Is Your Bank Really Secure?

Recently, I have been contemplating whether to put my money in this rural bank. I will not specify the name of the bank for privacy purposes.

I have been attracted to this rural bank because of the higher interest rates on time deposit, especially those with terms of greater than 5 years.

Rural banks, and smaller banks in general offer a much higher interest rate than bigger established banks whose deposit products are often so low, your money will be eaten up by inflation.

Personal time deposit products with terms greater than 5 years are still exempted from 20% withholding tax, unlike retail treasury bonds for example which have recently been removed from the exemption of 20% withholding tax for terms 5 years and above.

I have been studying financial statements and balance sheets of listed companies, but I have yet to analyze a bank financial statement.

Before "investing" my money in this rural bank, like most investments, I have to check the soundness of the institution by doing a little bit of homework. On my list are forums, customer experiences, and balance sheet.

I encountered the term NPL or Non-Performing Loan Ratio which seems to be very important metric for a creditor or lending institution.

 

Photos: Mike Gonzalez (wikipedia.org/wiki/User:TheCoffee)

As you know, the main business of banks is money lending. If they lend money and do not get them back nor paid interest they lose money. That is what the NPL (Non-Performing Loan) ratio measures.

Investopedia.com defines Non-Performing Loan Ratio as:

"A sum of borrowed money upon which the debtor has not made his or her scheduled payments for at least 90 days. A nonperforming loan is either in default or close to being in default. Once a loan is nonperforming, the odds that it will be repaid in full are considered to be substantially lower. If the debtor starts making payments again on a nonperforming loan, it becomes a reperforming loan, even if the debtor has not caught up on all the missed payments."

Basically, Non-Performing Loans are loans that are on default or near default; the debtor has not paid his due payments and are beyond due.

In the Philippines, there are many rural banks that close every year. According to BanksPhilippines.com there were 24 banks that closed in 2012 alone.

The trend in most established banks today have a Non-Performing Loan ratio of below 3% of gross loans.

Bank of the Philippine Islands or BPI for example had a NPL ratio of 2.1% in the first half of 2013. [source info.bpiexpressonline.com]

This rural bank that I'm looking at has 15% non-performing loan ratio. That is a whopping 7.5x the industry norm of non-performing loans. I also noticed an increase of this ratio from 14% of the previous year to 15% this year.

Although, this bank's depositors are insured by the PDIC up to P500,000, being the conservative investor that I am, I will pass up on this opportunity.