Investing in Rural Banks — Risky?

 

Any form of investment has inherent risks involved. As investors, you have to conduct your due diligence before jumping into something. Never ever give your hard-earned money to some investment scheme you dont fully understand.

Recently, Rural Banks offering high interest rates for their Time Deposit products have experienced some setbacks. We saw how G7 Rural Bank went belly-up, one of the biggest and trusted rural banks, a few weeks back.

To know more about it.. follow this Forum Thread

And now, rumors are hounding investors of the Legacy Banks, with issues of solvency and integrity.

To know more about it.. read this article from Inquireror follow this Forum Thread for recent updates.

As simple investors, we probably won’t know the real deal, until all the dust settles. But, if you have done your assigment before placing any investment, and you have understood all the risks involved — then, there’s no need to worry. Besides, PDIC will always be there to insure your money.

So, is it Risky? If you just followed the herd and didn’t do any research — yes, it’s Risky. But, if you have considered all the elements — like bank history, reasonable interest rate for your investment, and PDIC limit — then, the Risk is minimized or even close to Nil.

LEVERAGING

 

Leveraging is borrowing money to invest. Most people call it OPM or Other People’s Money. This is very tricky as it can magnify your gains or losses. But, if you’re sure of the investment vehicles you will invest your money to, then leveraging is a thing for you.

Here are ways you can use leveraging to your advantage:

1. Leveraging from your Credit Card’s credit limit. Let’s say you own a small business with fast moving goods. You can dispose all your items in less than 30 days. Using your credit card to purchase raw materials, allows you to use the bank’s money as your capital. Granting you have a credit limit of Php60,000 and use it for purchasing raw materials for your baking/food business. Purchasing all these items right after your cut-off date, gives to approx 50 days before your due date. Since food items are fast moving goods, and granting you’ve sold everything in 30 days with a decent profit margin of 30% — in effect, you’re ready to pay up your credit card debt even before your due date. Since you pay everything in full every due date, the credit card company charges you with nothing. This is like putting up a loan for Php60,000 in 50 days with 0% interest.

2. Taking up a loan with small interest rates and investing it with higher gains. Let’s say you’re a member of a cooperative, and your coop allows you to put up a loan and only charges for 10% p.a. interest rate. If you bring your money to fixed income tools that will yield definite and higher returns, then you have leveraged from your coop’s money. Several Rural Banks offer higher interest rates for long term placement, ranging from 12% to 20% for a 5-year placement. If your investment will gain 12%, and your loan is at 10%, then in effect you gained 2%, and this is not even your money. I suggest extra caution when you try this type of leveraging. Never invest your borrowed money in something that will not yield definite and fixed returns — like mutual funds and stock market, as you can’t afford to lose your principal. When investing borrowed money, always protect your principal, and your gains should always be higher than your loan’s interest rate.

3. Flipping Real Estate Properties. Though, this is not for everyone as it takes a lot of skills, many people use this type of leveraging to earn high profits. Let’s say a bank is selling a condo unit (foreclosed items)for 1M, and gives the full control to the successful bidder with only 10% downpayment. This means, you only need Php100k to take control of the property and pays the monthly bank amortization. You can now improve it and shell out some extra money to boost the sale value, or sell it as is for a profit. Let’s say, you flipped the property by shelling out another Php50K for some improvements, but sold the unit for 1.5M. This is a clear profit. You dont have to be a millionaire to close a million-peso sale/deal.

Though, the above examples seem very easy. It takes careful analysis before one can pull off a profitable deal. You have to be 100% sure that your investment will protect your capital, and your profit will always outweigh your loan’s interest rate. It not, then don’t risk using other people’s money — as this can make or break your credit rating.

INTEREST RATES for COMMERCIAL BANKS

 

You can check out the latest interest rates of the following Commercial banks:

Metrobank

Bank of the Philippine Island (BPI)

Banco de Oro

Chinabank

Among the four, Chinabank offers the highest interest rates for their Time Deposit Products. If you have multi-million funds to open for a time deposit, i suggest you deal with the big commercial banks for stability. But if you’ re starting, and can conveniently chop your funds under multiple accounts and still comply with the 250K PDIC Limit (to secure your deposits), then if you’ll ask me, Rural Banks still offer far better rates than commercial banks. (i have a separate post about rural banks, though the rates may no longer be updated — but still definitely higher than commercial banks) COMMERCIAL vs. RURAL

INFLATION HITS 11.4%

Inflation finally hits double digit in June with 11.4%, brought about by relentless oil price increase in the world market hitting a market high of $145 per barrel.

When inflation is high, what does it mean for the common people?

- Inflation eats up the purchasing power of your money. As prices of basic commodity increase, you’ll find yourself spending more for the same basket of goods you’re buying.

- Spending more would mean increasing the money supply in the market. As most people will continue to eat, drive to work, and spend everyday- more money will float in the market.

- When inflation is high, central bank tends to increase Interest Rates to control the money supply in the market. With high interest rates, people will think twice before buying goods which they have to pay with interest rates. With this, central bank hopes to reduce the money supply in the market, and hopefully curb inflation.

- If inflation is high; Interest Rate is high. Then interest rates for auto loan, housing loan, personal loan, etc will also increase — So, is it best to buy a new car, a new home, and get a loan during high inflationary period? — if your paying cash, go right on.. but, if you’ll pay the mortgage or monthly amortization — may not be a wise move.

- Inflation is not all negative — again, there will always be two sides of a coin. As a consumer, high inflation will definitely beat you down. But as an investor (if you have existing investments in the money market), high interest rates will work to your favor. As central bank increases interest rates, banks should follow suit by increasing their Time Deposit Rates, Bills and Bonds Rates, etc. What is the logic? With banks now offering attractive interest rates, people will save more and put more of their money in the banks than spend it — again, solving the problem of too much money supply in the market.

So, how do we cope with Inflation? Spend Less… Save More.

BDO REWARDS

When you save and keep your money in commercial banks, they give you 0.75% p.a. interest rate, and yet they lend your money to you or to other people through Auto Loan, Personal Loan or Housing Loan with exorbitant interest rates ranging from 10% to 15% p.a. or even more. On top of that, they earn whenever you pay your bills, load your cellphones, or make other bank transactions. Banking is truly a profitable business — literally people line up everyday in banks to give them funds, which they can use to earn more money. And yet, at times you get crappy service from bank employees treating you like sh*t, as if they don’t benefit from your hard-earned money (I can devote a whole separate post for this topic — I sure have so many stories to tell.. hehehe)

Until, one bank thought of giving back (even a miniscule fraction) to their depositors. The birth of BDO Rewards. As they claim, a consumer-centric approach that provides opportunity to depositors to share the earnings of their money. When the Sy’s took over the merger of Equitable-PCI and BDO, I’m quite positive they’ll bring their retail experience in the banking world — im sure everyone knows about SM Advantage Card, and the BDO Rewards Card is like a twin brother which gives you peso-points for bank transactions, and the amount of money you keep in their bank (on top of the usual, and crappy interest rates) — Is it enough? NO — but, better than nothings! I’m not jumping up and down, but I’m sure this will be the beginning of many other developments in banking system.

To know more about it — especially, if you’re a BDO depositor, please check this website…

http://www.bdo.com.ph/Rewards/index.asp

Will this encourage me to keep more money in a commercial bank? Probably. Some amount to keep my l life going — to settle my monthly bills and other expenses. But, for real savings with better interest rates — i still put my bet on Rural Banks. As long as it’s PDIC insured, I can still sleep peacefully every night.