BSP: LBC Bank doomed by huge cash advances to LBC Express

MANILA, Philippines—The Bangko Sentral ng Pilipinas said on Tuesday the LBC Development Bank had been making huge cash advances to its sister company, remittance firm LBC Express, partly the reason why the thrift bank became insolvent.

BSP Deputy Governor Nestor Espenilla Jr. said that based on the results of the investigation by the central bank, LBC had been giving cash advances to LBC Express so that the latter could facilitate the delivery of remittances to clients much faster. Some of the cash advances remained unpaid, thus causing the bank’s financial burden.

Espenilla said the practice of the LBC Development Bank to give cash advances was one of the key reasons why the bank was placed under the Prompt Corrective Action (PCA) program of the central bank. LBC had been under the PCA program for more than a year prior to its closure last week, the official said.

Under the PCA program, banks are tightly monitored and are given directives on how to improve their financial standing.

Espenilla said that under the PCA program, LBC Development Bank was told to stop giving out cash advances to LBC Express. However, it did not comply.

What the BSP did next was to issue a cease-and-desist order to the thrift bank’s cash-advance practice, Espenilla said, but the bank still did not comply with this recommendation.

Espenilla could not yet give the exact figure of the unpaid cash advances, but said the amount ran in the billions of pesos.

Espenilla said the Monetary Board ordered the thrift bank closed in the belief that allowing it to operate could spell more trouble to depositors due to its bad financial standing.

Another unsafe and unsound banking practice by the LBC Development Bank, the central bank official said, was its offering of very high interest rates on deposits to woo people to place money in the bank.

Espenilla said, for instance, that LBC Development Bank was paying 7.5 percent interest on one-year time deposit. Average in the banking industry for one-year time deposit is one percent or below, according to Espenilla.

He said the offering of high deposit interest rates would be unsustainable and usually spelled trouble for banks.  Espenilla said the public should be wary of banks that offer interest rates that are too good to be true.

The Monetary Board of the BSP placed LBC Development Bank under receivership of the PDIC last Thursday.

PDIC assured depositors that all valid deposit accounts each worth P500,000 or below would be paid insurance as soon as possible.

LBC Bank had a head office in Makati City and 19 branches nationwide. The bank had 321,516 depositors owning P6.09 billion worth of deposits. Of the amount of deposits, PDIC said, about P4 billion were covered by insurance.