Special Deposit Accounts in the Philippines - Understanding the Pros and Cons of SDA Investing

I’ve had this wrong idea that “Special Deposit Accounts (SDA)” is just another name for time deposits. But I’ve come to realize it isn’t. It’s actually something else entirely. I did some research to find out what exactly SDA’s are and I want to share with you what I now know.

But before I go any further, I’d like to direct your attention to what benefits SDA’s can bring you.  I think foremost to anything else, you can consider SDA’s as an alternative parking spot for your emergency funds. If you’ve been having difficulties figuring out where to put you cash for emergencies, SDA’s is a financial instrument you can consider. Why that is the case will be clearer as I describe what SDA’s are and how they work.

What are Special Deposit Accounts?

Let’s begin at the heart of the problem SDA’s are trying to solve. It’s called inflation. I suppose you know what inflation is and why it’s bad. If not you can read more about it here.

In the Philippines, the government agency tasked with fighting inflation (as with most other countries for that matter) is the central bank. We call it our Banko Sentral ng Pilipinas (BSP). The BSP fights inflation in different ways. One of the ways they do it is by controlling the supply of money available.

You don’t have to be an economist to understand how oversupply of anything can drive its prices lower. This means that if there is a lot of something, that thing’s value will decrease. The same is true with money. If cash available in circulation is increasing rapidly, then the value of money will likely decrease. That’s one way how inflation happens.

So to counter that phenomenon, BSP finds ways to siphon off cash. SDA’s were created specifically for this purpose. Banks and other financial institutions can deposit their cash to the BSP through SDA’s. In order for this arrangement to be attractive, BSP pays interests with competitive rates. As the banks put more of their cash in SDA’s, supply of money in the market will decrease which will in turn help fight inflation.

How to Invest in SDA’s?

BSP only allows banks and other financial institutions under its supervision to deposit directly to SDA’s. But individuals such as you and me can still participate in it through managed funds by trust entities (trust departments of banks). What these trust entities are allowed to do is to pool in funds from individual participants (investors). The total amount of the pooled funds should reach the minimum amount required by the BSP. This arrangement allows individuals to be an investor even with comparably smaller cash.

When banks or trust entities make their deposits to SDA’s, it’s easy to imagine how they will earn from it. BSP pays them the interest due to them for either the two weeks or one month duration. Take note that interest rates quoted are on an annual basis. But since SDA’s are short-term in nature, interest payments for two weeks or one month are pro-rated accordingly. Also, interest earnings on SDA’s are subject to 20% withholding tax so they’re actually just earning 80% of the interest rate.

For trust entities to earn from individual participants, they charge trust fees for their services. These fees are usually 0.5% of the amount of total investment yearly, although it may vary from one institution to the next. Trust fees and withholding taxes are two deductions which are usually factored in already in the interest rates quoted by banks in their SDA offerings. Although this may not always be the case so it’s best to check with your bank about it.

The minimum amount trust entities accept from individuals also varies among banks. The most favorable I have read from blogs is that of BPI (Bank of the Philippine Islands), which they claimed to require a minimum of only 100,000 pesos. But I did confirm from BPI that this is no longer the case.

I called up BPI and BDO (Banco de Oro) to inquire about their SDA’s and they told me they now have the following arrangements for SDA:

Banks Minimum Interest Rate (one month tenor)
BPI          PhP 500,000  2.4%
BDO  PhP 1,000,000  3.156%

Parking Emergency Funds

There are several factors that make SDA’s conducive as a parking spot for emergency funds. They include the following:
  1. Short-term tenor - Since the deposits are normally short-term (1 month maximum), emergency fund maintains a certain degree of liquidity that people may need. Pre-termination within the 1 month period may or may not be allowed by a trust entity. This can differ per institution. If allowed, penalties may be charged. But the usual practice is not to allow pre-termination. This means that your money will stay in the fund for the duration of the investment period.
  2. Competitive interest rates - As opposed to savings deposits, SDA’s will earn comparably higher interest earnings. For the degree of liquidity SDA’s offer, the interest rates are pretty good.
  3. Automatic Re-enrollment - With such a short investment duration, re-enrollment is a convenient and attractive feature that an investor can choose to avail. You can do this with the principal only or together with the interest earning. 
There are, however, some disadvantages and risks that should also be considered. These include the following:
  1. High minimum requirements - Assuming that 500,000 pesos is the minimum amount you need to participate in SDA’s, many people will likely find this too prohibitive. UTIF’s invested in short-term bonds with much lesser minimum capital requirements can be better alternatives.
  2. Not insured by PDIC - SDA’s are not insured by the PDIC (Philippine Deposit Insurance Corporation) because they are not considered deposits to the banks.
If you have additional information on current interest rates and minimum required investments for SDA’s of the banks you do business with, please share them in the comments section. I would highly appreciate it and I’m sure readers too.

Photo Credit: archangel_raphael (Creative Commons)