Rehabilitation, not liquidation

Whose money is it anyway?

This is one of the questions that the Bangko Sentral ng Pilipinas and Philippine Deposit Insurance Corp. have to address when they (finally) decide on the fate of Export and Industry Bank. It will be recalled that, on April 27, 2012, EIB was placed under receivership by BSP upon orders of the Monetary Board due to insolvency.  Judging from the actions taken by the banking regulators after the closure, it was apparent they preferred to liquidate the bank rather than nurse it back to financial health.

This stance prompted EIB’s majority stockholders to go to court to stop the bank’s liquidation on the ground that BSP and PDIC acted with “indecent haste” in ordering its dissolution. Early this week, a group of uninsured EIB depositors added its voice to the opposition to the liquidation and called on the government to give the banks’ stakeholders a reasonable period of time to come up with a viable rehabilitation program.

Claiming that rehabilitation was in their best interests, the depositors have formed a steering committee representing depositors from Luzon, Visayas and Mindanao.

Closure

They acknowledged that rehabilitation may entail the conversion of uninsured deposits into equity, deferral of payment of time deposits, or a combination of these measures at a ratio to be determined by new investors.

Per PDIC’s records, the bank has P11 billion (that’s with a letter “b”) in uninsured deposits from 2,666 accounts. This amount is not something to sneeze at or ignore in the resolution of the bank’s problems. If the liquidation pushes through, the uninsured deposits (or anything beyond the P500,000 cut off amount covered by deposit insurance) would either be repaid in proportion to whatever may be recovered from the sale of EIB’s assets after deducting its liabilities, or none at all in case nothing is left after settling the debts.

The financial loss to the affected depositors, which include retirees, cooperatives, small-scale businesses and mutual funds associations, would be devastating. They will bear the brunt of BSP’s failure, with its army of highly paid auditors and bank examiners, to prevent the performance of the acts that led to EIB’s collapse.

It’s the same neglect that resulted in the shutdown in 2008 of 13 rural banks under the Legacy Group of Companies headed by the late Celso delos Angeles.

As if the damage to the bank depositors was not enough, PDIC, instead of performing its mandate to protect their interests, put legal roadblocks on the offer of BDO Bank to take over EIB’s operations.

Rehabilitation

The plea of the depositors to hold in abeyance the banks’ liquidation while all avenues for its rehabilitation are explored is reasonable. With EIB no longer engaged in banking transactions and under PDIC receivership, what additional injury will six or more months of delay bring about?

Lest the regulators have forgotten, Congress, through the Financial Rehabilitation and Insolvency Act of 2010 (or Republic Act 10142), has declared it the policy of the State to “encourage debtors, both juridical and natural persons, and their creditors to collectively and realistically resolve and adjust competing claims and property rights.”

The law provides the mechanisms by which competing interests in a financially distressed business organization can be amicably resolved among themselves or with the assistance of the court to allow the business to recover as soon as possible with the least damage to the parties. Liquidation of assets is resorted to only if rehabilitation is no longer feasible. Until then, all efforts should be exerted to put the ailing business back on its feet.

The banking regulators should think out of the box in looking for a solution to EIB’s liquidity problems and make its takeover worthy of serious consideration by a financially viable white knight, not necessarily BDO. As had been done in previous rescues of distressed banks, BSP can offer incentives or carrots to make the takeover of EIB attractive to local banks that want to expand their network or foreign banks interested in getting a foothold in the country.

Prosecution

The recent filing of criminal charges by PDIC against EIB’s former key officials for “engaging in unsafe and unsound business practice” should not be a deterrent to the search for a workable rehabilitation plan for the bank. Whether or not the officials concerned are guilty of the crime being imputed to them should be left to the courts to decide. The personal criminal liability, if any, of these people should be dissociated from the bank’s personality and responsibility to its depositors.

The effort to run after the officers allegedly responsible for the bank’s collapse should not be done at the expense of the depositors whose only “fault” was to believe the bank was a safe place to put their money. That would be like cutting the nose to spite the face.

Verily, the discussions on possible rehabilitation of the bank can proceed independently from the action taken by PDIC against its former officers. As bank receiver, PDIC does not need their signature to enter into the arrangements that may be needed or appropriate to enable the bank to regain its footing.

Unless the courts step into the picture, BSP and PDIC have the last say on EIB’s fate. Let’s not forget though that, at the end of the day, it’s the depositors’ money on the line and they will either lose, win or break even. Their voices therefore deserve to be listened to by the regulators.

For comments, please send your e-mail to [email protected].