# PDIC Info For Expats Banking In Philippines

Disclaimer

## PDIC: The Philippine Depository Insurance Corporation

If you plan on relocating to the Philippines, then PDIC is something that you need to know about and understand. PDIC functions in much the same way as the FDIC in the US.

If you have money in a Philippine bank, then it is likely that in whole or in part it is covered by PDIC.

## Like The FDIC, There Is A Maximum PDIC Coverage Per Depositor

Effective June 1, 2009, the maximum deposit insurance coverage is P500,000 per depositor. All deposit accounts by a depositor in a closed bank maintained in the same right and capacity shall be added together.
There are certain cases that expand coverage and those scenarios are discussed below.

## Exceptions To PDIC Account Coverage

R.A. No. 9576 stipulates that PDIC will not pay deposit insurance for the following accounts or transactions:
1. Investment products such as bonds, securities and trust accounts;
2. Deposit accounts which are unfunded, fictitious or fraudulent;
3. Deposit products constituting or emanating from unsafe and unsound banking practices;
4. Deposits that are determined to be proceeds of an unlawful activity as defined under the Anti-Money Laundering Law.

## PDIC Coverage Scenarios

Another similarity to FDIC is the fact that joint accounts are insured separately from any individually-owned deposit account. So a married couple can have up to 2,000,000 PHP in a single bank and it can all be insured under PDIC in four separate accounts: two held individually and two held jointly and each account containing the 500,000 PHP maximum.

Exercise caution with joint accounts. If you carefully study the PDIC scenarios and explanations you will find that the P500,000 limit applies on a per account basis. If you have more than P500,000 in a single account, then that excess will not be covered. This is regardless of how many joint account holders own the account or how much coverage they have left over from other joint accounts they may hold.

PDIC provides some useful tools for you to determine exactly what can be covered across various scenarios. The PDIC coverage scenarios are a good primer for showing you how certain hypothetical account scenarios would be covered (or not covered), but the best tool is the PDIC calculator which allows you to input details of exactly how you want to create your accounts and it will show you what is and is not covered.

Be careful about accounts in multiple banks, because sometimes what appears to be different banks is actually the same bank, so if the parent fails, then your different accounts get added together and you lose.

## Bank Failure

Bank failure in the Philippines does not seem to be any more common than it is in the US - just my anecdotal opinion. But it does happen. Most of the time it will be the smaller banks, like rural banks that fail. In my near decade in the Philippines I have never had any personal experience with any kind of bank failure nor do I know anyone who has.

I learned only after the the fact that we may have dodged a bullet back in the 2011/2012 time-frame when we had significant accounts with PNB. Back then, when PNB was in the process of merging with Allied Bank, PNB was considered to be borderline insolvent:

Philippine National Bank (PNB) has a borderline insolvency ratio of 153.50% as of June 30, 2012, down 6.03% from 163.35% as of March 31, 2012.

Allied Bank was in better financial shape than PNB and since that time PNB has steadily improved. I do not believe that PNB would have ever been allowed to fail, because it is one of the biggest and oldest banks in the Philippines. The failure of PNB would have cost the Philippines a great deal of economic confidence at home and abroad.

## Filing A PDIC Claim

If your bank fails, then you must file a claim with PDIC within 24 months. Otherwise you forfeit your right to file a claim. However you may still be able to make a claim against the assets of the bank. This is also the case if you have a balance over the insured limit. Filing a claim against bank assets is not guaranteed to be a success and even if successful there will be costs associated and much time spent and still no guarantee that you will get back all or any of your money. Such claims must be filed with the liquidator of the closed bank within sixty (60) days from publication of notice of closure. Keep in mind that there will most likely be a long line of other creditors that may be ahead of you.

To limit loss and hassle, keep all accounts within the insured limits and promptly file a claim in case of bank failure.

## Time-Frame For PDIC To Pay Claims

The claim for insured deposit should be settled within six (6) months from the date of filing provided all requirements are met but the claim must be filed within twenty-four (24) months after bank takeover. The six-month period shall not apply if the documents of the claimant are incomplete or if the validity of the claim requires the resolution of issues of facts and law by another office, body or agency, independently or in coordination with PDIC.
Notice the phrase "should be settled within six (6) months." They use the word "should" rather than "shall" because the word "shall" would be your guarantee that your claim would be settled within six months. In this case "should" indicates that we all hope that is the case, but perhaps it is not.

## Unsafe And Unsound Banking Practices

Be familiar with these "unsafe/unsound" banking practices that MIGHT place a financial institution in danger of losing PDIC coverage:
1. Solicitation and acceptance of deposits outside bank premises.
2. Solicitation and acceptance of deposits outside  bank premises.
3. Non-compliance with the minimum identification and documentation requirements for depositors for opening of deposit accounts.
4. Failure to keep bank records  (printed  and/or  electronic) within the bank premises.
5. Recording deposits or withdrawals without legitimate supporting documents
6. Offering and accepting high cost deposits despite the Cease and Desist Order issued by the Monetary Board.
7. Granting high interest rates when the bank has (i) negative unimpaired capital and (ii) either a liquid assets-to- deposits ratio of less than 10% or an operating loss.
8. Allowing depositors to deposit directly into the bank’s deposit account/s with other banks without implementing controls.
9. Allowing unauthorized bank personnel and non-bank personnel to handle deposit transactions.
10. Failure to reconcile inter-branch deposit transactions or deposit float items within 7 banking days.
11. Allowing depositors to deposit, withdraw, and/or transfer funds without proper documentation such as a duly accomplished deposit or withdrawal slip or debit/credit memo, or its equivalent.
12. Making, use or issuance of bank advertisements, marketing proposals or strategies, and other similar statements or issuances, which directly or indirectly offer, promise, represent, or promote: (a) a separate and distinct PDIC  deposit  insurance cover for deposit accounts maintained in the same right and capacity of a depositor, either in his own name or in the name of others who have no beneficial ownership over the account/s; or (b) deposit insurance coverage that is inconsistent with and otherwise violative of the laws, rules and regulations and/or policies on beneficial ownership and deposit splitting.
13. Failure to adopt a Board-approved Operations Manual (OM) on Deposit Record  Keeping and/or submission of an inadequate OM that does not reflect deposit practices.
14. Allowing bank employees to process their own deposit transactions including those of their relatives up to fourth degree of consanguinity or affinity.

## The Deposit Insurance Fund

The Deposit Insurance Fund is the fund that PDIC uses to pay out covered accounts. The Deposit Insurance Fund is composed of three parts:

The Deposit Insurance Fund (DIF) is the capital/equity account of the Corporation and consists of the following: (a) the permanent insurance fund; (b) reserves for insurance losses; and (c) retained earnings. The DIF shall be maintained at a reasonable level to ensure capital adequacy.

This information came from Financial Highlights, Page 11 under f.2 Equity, located under the Site Map on the PDIC website.

Page 4, Statements of Financial Position, shows a total equity of 147,150,186,499 PHP for these three components. This is the total amount of cash available to pay out in case of bank failures.

Within the PDIC Quarterly Deposit Trend for December 2018, on page 1 we find that total deposits as of December 2018 amount to 12.7453 trillion PHP (figures are given in billions so 12,745.3 billion PHP = 12.7453 trillion PHP).

The graphics and tables on page 4 show that 96.3% of 62.9 million total accounts are at or below the 500,000 PHP coverage limit. But these 60.5 million fully covered accounts only account for 11.8% of total deposits, leaving 11.178 trillion PHP in deposits only partially covered. We know that this 11.178 trillion PHP is held by 2.3 million accounts (table 5), so multiplying 2.3 million accounts by the 500,000 PHP limit we can know that of the 11.178 trillion PHP only 1.15 trillion PHP is covered by PDIC. Adding this to the 1.504 trillion in fully insured accounts gives us a total of 2.654 trillion PHP that is covered by PDIC insurance.

As stated earlier (from the Financial Highlights document) the total equity in the Insurance fund is 147.15 billion PHP. This amount is approximately 5.5% of total insured deposits. This is not atypical. The US mandated reserve is 1.35% and in practice they run about 2%. But the US stated maximum insured deposit is also 25 times that of the Philippines (at current exchange rates), being \$250,000 as opposed to the Philippines' 500,000 PHP (~\$10,000).

## Bank Balance Sheet

Banks are required by law to make their balance sheet publicly available. The big Philippine banks usually publish these on their website and are also required to publish it in the newspaper. Rural banks may post them on premises or in other conspicuous locations. Full details of balance sheet publishing requirements can be found on the PDIC website.

The items I scan for on the balance sheets are assets, liabilities, nonperforming assets (NPA) and the Capital Adequacy Ratio (CAR).

I want to compare the assets to the liabilities and also see how the two compare over time. What were they on the previous quarterly reports. Have there been big changes? Is capital adequate to cover liabilities? The NPL (non performing loan) ratio is usually around 1.5% for a healthy bank. With COVID19 it is trending up and is above 2% as of September 2020.

I also want to know about nonperforming assets. NPAs are loans that have not been paid in 90 days or more and they are broken into two categories: gross NPAs and net NPAs. Gross NPAs are the total of all NPAs, whereas net NPAs is the amount of badloans for which the bank has no cover or provision.

There is always going to be a certain percentage of  NPAs, but in general gross NPAs are held to about 10% of total loans. Any more than that or if they is an uptrend across quarterly reports and I will be concerned. I would be concerned about putting my money into any bank with more than a couple of % gross NPAs.

Capital adequacy ratios (CARs) are a measure of the amount of a bank's core capital expressed as a percentage of its risk-weighted asset.
Capital adequacy ratio is defined as:
${\displaystyle {\mbox{CAR}}={\cfrac {\mbox{Tier 1 capital + Tier 2 capital}}{\mbox{Risk weighted assets}}}}$
TIER 1 CAPITAL = (paid up capital + statutory reserves + disclosed free reserves) - (equity investments in subsidiary + intangible assets + current & brought-forward losses)
TIER 2 CAPITAL = A) Undisclosed Reserves + B) General Loss reserves + C) hybrid debt capital instruments and subordinated debts where Risk can either be weighted assets (${\displaystyle \,a}$) or the respective national regulator's minimum total capital requirement. If using risk weighted assets,
${\displaystyle {\mbox{CAR}}={\cfrac {T_{1}+T_{2}}{a}}}$ ≥ 10%.[1]
The percent threshold varies from bank to bank (10% in this case, a common requirement for regulators conforming to the Basel Accords) and is set by the national banking regulator of different countries.
Two types of capital are measured: tier one capital (${\displaystyle T_{1}}$ above), which can absorb losses without a bank being required to cease trading, and tier two capital (${\displaystyle T_{2}}$ above), which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors.
The CAR is important because it shows that a bank has taken basic steps to shore up funds against risk. The higher the CAR the better prepared the bank is to deal with unexpected loss. The minimum CAR is currently 10.5% under Basel III. A higher CAR is better.

## The Bottom Line

For me, the plan is to limit exposure to potential loss as much as is possible. I only bring necessary cash into the country and the rest stays in the US. I keep my balances under the insured limit and these days I do not get too cute with spreading accounts across too many different banks. Having too many accounts is also a hassle when you do your FBAR and taxes.

This post is my layman's understanding of PDIC as it pertains to my personal experience. As always, use caution and your better judgment in making financial decisions. And if you spot something incorrect or just plain dumb in this post, then please leave a comment so I can fix it.