Life after PCA

Life after PCA

IN recent years we at Unlad Rural Bank have been visited by liquidity problems that got in the way of an efficient delivery of financial services to our clients. Our capital accounts were under critical stress and finally in 2004 it caved in under the weight of years of income losses. Suddenly, the issue of putting things to right shifted from critical to desperate. What were we to do?

This was what happened. In a three-year period beginning 2002, our total resources were still effectively expanding, the same having grown from P40.047 million to P42.921 million the following year and finally to P43.662 million by 2004. But if resources were growing, so did our deposit liabilities. Naturally, our capital accounts went from P763.823 million in one year to P916.934 million the following year before it was completely eroded to negative P626.939 million in 2004. These were the years when income losses were as high as P3.343 million in a year and we were desperate to find ways to stop the bleeding for good.
These numbers clearly qualified us to be placed under the prompt corrective action or PCA program implemented by the Bangko Sentral ng Pilipinas in tandem with the Philippine Deposit Insurance Corporation. And these were numbers we sustained even as we also had to deal with quite a number of more domestic issues that similarly demanded our time and energy. For instance, there was this long standing legal tussle with key shareholders of Unlad Rural Bank that started in 1987 but was finally resolved in the bank’s favor after 13 years when the Supreme Court ruled with finality in 2010.
There was also grave oversight on the part of the former managers of our bank whose end result aggravated our financial condition. We accumulated ROPA, the certificates of sale or COS of which they registered but somehow forgot or neglected to consolidate. The tax liabilities on these ROPA also were not paid no matter the annotation on the COS. Thus, the accumulated surcharges and penalties complicated our effort to consolidate the properties that in 2002 already totaled more than P23 million.
It must also be said the contributions that should have been made to our retirement fund during this period of stress were some of the more significant ill-effects of the bank’s inability to post profits. We stopped adding to the retirement fund even as contingent service liabilities to the aging employees kept rising.
By 2004, and as a result of the slow disposition of our acquired assets and as a result of the continuous outflow of funds required to consolidate the various ROPA, our capital accounts finally posted a deficiency of P626.939 million. We were literally at the end of the accounting rope. You can just imagine the barrage of correspondence coming from the BSP expressing serious concern on the financial condition of the bank. You must also imagine what it was like for the existing management team in terms of pressure and workload.
So in other words we were ripe for the PCA whether we wanted it or not.
This program was designed to stop whatever harm was done to the bank’s books at that point. Guidelines mandated banks under BSP supervision to come under PCA whenever the capital adequacy ratio or CAR fall below 10 percent, the tier one risk-based ratio hit six percent and the leverage ratio at five percent.
PCA also applies whenever our CAMELS rating—representing capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risks—falls below “3” or whenever our management component rating also falls below “3.” Under the same regulatory guidelines, the PCA also kicks in whenever regulators determine there is more-than-normal risk for any bank to topple over. In any case, the BSP made all these very clear to us when they sent us a formal notice we were already in more-than-normal risk of collapsing as a going concern.
Recovery through best practices
Fortunately for us, we have a good management team that crafted a rehabilitation program we knew could help us turn the bank around and convince the regulators of the merits of the program at the same time. The rehabilitation program required the adoption of a four-point plan that immediately addressed the severe liquidity issues we were facing, helped us stanch the financial bleeding in the identified areas, soothe the regulatory concerns of the BSP and think up ways to sell assets we still have in a hurry.
First, we launched a salary and microfinance loan program we knew will immediately address the poor operating income we were having. This had the desired impact on cash flow.
Then we identified those assets we can quickly sell. The objective was to form an attractive cache of properties we can sell in a jiffy.
At the same time, we learned to cope with the barrage of correspondence from the BSP whose auditors were all over our books of accounts. We learned to be patient and cooperative with the regulators. Our people were astute enough to read through the bureaucratic language of concerns that oftentimes taxed the patience of our management. We also understood what the BSP auditors were saying beyond the official language used to convey to us that we were in very real danger of toppling over.
In other words, we read through their intentions and understood the regulatory limits.
These points helped us through the trying times, encouraged us to push forward, made us find more creative or innovative ways to lick our problems. We persisted. At the end of it we won.
Today Unlad Rural Bank lives up to its name, both for the bank management and it’s employees and most importantly to the communities we serve.
This could not have been done without implementing the 4 points of best practices that we ourselves adopted. Mas maunlad na ang Unlad Rural Bank.

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