? -- Geno Real

A rural bank in my place offers an interest rate of six percent for a regular deposit and as much as 10% for a time deposit. Is the risk worth taking? I will only deposit the amount covered by the PDIC, Where can I check the strength of a rural bank to evaluate the risk I may be taking? Chester Barcenas

Geno, Chester, your respective inquiries are quite similar so let me just take them together.

What is probably being offered to you Geno is a double-your-money type of deposit. This takes advantage of a provision in the law that exempts 5-year deposits from the final withholding tax. With this tax break, you would only need an interest rate of 14.8 percent to double your money in five years.

What are the risks to these? The same law that exempts you from the withholding tax says that if you withdraw before the five years are up, you have to pay the tax. The risk here is whether you have enough resources elsewhere to keep you from withdrawing the money you put in the potentially 5-year deposit. If liquidity is an issue, the chances of doubling-your-money in five years are quite remote.

Oh, just to be safe Geno, please make sure that the bank is indeed offering you a deposit instrument that is duly covered by the Philippine Deposit Insurance Corp.

In both of your questions, the deposit rate being offered is something you should think about. For banks to continue operating, its lending and investment operations have to earn a premium over the deposit rates it pays out.

Under present reserve requirements (that’s the portion of funds banks are required to keep as reserves), this premium would be roughly 27 percent. That means a 10 percent deposit rate translates to a 12.7 percent loan rate to fund itself. This is before taxes, before administrative costs, before regulatory fees and before any premium for taking the additional risks.

Make a judgment if the deposit rates these rural banks are offering seem reasonable to you given its environment and business because, no matter how you spin the calculations, these are the hurdle rates the bank must face to continue doing what it is doing.

The insurance provided by PDIC is a safety net. It should not be counted on as a first way out. The insurance should not give you a false sense of security. The point here is a commonly cited tenet in risk management: 100 year wars do not happen often but they do happen. And when they happen, the chances of you outlasting the war aren't too bright either.

When all have been said and done, the ultimate issue goes back to something Chester asked. It would still be part of your due diligence to judge the stability of your potential bank. It is your money so take the pain to make an informed choice of which bank you can trust with your money.
It all boils down to "trust". Thankfully, this does not have to be a leap of faith since there are clear tangible issues that you can consider and evaluate. But it is also not an exact science. Ask around the place what people think of the bank. Some will like it, others will have their own gripes here and there.

Rafael B. Buenaventura, the former Governor of the Bangko Sentral ng Pilipinas and an internationally seasoned banker was often heard saying: if it sounds too good to be true, it probably is.

Take heed. That is very wise counsel from a man who I consider to have very, very few equals.

(Noet Ravalo is the first Filipino to earn a PhD in Economics from Boston University and is a macro-financial economist by practice and profession. He was chief economist of the Bankers Association of the Philippines until 2002 and has since been doing consulting work for multilateral and foreign agencies. His current engagements are with the Bangko Sentral ng Pilipinas and the PDS Group. Over the past 12 years, he has been asked to provide technical inputs to both the Senate and the House of Representatives on various economic and financial legislation, some of which will have big impact on Filipinos’ personal finances.)

Aside from the Legacy Group rural banks, meron pa ba iba that offers this promo now? parang sila lang ata alam ko nag o offer nito eh.

@ravenhawk yes pnb offers this promo but that was many years ago already. I was able also to avail of their promo and most of my friends avail also. At least PNB is a bigger and stable bank compared to this rural banks kaya medyo ok lang.

[-TC-]

Originally Posted by Risk Taker

Aside from the Legacy Group rural banks, meron pa ba iba that offers this promo now? parang sila lang ata alam ko nag o offer nito eh.

Unless you are really a risk taker as your handle suggests... I wouldn't touch them with a 10 foot pole if I were you.

[Risk Taker]

Originally Posted by tcchua

Unless you are really a risk taker as your handle suggests... I wouldn't touch them with a 10 foot pole if I were you.

i have not taken that risk yet and it's never been an option but i'm very much interested with your inside information. thanks

[sandrn]

Foreign banks 2006 profits jump 37.7%
05/27/2007 | 06:11 PM
http://www.gmanews.tv/story/44029/Fo...ofits-jump-377

Foreign banks in the country sustained record-high profits in 2006 from trading government securities amid declining interest rates and from high-margin but low-risk consumer lending.

The annual report submitted by the Bangko Sentral ng Pilipinas (BSP) to Congress revealed that foreign banks yielded a net income after tax (NIAT) of P12 billion, up 37.7 percent from P8.7 billion in 2005.

The BSP detailed this in the Annual Report on the Implementation of Republic Act No. 7721 (An Act Liberalizing the Entry and Scope of Operations of Foreign Banks in the Philippines and for Other Purposes).

The BSP said in the report that strong trading gains allowed banks to rake in profits as well as the resumption of lending activities.

The BSP said the general decline in interest rates on debt securities and the substantial foreign exchange transactions translated to huge trading income, which soared by 180.6 percent and propelled the industry's non-interest income by 48.3 percent.

On the other hand, the BSP said the fee-based income of foreign banks grew by 12.2 percent and contributed almost P1 billion to their non-interest income.

Meanwhile, the BSP said interest income from lending rose more modestly by 8.5 percent or P3.9 billion attributable to the growth in foreign bank lending.

But investment dropped faster during the period and together with the increase in interest expenses due to rising deposit liabilities, the overall net interest income grew by only 5.9 percent for the whole of 2006.

For the year, the BSP said the operating expenses of foreign banks rose by 18 percent or P4.9 billion due to higher provisioning for probable losses which led to a 37.2 percent increase along with the 14.4 percent increase in other operating expenses.

Across foreign banking groups, the BSP said new foreign bank branches were consistently the most efficient in their operations, posting the lowest cost-to-income (CTI) ratio of 45.8 percent, down from 46 percent in 2005.

The four original foreign bank branches were second with a CTI ratio of 58.2 percent (down from 56.7 percent) while foreign bank subsidiaries posted the highest CTI ratio of 96.3 percent (up from 89.9 percent).

In comparison, the CTI ratio of domestic banks was recorded at 68.7 percent.

The BSP said the total resources of foreign banks were also at an all-time high of P647.5 billion, rising by 11.5 percent, principally funded by deposit liabilities and channeled primarily to loans and cash and due from banks.

Loans grew by 25 percent in 2006, the BSP said, supported by expansion in the industry's credit exposures to all economic activities except manufacturing and utilities.

The BSP said the financial intermediation sector was still the biggest beneficiary of foreign banks' loans where lending soared by 44.7 percent. The share of community, social and personal services lending also increased to 15.6 percent, overtaking the manufacturing sector whose share fell to 13.8 percent.

On the other hand, the BSP's annual report on foreign banks said the industry's non-performing loans dropped to 1.4 percent of their total loan portfolio as a result of improvements in credit risk management and asset clean-up.

On the whole, the BSP said the NPL of foreign banks fell by 28.3 percent. - GMANews.TV

[kiretoce]

Bank wants bigger share of rich Pinoys

A universal bank is capitalizing on the Philippines’ growing market of “mass affluent customers” as it intensifies its wealth management service.

Hong Kong and Shanghai Banking Corp. (HSBC) Philippines president and chief executive officer Mark Watkinson said there are about 200,000 individuals in the Philippines who belong to the mass affluent market and they are the focus of HSBC’ redefined Premier, a global wealth management service.

Watkinson, during the launch of the new Premier, said the mass affluent market are people who are “open-minded and future-oriented, well traveled, modern, unpretentious yet ambitious, and see the world as full of opportunities to learn, grow, and get the most out of life.”

He said this market has liquid assets of $100,000 to $2 million. “There are around 200 million in this segment around the world,” he added.

Freedom

“While the affluent still value being recognized as important individuals, they no longer pursue wealth just for wealth’s sake but as an enabler to have the freedom and time to enjoy the things that matter in life like good health, knowledge, family and life experiences,” Watkinson said in a statement.

Because of this, he said the mass affluent demand for a comprehensive wealth management service that will take care of their finances wherever they travel.

This is why the bank has redefined HSBC Premier, a global wealth management service providing personalized assistance with the help of the bank’s “relationship managers.”

The enhanced Premier allows customers to take their bank accounts and credit history wherever they choose to live and work.

It also allows customers to transfer their credit history when moving abroad, to obtain credit facilities in other countries.

“In the US for example, it is difficult to get credit if you have no personal track record. But with Premier, your credit information is sent to the bank so you can have access to mortgage (and) loans, (among others),” Watkinson told a press conference last Tuesday at the Marco Polo Plaza Hotel.

Access

HSBC Premier customers are depositors who have accounts of at least $80,000 with the bank. They have access to their HSBC accounts through a single log-on online system, enjoy pre-approved loans for overseas property purchases subject to local regulations, pre-approved Premier MasterCard with waived annual fees and other privileges even while traveling abroad.

Clients also have access to round-the-clock worldwide emergency service, which can provide credit card replacement and emergency cash.

While other banks offer similar packages, HSBC Philippines senior vice president for wealth management Patrick Cheng said what is unique about Premier is that it “maximizes the use of international networks to help international clients.”

Cheng is optimistic that HSBC would get a good share of the mass affluent market in the Philippines because of the country’s strong economic boom.

“The market in the Philippines is more than ready because people want access to information. Filipinos are now globally inclined,” he said.

[-TC-]

http://www.bworldonline.com/BW062207/content.php?id=021

Another merger in the offing...
China Bank to merge with Manilabank
Businessworld
June 22, 2007

Sy-led China Banking Corp. (China Bank) will merge with Puyat-led Manilabanking Corp. (Manilabank) for a purchase price that will be concluded after a 30-day due diligence. China Bank, a listed universal bank, has agreed to buy 87.51% of the subscribed shares of Manilabank, a thrift bank.

In a statement, Manilabank Chairman Luis Puyat said the rapidly changing landscape of the Philippine banking industry has made it tougher for smaller banks to compete. The deal is yet to be approved by the Monetary Board and the Securities and Exchange Commission.

"It was a difficult decision for the family to let go of a business we have painstakingly built over the years. In looking for a partner, we were attracted by China Bank’s capital strength, financial stability, loyal customers and sustained profitability. We are gratified that Manilabank will become a crucial part of China Bank’s plans to become a strong major player in the industry," he said.

Reopened as a savings bank in June 1999, Manilabank’s total assets stood at P10.2 billion, loans at P4.4 billion and deposits at P5.2 billion as of December 2006.

The merger will expand China Bank’s network of 155 branches by another 75 branches from Manilabank, on top of the ongoing three-year branch expansion program of China Bank.
Of the 75 Manilabank branch licenses, 41 are for Metro Manila and 34 are for provincial areas.
However, only 27 are operating.

China Bank’s net income of P3.54 billion last year represented a return on stockholders’ equity of 15.93% and a return on assets of 2.47%. Its capital adequacy ratio of 28.35%, adjusted for credit risk, continues to be among the highest in the industry.

It said this places the bank in a position to pursue its three-year plan of accelerated loan growth and branch network expansion and comply with Basel 2, while providing satisfactory returns to shareholders through cash and stock dividends.

Peter S. Dee, China Bank president and chief executive officer, said the bank’s three-year business plan calls for an aggressive expansion of its distribution network, together with substantial growth in assets and loan portfolio.

"This acquisition will boost our branch network substantially to over 250 branches, including the expansion program we already started even before this deal," he said.

"With a bigger footprint and network through which we can sell and distribute our full range of products and services, we are now in a better position to compete more effectively with the bigger competitors in the banking industry," he added.

"We consider this deal a strong recognition of the inherent strengths of China Bank and the strong future that this combination of resources would mean for our combined client base," China Bank Vice Chairman Hans T. Sy said in a statement. Yesterday, China Bank shares closed 1.1% higher at P915.

[-TC-]

This has been a very good and popular investment product for my clients...

http://www.bworldonline.com/BW062207/content.php?id=051
Central bank defends liquidity mopping tack

By Ma. Eloisa Calderon
Businessworld
June 22, 2007

The domestic capital market is supported by still-abundant money supply in the financial system, Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco, Jr. said in a mobile text message to reporters yesterday.

He contested claims that the central bank’s special deposit facility has drawn investors away from other investment instruments.

Market players earlier called for a reversal of the BSP’s move to widen access to special deposit accounts (SDAs).

They argued that the facility resulted in investors’ waning appetite for local securities and other investment instruments.

The central bank made the SDAs, formerly limited to banks, available to trust units and state firms since May 10 in a bid to mop up excess liquidity, which it cited as a key driver of inflation.

Enough in the system

Compared with the benchmark 91-day Treasury bill which is being traded in the secondary market for around 3%, the SDA instruments carry a rate of as much as 7.8% for the three-month tenor, making the latter highly
attractive to banks and trust units.

Monetary authorities earlier estimated that trust units alone manage around P800 billion worth of funds.

Latest data from the central bank showed that the new monetary tool has, so far, siphoned off P182.8 billion from banks and trust units as of May 25.
"There is ample liquidity in the system," Mr. Tetangco’s "text" message read.

"What we need to ensure is that the inflation outlook remains favorable so interest rates would continue to be generally low and stable," he added.

Up for review

The BSP chief, however, did not rule out the possibility that the concerns of the capital market would be tackled during a Monetary Board rate-setting meeting scheduled for July 12.

Mr. Tetangco said the monetary tool is up for review during the policy meeting amid developments in reserve money data, which point to slowing money supply growth.

Latest data from the central bank showed that reserve money — a narrower definition of money supply consisting of currency issue and banks’ reserve balances with the BSP (net of cash in the vaults of the Bureau of the Treasury) — slid to P775.28 billion as of May 25.

The amount was significantly lower than the P796.99 billion worth of reserve money posted a week after the mop up operations began.

Working

Increases in reserve money translate into a rise in domestic liquidity.

M3, which is the total amount of money in the economy, had been expanding at rates of over 20% in the five months to April. It posted a 26.3% growth from March’s 24.6%.

Mr. Tetangco, however, was confident domestic liquidity should have started to decelerate starting May.

"We’ll look at M3 in our next policy meeting. The expectation is for it to decelerate," he said.

"Reserve money has gone down, so it means [the SDA] is working," he added.

[lazybum]

Originally Posted by Rene Ybardolaza

John, A little over ten years ago when I was working with The World Bank, we did an analysis of the real estate market and lending practices in the Philippines. At that time, the economy was doing well under the Ramos presidency, and the real estate market was appreciating fast. Given that rosy scenario, government agencies that were lending and providing guarantees had large portfolios of non-performing loans. The foreclosure process then (I don’t know the current practices) was very cumbersome. The system allows the foreclosed borrower one year of redemption period – a loooong amount of time for a non-performing loan to sit idle in one’s books. When I shared with a developer how the U.S. lenders do their foreclosure process, where the property is acquired by the bank in less than 120 days, the comment to me was, “masyadong malupit kayo.” On the personal side, my wife’s uncle, who was a councilman at the time, had been delinquent with his loan for over three years, and no one from the bank has sent him a notice of default. Obviously, there was inefficiency in the system.

Another difference we noted is the way Philippine banks look at non-performing loans in their portfolio. In the U.S., the bank’s objective is to get rid of non-performing asset as quickly as possible by giving it a haircut, sometimes selling assets 50 cents to a dollar, if necessary. Thus, the need for more reserves. The Philippine counterpart is not so willing to realize that loss in the balance sheet. There is cultural belief that property value cannot go below the original value when the loan was created. This is similar thinking in Japan. So instead of getting non-performing assets off their books, they wait for the value to rise – per market demand.

Another cultural difference is the way loans are underwritten. The U.S. lending practices is probably 25 years ahead of the Philippines, where loans are bundled, sliced and diced into securities (Mortgage-Backed Securities) for investors with different appetites for risk. This means loans must be originated with uniform documentation, standard underwriting practices, etc. In the Philippines, we found multi-million peso loans originated with no documentation – all done with a handshake. In a country where your face is more important than your signature, the handshake will do just fine. After the break-up of the Soviet Union, a lot of Americans went in to invest and lost their shirts because they lacked understanding of this cultural difference. The American placed a higher trust to the value of the pen, instead of the value of the person using the pen. Unfortunately, loans originated with a handshake do not have value if the lender wants to sell it to the secondary market.

In summary, what works for one country will not always work for the other. We just need to understand the differences and find commonalities that will allow us to work together efficiently.

Hello Rene,

I just want to share my observation to add to your very well-written analysis of lending practices in the Philippines.

Sometimes I find it amusing everytime I read or hear financial people (from both private and government institutions alike) talk about sound economic fundamental this or good lending fundamentals that. Frankly, I am not sure if they are just repeating their favorite corporate mantra. However, your first hand knowledge of how Philippine banks handle non-performing loans in their books, I thought was very interesting.

I do have a slightly diffrent take on this matter though. I think that to some extent, the lending practices in some of these Philippine banks is a reflection of the greater socio-political realities in Philippine society (ex. padrino system) where bank customers are treated differently depending on their socio-political status.

My ex-father in-law who is a third generation Irish told me that during his time, local banks in his town do practice preferential treatments of their customers also. But thank God, this is now a thing of the past, and as you know, the U.S. financial institutions belong to one of the most regulated industry on the planet - but IMO, it is a good thing as there is more transparency now in how they do business. Maybe it is time that the Banko Sentral Ng Pilipinas starts overhauling the lending practices in the country.

But you are right, U.S. banks are able to execute different vehicles to raise money and spread risks across a wide spectrum in such a manner that is so transparent to its customers.

Somebody mentioned Lorenzo Tan in this thread - Lorenzo is a former colleague of mine during my Citicorp days and he can tell you that during the time we where there, we have also seen a multi-million dollar loan commitment written on a piece of napkin...of course the customer was Donald Trump...and that is the rest of the story...

[pushstars]

Originally Posted by Rene Ybardolaza

John, A little over ten years ago when I was working with The World Bank, we did an analysis of the real estate market and lending practices in the Philippines. At that time, the economy was doing well under the Ramos presidency, and the real estate market was appreciating fast. Given that rosy scenario, government agencies that were lending and providing guarantees had large portfolios of non-performing loans. The foreclosure process then (I don’t know the current practices) was very cumbersome. The system allows the foreclosed borrower one year of redemption period – a loooong amount of time for a non-performing loan to sit idle in one’s books. When I shared with a developer how the U.S. lenders do their foreclosure process, where the property is acquired by the bank in less than 120 days, the comment to me was, “masyadong malupit kayo.” On the personal side, my wife’s uncle, who was a councilman at the time, had been delinquent with his loan for over three years, and no one from the bank has sent him a notice of default. Obviously, there was inefficiency in the system.

Another difference we noted is the way Philippine banks look at non-performing loans in their portfolio. In the U.S., the bank’s objective is to get rid of non-performing asset as quickly as possible by giving it a haircut, sometimes selling assets 50 cents to a dollar, if necessary. Thus, the need for more reserves. The Philippine counterpart is not so willing to realize that loss in the balance sheet. There is cultural belief that property value cannot go below the original value when the loan was created. This is similar thinking in Japan. So instead of getting non-performing assets off their books, they wait for the value to rise – per market demand.

I have to agree with this. When I was still working in the real estate industry, I was looking at that time some of the REPOAs of one bank. The property was located in a prime location but was way overvalued compared to the other properties near it. Still the bank was holding on to it even the property has been on the books for a long time.

Yes, they are not willing to realize that loss even though BSP requires them to put on an account of contingent losses in the balance sheet. I think this is just plain greed on the part of the bank. (in my point of view that loss has been already absorbed by that contra account)

Every year, Banks announcing all time earning but service has not been improving (damn sometimes you wait a long time in a queue). I think the Filipino people has being short changed since time and again.

[Dvorak]

may balita naba sa implementing rules nitong bagong batas na ito?? kelan kaya i o offer nang mga banko ito??

Lahat ba nang banks mag o offer nito?? Or thru SSS / GSIS lang ito??

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Explanatory Note:

About 6.2 million Filipinos or 20% of the country's total labor force are not covered by any type of retirement plan. This segment of the population is thus deprived of the privilege of enjoying security in their retirement years. As of December 2000, only about 23.22 private or self- employed employees are members of the Social Security System (SSS) and another 1.7 million government workers are covered by the Government Service Insurance Funds administered by the Government Service and Insurance System (GSIS).

Savings accounts can not be depended upon to provide financial security to these Filipinos since most families barely make both ends meet and are thus not able to save very much. Moreover, retirement or pension plans being offered by pre-need companies are quite expensive and can only be afforded by high salary earners. A savings scheme is thus needed to encourage the majority of Filipinos to save for their retirement years. The Personal Equity Retirement Account (PERA) is a form of savings scheme that will help improve the country's savings rate, : which is one of the lowest in the region.

The bill provides that contributions made to PERA per taxable year shall be 100% deductible from the taxable income of the contributor I subject to certain conditions. This aims to encourage more people to invest their money in PERA. This scheme is similar to the US experience wherein savings of up to $2000 in mutual fund are tax deductible as Individual Retirement Accounts (IRA). This paved the way for mutual funds in the US to reach $2.5 trillion in 1996 from $50 million in the 1970s prior to the IRA. In Singapore, employee contribution to the Central Provident Fund (CPF), which amounts to 25% of employee income, is also tax-free. The CPF not only serves as pension fund for Singaporeans but is also use by members for other purposes such as housing. The amount of the CPF allows the government to finance infrastructure projects such as roads, airports, seaports, mass transport and high rise public housing.

Non-members of government insurance funds can avail of PERA. Those with very limited retirement plan options are especially targeted to invest in this scheme. Investors will be allowed to keep tract of their funds and even directly manage their PERAs as an investment portfolio.

Through PERA, Filipinos can prepare for and enjoy their retirement years. They are assured of a financially secure future. The bill will also facilitate an increase in savings because funds deposited to the PERA can be invested in securities including ordinary shares of stock. It will also offer facilities to move funds to high investment levels and take advantage of prevailing market conditions. This means more funds will be available for investments to spur economic growth.

[smokingunmanila]

it's about time that the government should implement compulsory retirement plans.

[Arkdriver]

i'm quite surprised to find out that Filipinos dont actually have this kinda forced saving for future retirement plan. In Malaysia they call it EPF (Employees Provident Fund). Government dig the fund to finance infra projects and returns are about 5-6% per annum. Minimum. EPF employ top fund managers and bought shares/invest in many companies to maximise returns.

Apart from helping Filipinos save for their later days, it also help government finance many projects. But it will take years before the PERA will be large enough to be tapped as a source of finance.

Good start.

[Dvorak]

We have SSS for employees in the private sector and GSIS for the government employees.

For SSS, 10% (split to 6.67% employer and 3.33% employee shares) of the salary bracket (highest is at 15T, so 1,500.00 a month lang maximum contribution), masyadong mababa para maging retirement fund..

[smokingunmanila]

dapat kasi meron din yung non-taxable savings until retirement ...like mutual funds etc...eh sa SSS hindi naman lumalaki savvings mo..pension na hindi kamabubuhay nun ehh...

pero the way I see it....the minimum wage is not even enough for peopleto save in their retirement...I think...the minimum wage should be increase to 500/day...but of course...the demand will be there for better education and efficiency ng mga employees...

[Dvorak]

ayus nga yang PERA pag na implement.. coz it's 100% tax credit.. so imbes na bayad nang bayad nang tax na wala namang napupuntahan.. eh sa savings na lang napupunta.. pwede mo pa pakinabangan..

minimum of 50T per year ang investment dyan sa PERA.. withdrawable at age 55, tax free with interest.. so kung 20 years ka mag huhulog eh that's 1M sa principal pa lang.. eh interest pa..

tapos they allow emergency withdrawals (subject to 20% tax), for medical, schooling, housing purposes.. ayos na din.. kesa naman bayad lang nang bayad nang tax.. ang mahirap kasi yung mga fixed salary earners eh walang kalaban laban sa income tax.. di katulad nang mga professionals, businesses, self-employed, na ang daming tax shields..