Empowering the banking industry

BAIPhil President Emmanuel E. Barcena, distinguished bankers, distinguished guests, ladies and gentlemen, good evening.

Thank you for inviting me to the 26th National Convention of the Bankers Institute of the Philippines, Inc. (BAIPhil).

General outlook

I feel very much at home with banking professionals who are said to be among the happiest people these days. They have reason to be. Banking, after all, is booming and the year 2010 was considered one of the best for Philippine banks. Average capital adequacy ratio (CAR) of over 15% remained comfortably above the Bangko Sentral ng Pilipinas (BSP)'s 10% minimum requirement. Non-performing loans likewise remained generally low at 3%. In fact, the country's largest bank, Banco de Oro, achieved a milestone in the banking industry when its consolidated resources hit the P1-trillion mark at the end of 2010, the first Philippine bank to do so. No doubt, the strength of the banking sector contributed to the 7.3% growth rate in 2010, the fastest in 34 years.

Such growth is remarkable since it took place in a low-inflation environment with 2010 inflation averaging at 3.8%. Not surprisingly, businessmen surveyed by the BSP are more upbeat over their profitability expectations and outlook on the country's performance in the next quarter than at any other time in the past.

Such optimism is shared by the results of global accounting leader and advisor Grant Thornton's annual International Business Report (IBR) showing that Filipino business leaders are ranked third in the world with 87% of our businessmen saying that they are more confident about business prospects for 2011.

This positive assessment is further reinforced by banking giant Citigroup which identified the Philippines last month as one of the eleven (11) countries that ''will likely stand out in a globally integrated economy in terms of high growth rates and investment returns over the next forty years.''

To be sure, the path to economic progress, albeit slow, reflects a steady upward trajectory and no longer the boom-bust cycle of the early 1990s. Of course, it is quite unfortunate that the benefits of our growing economy seem unevenly spread, meaning, huge discrepancies in development exist. But that is another story.

BAIPhil has achieved giant strides since its modest beginnings in 1941 under the name National Association of Bank Auditors and Comptrollers (NABAC). Its original purpose was to pursue efficiency and uniformity in bank accounting, auditing and operations.

Its founding members were the Philippine National Bank, First National City Bank (now Citibank), Philippine Trust Company, Agricultural and Industrial Bank (now Development Bank of the Philippines), Bank of the Philippine Islands, Monte de Piedad & Savings Bank and China Banking Corporation.

Although names have changed and modern banking visions, missions and goals have evolved, BAIPhil and its founding institutions have survived and continued to serve the country's financial concerns for over 70 years.

For us in the Judiciary, the retirement age is 70 years old. For BAIPhil, however, 70 must be its comparable adolescent phase. In the course of seven decades, BAIPhil today has developed its own strong sense of purpose and identity which transcend generational and geographical considerations.

BAIPhil, an organization of professional bankers, today has 61 institutional members of local and foreign banks, offshore banking units, thrift and government banks, electronic banking networks, Philippine Clearing House Corporation and regulatory agencies, such as the Bangko Sentral ng Pilipinas (BSP) and the Philippine Deposit Insurance Corporation. It has also close to 300 key bank executives as associate members. It is also the partner of the BSP and the Bankers' Association of the Philippines in the training and development of banking professionals.

BAIPhil is firmly founded not on sand but on rock, thanks in part to the pioneers of our banking industry. Over the years, each institutional and individual member prudently and sagaciously built upon this rock. Each generation of symbolical bricklayers had new ideas and improved ways of implementing the blueprint.

Certainly, bankers today do not have temples in which to store money and commodities, just like the earliest banking precursors in Persia during the 3rd century AD. Neither do they use benches as desks or exchange counters, just like the Florentine bankers during the Renaissance who did their transactions atop desks covered by green tablecloths.

Neither is frontline banking today limited to human tellers only, just as it was during my early banking career in the Development Bank of the Philippines and the Commercial Bank of Manila. At that time, it was unthinkable to entrust to a machine or a computer the responsibility of automatically receiving, dispensing and paying money in any form or currency anywhere in the world, without the personal supervision of a bank officer.

But times have changed. So have banking technology, products and amenities.

Now, it is commonplace to use payment methods such as electronic fund transfer at the point of sale, automatic teller machines, mobile banking, online banking, telephone banking, video banking, direct credit, direct debit, internet banking and numerous other convenient methods, without need of direct human intervention.

And this is as it should be. Bankers and banks should continue to evolve and improve on ways to achieve better services and thereby immortalize the fairly immutable basic character of the banking industry, that of connecting its customers with capital surpluses to its customers with capital deficits.

Viewed from another context, the banking industry plays a key role in directly spurring national, institutional and individual socio-economic growth on one hand, while indirectly distributing wealth on the other.

And because of this basic but critical function, and its significant effects on people's money and the country's economy, there is a need for the supervision and regulation of the banking industry by the government. In some indirect way, the judiciary is a part of this control mechanism.

This of course is required for a strong, reliable and sustainable economy. Despite occasional periods of difficulty, the Philippines has never undergone a serious banking crisis like Iceland whose banks, deregulated in 2001, almost collapsed less than ten years later in 2008-2010. It will take days to tell the whole story of what happened in Iceland - too complicated for a non-economist like me to describe in minute detail. Suffice it to say that it was the result of a flawed economic policy coupled with bad governance and lack of regulation and control. The lesson is one which all of you are thoroughly familiar with: no person or institution should borrow more than what he or the entity can pay. And there ought to be someone to make sure it does not happen.

With this lesson vividly in mind, particularly on the adverse effect of high interest rates, you have to understand why the Supreme Court has been intervening and setting legal standards on imposable interest rates. The Supreme Court has been filling in the gaps left by Central Bank Circular No. 905 which effectively removed the ceiling on interest rates on loans or forebearance of money, goods or credit.

In numerous decisions, the Supreme Court took cognizance of CB Circular No. 905 but equitably reduced or even invalidated unconscionable interest rates. These cases should be part of your repository of knowledge.

To give you a very brief summary of these decisions, the Supreme Court, in Solidbank Corporation vs. Permanent Homes, Inc., GR No. 171925, July 23, 2010 ruled that there is an indispensable requirement for mutual notice and written consent on the imposition of increased interest rates which, in this case, seemed to be on the high side. In other words, the debtor should be given the option to prepay the loan if he does not want to pay the higher interest rate being demanded by the lender, regardless of any contrary provision in the promissory note. The court said that a ''contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties is void.''

In Pasco vs. Heirs of Filomena de Guzman, represented by Cresencia de Guzman, GR No. 165554, July 26, 2010, however, we clarified that excessive and exorbitant interest rates should be reduced.

The Supreme Court laid down further rules on the imposition of interest in Eastern Shipping Lines, Inc. v. Court of Appeals, cited in several cases, including Maceda, Jr. vs. DBP / DBP vs. Maceda, Jr., GR No. 174979 and GR No. 175010, August 11, 2010.

There are other recent and landmark decisions which are important to the banking industry, such as those pertaining to negotiable instruments, foreclosure of mortgages, etc., I hope the BAIPhil will also include these important Supreme Court decisions and rulings in the continuing training, professional growth and development of the banking industry so as to lessen the possibility of litigation. As all bank executives and lawyers know, litigation in many instances only serves to sap bank resources unnecessarily and distracts our focus from more productive undertakings.

On this, I assure you that the Supreme Court and all inferior courts will be working with business, not against it, especially if public interest is at stake. I believe that government, including the courts, should play the role of facilitator of growth. This can only be done with good governance.

The Asian Development Bank says good governance is ''not just effective or efficient governance,'' but good governance as ''that system of rules, rule-making, and rule-enforcement that regulates the behavior of people and norms of society, upholds the law and delivers timely justice to all - equally and fairly.''

Central to the concept of the rule of law is the notion of fairness. Right is right. Wrong is wrong.

Good, consistent jurisprudence based on law, as well as time-efficient resolution procedures teach government and investors alike on how to act and conduct their affairs with predictability, transparency, and accountability.

In conclusion, allow me to cite English philosopher Thomas Hobbes who, as early as the 16th century, argued that ''without a judicial system, traders would be reluctant to enter into wealth-enhancing exchanges for fear that the bargain would not be honored.

In Hobbes' words, when two parties enter into a contract, ''he that performs first has no assurance the other will perform after because the bonds of words are too weak to bridle men's ambitions, avarice, anger, and other passions without the fear of some coercive power.''

On that note, thank you once again and a pleasant good evening to you all.