Sunday Times-business pages
Sri Lanka’s financial sector has been awash with news and regulator intervention as a crisis builds up in the finance company sector.
Adding fuel to the fire are reports that a senior regulatory official is in hot water over aiding and abetting some finance companies to inflate their valuation by re-valuing the assets!
At least five registered finance companies are in the doghouse for mismanagement and inability to pay interest to depositors on time or allowing depositors to redeem their investment on maturity or remove it.
The crisis is symptomatic of a malady afflicting Sri Lankan society where the rule of law is violated by the law enforcers or regulators themselves in an “I don’t care-like” attitude! A classic example of this helpless situation faced by ordinary, law-abiding citizens happened on Wednesday when a 50-strong group stormed the Serene Pavillions resort at Wadduwa and took over the premises for a temporary period over an ownership issue. “If there is an ownership issue, they should sort it in courts, the legal way. This is very bad for tourism and the police are also helping them,” said company Deputy Chairman and CEO Anura Lokuhetty.
In this case, the investigation is reportedly overseen by Colombo-based Senior DIG Anura Senanayake, a powerful personality himself, for what is essentially a civil dispute that must be resolved in courts, not the kind of shocking street thuggery witnessed on Wednesday.
This devil-may care attitude is evident in the financial sector too as fears grow of a crisis building up in also the more established banking sector where the People’s Bank and the Bank of Ceylon are up to their necks with borrowings from the state which is adding to debt.
The under-pressure Treasury, fielding enough and more requests for funds outside budgetary allocations from politically-powerful government agencies, is desperately looking for ways of balancing the “ins’ and outs” – expenditure versus revenue to maintain set budget deficit targets.
The National Savings Bank (NSB), the country’s biggest savings institutions which has joined the melee having to borrow US $500 million (down from a planned $1 billion) to support government spending, on Thursday offered a far-above market rate to the lead managers of the bond issue. Critics of the issue have pointed out the dangers of the NSB committing to a dollar interest rate with the dollar-to-rupee level rising all the time, and at a higher level than now when the bonds eventually mature and must be paid back. There is no return or commercial gain from this loan which is for government spending. Thus a bank which the public values as solid and safe will be paying interest on an unproductive asset. It’s the people’s money that is at stake.
Similarly, current efforts by the Central Bank (CB) to bail out these bankrupt finance companies with a financial life-line is also taxing the people for no fault of theirs. As stated over and over again, the CB’s failure to strictly, and properly, monitor these institutions starting off with the infamous Golden Key collapse that led to the ‘gold’ rush – depositors in panic mode pulling out their money from many finance companies – has led to a situation where action is being taken after the horse has bolted.
While eventually these companies have to be bailed out through a cash infusion and ensure the depositors get their money – the role of the CB , the solution itself is mired in controversy. In many cases, because companies don’t have money convert deposits to shares, often non-voting shares which means such depositors have no say in how the company is run. Bailing out companies by asking shareholders to run the institutions they themselves ruined and even cheated is akin to a rogue being asked to sit in judgment over his trial! Handing over management to another professional management has also not always worked because politics often gets in the way of independent and credible management.
On the other hand, depositors and minority shareholders taking over the reins like in the Golden Key case is also not a water-tight option. Some depositors are complaining that the –depositor-led payments solution in the Golden Key case is unfair and unjust.
The one time this depositor-led model worked was when depositors banded together and pushed the authorities for a solution in the Pramuka Bank collapse. The main issue in all these solutions is that politics tends to creep into all solutions.
People are desperate and if ever letter writing (a dying tradition) has survived in recent times, it has to do with the various problems citizens of the country are facing. Often in flowing hand-writing or using an old Olivetti typewriter, newspapers receive many letters with citizens pouring their woes on an issue where they have failed to get redress from the authorities and hope highlighting it in the newspapers will bring some relief.
For example, the Business Times receives at least 2 to 3 letters a week (some of which are being published today) from desperate depositors of finance companies complaining about the company, fearing their deposits are at stake or not sure what is going to happen as news report swirl around about other finance companies in trouble.
The faith, credibility and trust in a once-unshaken financial system are under severe threat as bouts of uncertainly in the sector have arisen in the past decade.
The big question being asked today is where do you invest some extra cash, hard-earned money or a pension on retirement that gives you a decent return and is safe for eternity? Is it in banks, finance companies, stock market or the many dubious investment avenues like the forestry management schemes in which one such company, Touchwood Investments, is being investigated by the Securities and Exchange Commission? The Business Times and its polls partner, research agency Research Consultancy Bureau (RCB) intend asking the public for their views next week on this issue.
Good governance activist and whistle-blower K.C. Vignarajah says the only way to eliminate this malady is through good governance and maintaining fundamentals. Likewise if the regulators do their job properly without allowing politics and politically-influential people to take over, none of these problems would be there.