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PDIC Deposit Coverage

Hello fellow Pexers,

I have a question for you. I have Php65,000 in a time deposit account that matures in 5 years to Php100,000. PDIC insures deposits up to Php100,000. My question is if my bank collapses on the third year, will PDIC return my principal (Php65,000) and pay the accrued interest for 3 years? Let's assume that the bank was closed by PDIC.

Thanks in advance for any answers.
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Comments

  • KuyaDannyKuyaDanny Moderator PEx Moderator
    My interpretation is that only the principal is covered.

    In the case of savings accounts, when interest is credited to the account, it becomes part of principal and becomes covered when it is credited.

    If interest is accrued but not yet credited it is not covered.

    That said, I would like to also say that based on our experience with the rehabilitation of Urban Bank deposits, some interest was paid on deposits that were frozen but eventually repaid. This was not paid by PDIC, but by the bank which eventually acquired Urban. However I am sure PDIC had a hand in structuring the rehabilitation plan.
  • KuyaDanny,

    My bank says my principal grows because of compound interest. This leads me to assume that the interest is credited to the principal every year (otherwise there will be no compounding effect). As such, it appears this case is similar to savings accounts, which, as you implied above, enjoy both principal and interest protection. Do you think this reasoning is right?

    Thanks again for you very informative replies. =)

    PS: I've talked with PDIC but their depositor assistance unit is unsure about its answers. Tried to talk to high-ranking PDIC officials (preferably a lawyer) but they appear to be inaccessible. Their website, while discussing specific cases, does not discuss the case I presented above.
  • KuyaDannyKuyaDanny Moderator PEx Moderator
    Your reasoning is the same as mine. But we may both be wrong. ;)

    You might want to check with your bank. The key here is when the interest becomes part of the principal. One way of proving this is the bank's own accounting. In the case of the savings account, the date the interest becomes part of principal is clear - the evidence is the entry posted in the passbook/statement.

    In the time deposit case, there is no accounting record you can hang on to.

    There is another issue involved here, and that is taxes. Typically, interest earnings on time deposits are paid at maturity. Interest on time deposits of at leasy five years' duration is exempt from taxes. But if interest on a five year time deposit is paid before maturity, would that still be a five year time deposit, or a series of shorter duration time deposits which have been reinvested?

    Magulo ba?
  • KuyaDanny,

    I have another 5-year placement (a 5-year time deposit actually since a certificate of time deposit was issued) that pays monthly interest that are free of taxes. Are you saying that this product should not be tax exempt? Oh no! I dread the day when my bank informs me that they are rescinding the terms of that CTD. That will certainly ruin my mid-life retirement plan. =(

    FYI: Citibank has a 5-year time deposit that pays monthly tax free interest at 8%. Others with similar products include Chinabank and UCPB. There are rural banks that offer such a product at even higher rates -- 20% per annum tax free. I just hope that they all consulted their lawyers.
  • KuyaDannyKuyaDanny Moderator PEx Moderator
    Yes, I hope they did. I think they will dock you for taxes only if you preterminate.
  • mac_bolan00mac_bolan00 PEx Veteran ⭐⭐
    interest on deposits is computed monthly. this is from GAAP. however, it is not ALWAYS instantaneously coverted to principal upon booking. KD is right wrt TDs. its' usually just the principal deposit that's insured. this is to be consistent with what the PDIC is in business for: to guard against operating risk for banks. the PDIC will insure your money but NOT the earnings you expected to make by transacting with that bank. that was the risk you took.
  • Hi mac_bolan00,

    Thanks for sharing your view. =)

    So is it that PDIC will only insure the initial deposit one has placed in a bank? I am a bit confused as KuyaDanny said savings accounts and their interest earnings are covered by PDIC after the interest has been credited to the principal and as long as they remain within the 100K coverage limit. Or is it that PDIC treats time deposits and savings deposits differently?

    Now here's another scenario: As I said I have a 5-year time deposit that pays tax-free interest monthly. Let's say I already received interest payments for 3 years. What happens if the bank collapses right afterwards? Do I still get my principal back intact? Or will PDIC deduct the interest payments from it?

    Let's assume that the principal and the interest payments amount to less than Php100K.

    Thanks in advance for your reply. =)
  • KuyaDannyKuyaDanny Moderator PEx Moderator
    Where's mac_bolan00?

    Pre, whatever interest payments you have received are yours and yours alone (unless you want to give me some). PDIC won't touch the same even if the bank closes. You will get your principal back intact, assuming it is P100,000 or less. What we only have to worry about is the interest on the unexpired term of the time deposit. This is where is gets murky and both mac_bolan00 and I think this interest is not covered by insurance.
  • mac_bolan00mac_bolan00 PEx Veteran ⭐⭐
    well, we know you WON'T earn interest once PDIC steps in. :D

    but what worries me is the interest my TD account has booked thus far. every officemate tells me it's 'goodbye' should a crash happen before maturity. in my opinion, this should already be counted as principal deposited to your account. i have a feeling the judgement's still not out on this.

    think of the logistic mess. it's hard enough for PDIC to cover just the initial deposits of UB depositors. and UB is just a medium-sized com-bank. i dare say.

    gulp! i have a 5-year TD, several 90-day TDs and several retail t-bills maturing in 3 years.
  • KuyaDanny and mac_bolan00,

    Thanks for your inputs. =)

    It seems that there is a lot of gray area about this subject. Nevertheless, I appreciate your views on it.

    Since we are on the subject of TDs, I am sharing to you what I would describe as an unusual yet enticing product I found while searching for 5-year TDs.

    There is this rural bank that offers a 5-year TD that pays tax free monthly interest at 20% per annum. The minimum placement is Php20,000. Assuming you invest Php1m, you get about Php16,666 monthly for 60 months -- effectively doubling your money in 5 years.

    The odd thing is that the bank person I talked to advises that the placement should be structured in such a way that the full amount is covered by PDIC. Assuming again a Php1m placement, it is recommended that this should be spread over 10 accounts containing Php100,000 each. The first account should be under my name while the rest should be "and/or" accounts I should open with my relatives.

    Now I sense a case of moral hazard here. While the bank has been operating for almost 50 years, its emphasis on structuring the deposits, while wise and perfectly legal, made me a little uneasy.

    But while remaining cautious, I also felt that the bank's business model made a lot of sense. It appears to be emulating the strategy of Indian lenders (the bumbays), who collect every day to ensure a high repayment rate on their loans.

    I found out that it caters mainly to teachers, soldiers and market vendors. In the case of teachers and soldiers, the bank lends at 24% to 36% per annum. Collections are made every payday through salary deduction. In the case of market vendors, there are small daily collections.

    Aside from these types of lending, the bank, through what I think is its parent company, also offers a credit card affiliated with JCB. Credit card loans are charged between 3% to 3.5% monthly (I don't exactly remember). Its sister companies include several pre-need firms, a car dealership and a money remittance business.

    The officers of the bank's parent company appear to be competent people. The top three posts are held by people who graduated from a top Catholic university. As such, they appear to be morally-upright and respectable individuals who are not out to squander my hard-earned money.

    Finally, the bank is a PDIC member in good standing.

    Now here's my question: So what do you guys think? Do you think that its business model is sound? Do you think this bank deserves another look? I'm off to the BSP in January to check out its financial statements. Aside from the capital-to-risk asset and NPL ratios, what else should I be looking for when assessing this bank?

    Again, thanks in advance for your replies. =)
  • KuyaDannyKuyaDanny Moderator PEx Moderator
    If every depositor were as diligent as you, I would not worry about our banking system at all. The BSP would be superfluous because the banks would have to answer to eighty million regulators (OK, maybe fewer than that).

    This scheme to split up deposits into ten different account names to "maximize" your PDIC coverage is not unique to this bank you talk about. Other banks know of the same thing; they are just a little less "in your face" when it comes to suggesting it. Just remember, you can't choose your relatives. Some of them might actually insist the money is theirs when you place their names on the piece of paper, so be careful.
  • Mr. Barok5, if possible p.m. mo naman sa akin ang bank na may 20% 5yr TD rate. I'm diversifying my konting ipon (mutual funds, rtbs, TDs, 401k) - I don't think I'll be opening with my relatives' names though, too complicated :D
  • mac_bolan00mac_bolan00 PEx Veteran ⭐⭐
    i will want to look at the financial statements of barok's rural bank. a lot of them should be closed down but some are very good and if that one has been around for 50 years, it must be something.

    the 'double-your money thing' has evolved into so many variations. in our bank, the annual interest is only 1.5% NET for a 5-year TD but you get a free cell phone at the start.

    going back to your deal, are you sure it's not a retail T-bill deal disguised as a time deposit? retail t-bills are sold at face value (meaning a 10,000 peso bill is really worth 10,000 pesos). you are charged additional, say 150 pesos per 10,000 and then externally receive the interest every month or quarter.
  • omengomeng PEx Veteran ⭐⭐
    nice job barok!

    =)
  • KuyaDanny,

    I have to be diligent because back in 2000, I almost deposited my first substantial savings at Urban Bank! Thank God I didn't.

    Mac,

    The 5-yr TD appears to be just the conventional one. I do not think it is as fancy as you described above. Btw, do you happen to work for Asiatrust Bank? They offer that cellphone promo. I believe you also have that double your money in 7 years. Forgive me if your not with AB.

    Omeng,

    Can you give me more "insider" information? You are an agent of one of the pre-need companies right?

    Happy holidays to all of you guys! =)
  • omengomeng PEx Veteran ⭐⭐
    hello barok,

    thanks for dropping by in our shop in MRT. nice meeting you na rin.

    check your PM. kaw ng mag follow up.

    happy holidays din. =)
  • Hello Pexers

    Anybody here knows whether the new law increasing PDIC's deposit insurance coverage to P250,000 applies to old savings accounts? What I'm sure of is that it applies to new accounts.

    Thanks for any replies.
  • you could try checking out their website :)
  • i think so.
  • KuyaDannyKuyaDanny Moderator PEx Moderator
    It applies to ALL eligible deposit accounts which are still open at the time the law goes into effect, or will be opened afterwards.
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