Banks agree to assume obligations of dormant cash management center

REPORT FROM BUSINESSWORLD Banks have assumed hundreds of millions of pesos worth of debt related to the cash management center project, which encountered financial difficulties when the central bank reneged on its contract. The center was supposed to manage banks’ cash reserves held by the central bank, but the plan was criticized by state auditors for being illegal and extravagant. During its board meeting last week, the Philippine Clearing House Corp. (PCHC), which is owned and managed by banks, has agreed to pay P330 million worth of liabilities incurred by the Cash Management Center of the Philippines, Inc. (CMCPI), its wholly owned subsidiary. The bailout is expected to deplete PCHC’s fund, including its members’ refundable deposits. The PCHC board resolution also authorized the company to raise the required funding through borrowings or assessments on stockholders. As of December 2005, audited financial statements of PCHC showed its retained earnings amounted to P215 million. Members’ refundable deposits stood at P120 million. PCHC board resolution 09-2006 authorized the company to take on obligations by CMCPI in connection with the procurement of cash processing equipment from De La Rue Cash Processing Solutions. De La Rue is giving CMCPI only until September 1 to pay. Otherwise, it will sue for breach of contract. Based on the minutes of the PCHC board meeting last July 7, PCHC agreed to still deliver the equipment to the central bank. In return, the regulator will waive fees it had originally intended to levy on banks that use its cash center, as a way for banks to recover their losses. The Bangko Sentral ng Pilipinas (BSP) cannot assume the liabilities since it will violate government rules on procurement. In a letter dated July 14, 2006, PCHC Chairman Benjamin P. Castillo and CMCPI Chairman Leonilo G. Coronel informed PCHC stockholders that the industry and the central bank had agreed on a "win-win arrangement" where PCHC, on behalf of the banks, will pay for the equipment. "Under a usufruct arrangement, PCHC will give BSP the right to use the equipment... Investments may be recovered by the banks either through a fee-sharing formula or through a discount," the letter said. BusinessWorld tried to reach PCHC and CMCPI, but officials were unavailable for comment. The letter further assured stockholders that the central bank would find a way to enable the banks to recover the cost. "In case BSP cannot provide for the defined services, it will find a mechanism to reimburse the cost incurred by the industry," the letter said. BSP officials were also unavailable for comment. In 1995, the central bank said it would charge banks a service fee equivalent to 0.5% of fit currency note deposits in banks’ demand deposit accounts. It later deferred the charge upon the request of the Bankers Association of the Philippines. The PCHC said the levy had cost banks more than P1 billion last year. The CMCPI was established in 2003 to provide cash management services now provided by the BSP. The center was supposed to process and recycle notes on behalf of commercial banks and pass unfit notes to the central bank, among other services. Thus, the BSP will only have to deal with the center in servicing the cash requirements of banks instead of dealing with them individually. Banks agreed to put up a cash management center and PCHC provided P100 million worth of equity. The central bank started constructing a building inside its complex in Quezon City for the exclusive use of the CMCPI. But last year, it halted the project due to objections from the Commission on Audit, which accused the BSP of entrusting its mandate to a private entity in violation of its charter. -- Karl Lester M. Yap/BusinessWorld