Notwithstanding the frantic, even misleading, efforts of the respondents in the Urban Bank case to cast doubt on the merits of the charges filed against them on September 11, the fact is that they are facing those charges based on hard evidence in the Department of Justice. As far as the Bangko Sentral ng Pilipinas (BSP) and the Philippine Deposit Insurance Company (PDIC) are concerned, it is clear that they conspired to misuse P2.8 billion of the funds of the Urban Bank Inc. (UBI), thereby defrauding or prejudicing the interests of the Bank, stockholders and their own depositors, to be able to pay and benefit selected clients and investors of their 40% owned affiliate, Urbancorp Investment, Inc. (UII).
This is a case that the respondents brought upon themselves. It is not in pursuit of personal agenda but the protection and restitution of UBI depositors that the receiver and regulators have brought the case to the DOJ. In the end it is the courts of justice that will decide the guilt or innocence of the respondents.
BSP Did Help Urban
If truth must be told, the Bangko Sentral and PDIC were supportive of Urban Bank every inch of the way, beginning on March 9 when Mr. Arsenio M. Bartolome, the Chairman, and Mr. Teodoro C. Borlongan, the President & CEO, went to see Governor Rafael B. Buenaventura for the first time about problems that the bank was encountering.
BSP and PDIC did help UBI as will be explained in some detail in this paper, contrary to the facetious claims made in a slanderous white paper being circulated by e-mail. The reason Urban Bank collapsed the way it did was because, unknown to the regulators and while Messrs. Bartolome and Borlongan were dutifully making representations for bailout mechanisms, they resorted to the wrongful scheme of buying “garbage receivables”, which is the subject now of the criminal complaint against them, to satisfy favored clients. Looking back, even the P3.5 billion in emergency loans that BSP was willing to give them if they had sufficient collateral, could not have stopped the hemorrhage.
The first request for assistance from Messrs. Bartolome and Borlongan was for the possibility of UBI rediscounting their NFA (National Food Authority) promissory notes with the Bangko Sentral totalling P2.4 billion. What BSP did was to refer the matter to the Land Bank instead and the result was that NFA was given a loan that enabled it to pay the promissory notes. On top of this, UBI was able to secure a loan from the Land Bank in the amount of P600 million with NFA papers as collateral. In other words, they were able to generate liquidity amounting to P3 billion using their NFA papers, thanks to the BSP.
UBI also wanted an emergency loan. As early as March 24, Messrs. Bartolome and Borlongan were beginning to see a “pattern of withdrawals” in the bank and UII. BSP replied that it was willing to provide advances up to P3.5 billion equivalent to 50% of their total deposits as allowed by law. However, they opted not to avail of it because they found the requirements too stiff, e.g. producing collateral for the full amount and submitting a resolution of the board of directors.
As an alternative to a BSP advance, liquidity support in the amount of P1.5 billion from PDIC was offered based on their representation that they could produce collateral to support such a facility. The loan documents were ready for signing but as it turned out UBI could produce collaterals which was substantially less. As a consequence, they decided not to avail but instead declare a bank holiday.
One other request of Messrs. Bartolome and Borlongan was for BSP to help identify a “white knight” or an investor to buy into Urban Bank to restore market confidence. They wanted SSS or GSIS but this was discouraged given the policy of government to privatize. Governor Buenaventura suggested either Equitable PCI Bank or Banco de Oro. He and Secretary of Finance Jose Pardo personally tried to persuade these banks to help out on UBI’s behalf. They spent much of the Holy Week in meetings and on the telephone.
On Easter Sunday, April 23, Governor Buenaventura called for a meeting of BSP and PDIC officials, attended by Messrs. Bartolome and Borlongan, at the Manila Golf Club in a last-ditch effort to consider the remaining options to avert the collapse of Urban Bank. Also present at that meeting were Tessie Coson, Chairperson of Banco de Oro, (BDO) and Nestor Tan, President, who were there to discuss possible acquisition by BDO, subject to satisfactory due diligence.
By the time UBI went into a bank holiday on April 25, Banco de Oro was a candidate to buy Urban Bank.
Considering the foregoing, the poison e-mail “tale of vindictiveness” about Governor Buenaventura is a blatant lie. What the authors of that e-mail do not know is that at some point shortly after the hassle that followed the closure of UBI and UII, Messrs. Bartolome and Borlongan appeared before the Monetary Board and Mr. Borlongan spoke to say “Archit and I are extremely grateful to you, Governor” and went on to acknowledge that “the Bangko Sentral bent backwards to accommodate us.”
UBI Closure Justified
The impression given that the closure of UBI on April 26 was done in haste and without sufficient justification also needs to be corrected. Monetary Board Resolution No. 634, which placed Urban Bank under receivership was based on a memorandum from the BSP’s Department of Commercial Banks (DCB II), declaring the bank to be “capital deficient” and “suffering from illiquidity, and therefore unable to pay its liabilities as they become due in the ordinary course of business.” These are conditions prescribed by Section 30 of The New Central Bank Act (Republic Act 7653).
These conditions are confirmed in UBI’s letter of April 25 advising BSP of its declaration of bank holiday on April 25 and a certification about a special UBI board meeting approving the declaration of bank holiday.
The financial condition of Urban Bank is worse than what appears on the surface.
Since the early part of February up to April 25, when it declared a bank holiday, UBI was resorting to heavy inter-bank borrowings to meet its mounting liquidity requirements. It is on record that UBI was a net borrower in the interbank market in 17 out of 20 banking days in February, borrowing a total of P5.8 billion. In March, in 19 out of a total of 23 banking days, UBI’s borrowings totalled P5.7 billion. In the period from April 1 to 24, in 13 out of 18 banking days, UBI borrowed P5.7 billion.
Affidavits submitted by examiners from BSP and PDIC showed that UBI’s non-performing loan ratios as early as December 1999 consistently exceeded the industry average. The examiners also found that UBI’s capital had been deficient from January to March, meaning that it could not meet the P2.4 billion required capitalization of a commercial bank.
UBI Bought Trash Receivables
Notwithstanding the bank’s precarious financial condition and while the UBI/UII chairman, Mr. Arsenio M. Bartolome, and the president and CEO, Mr. Teodoro C. Borlongan, were negotiating for BSP financial assistance, they and the other respondents went ahead on April 19 to use P2.8 billion in UBI funds to purchase for cash at face value, including accrued and unbooked interest, sub-standard and/or doubtful receivables from the UII’s trust department. This is obviously a case of “overpricing” at the expense of the depositors of UBI. The receivables were the “garbage” or “trash” receivables so described in the complaint-affidavit filed in the Department of Justice. The proceeds were used to service the continuing massive withdrawals and pre-terminations of placements of UII clients and investors, among whom are the relatives of Mr. Bartolome.
The respondents were accordingly charged with estafa. The charge was on four counts because the P2.8 billion was paid to UII in four manager’s checks. The charge was based on a violation of the Revised Penal Code as well as the respondents’ fiduciary duty to prudently and faithfully administer the funds of the bank.
What is a “garbage receivable?” The transaction in an investment bank like UII begins with an investor putting his money in the bank on the expectation that the bank would be able to lend it and make a profit for the investor. In the case of UII, many of the loans in the millions had soured and the investors knowing this were demanding their money back. It was at this point that Urban Bank decided to buy the loans made by its affiliate, regardless of the quality of these loans, to enable UII to pay the pre-terminations, including accrued interest.
UBI is today stuck with these loan receivables, many of which the examiners describe as “substandard” or “doubtful” according to criteria provided under BSP Circular 210. By definition, substandard loans involve “unreasonable degree of risk” while doubtful loans are substandard loans with the added characteristic that makes collection “highly improbable.” They were all paid for with UBI depositors’ money at face value including interest, accrued or unbooked.
Two such “trash” loan receivables, for example, belonged to a troubled realty company amounting to P190 million. UBI purchased not only the principal at full face value but also the unpaid accrued interest amounting to P25.4 million for a total of P215.4 million.
Many of the receivables cited in the complaint-affidavit have been past due and restructured several times. Some have incomplete documentation. Still others belong to companies that have been consistently incurring losses resulting in negative capital and net worth. No prudent banker mindful of the interest of its depositors would have bought these. They are “trash receivables.”
In her letter to the interim receiver, one of the respondents, Ms. Corazon Bejasa, the corporate secretary of both UBI and UII, admitted that indeed “heavy withdrawals from trust funds occurred on April 19, 24 and 25, 2000 and that in order to service these withdrawals, certain receivables of UII were sold to the bank, the proceeds of which were used to fund the manager’s checks purchased from the bank by UII and issued to UII clients in payment of their withdrawn funds.”
Ms. Bejasa admitted that indeed documentation of these receivables might not have been complete but this was due to “the heavy volume of transactions on these dates and the extreme pressure to service the numerous withdrawals. . .”
The series of poison e-mail letters ignores these facts which are all on the record in the formal complaint-affidavit and annexes filed by BSP and PDIC in the Department of Justice. It prefers to float innuendoes besmirching the person and questioning the motives of the BSP Governor and one particular member of the Monetary Board, a normal reaction, of course, of people in desperate straits.
Reopening Difficulties Explained
Why is the reopening of the Urban Bank slow in coming? There are several reasons for this. It must be realized that reopening hinges on technically merging four banks into one: Bank of Commerce, which will be the surviving entity, Urban Bank, Pan Asia Banking Inc. and Traders Bank. This is easier said than done.
The more difficult part of the rehabilitation and reopening of Urban Bank is the merger of the bank and its affiliate, UII, into the Bank of Commerce. This is necessary because of the intertwined activities and transactions between the two institutions which precisely led to the closure of Urban Bank. Furthermore, since the closure of Urban Bank came about when it ran out of cash, sufficient cash must be ready for its resumption of operation. This means raising funds from investors, including the existing depositors and shareholders of all the institutions involved under terms acceptable to them. In other words, the rehabilitation plan must be approved by them.
The public can rest assured, regardless of what the respondents in the Urban Bank case claim to the contrary, that both the legal case and the plan to reopen Urban Bank as part of the Bank of Commerce are on track. The BSP, the PDIC and the Securities and Exchange Commission, the government regulators involved, are working closely together to bring justice to bear on the people responsible for the collapse of Urban Bank. It is time that discipline is made to prevail in the banking system not only to protect the banks and depositors but more importantly to show the rest of the global community that in the Philippines the rule of law works.