The Central Bank of Sri Lanka (CBSL) knew of a crisis at Central Investments and Finance Ltd (CIFL) as far back as 2011, even stating in internal reports that the Company was “operating as a ponzi scheme”. Matters only came to head in July 2013, when CBSL acknowledged “prevailing liquidity and management issues of CIFL” and appointed People’s Leasing and Finance PLC as the Company’s managing agent.
However, in a statutory examination of the troubled finance company conducted in June 2011, the CBSL found that, “the overall risk exposure of CIFL was considered very high, given the inadequacy of resources to mitigate the risks”. “Currently with no earnings from 61.4 per cent assets concentration in real estate, CIFL is dependent on new deposits to meet expenses and repayments, thus operating as a ponzi scheme,” a report based on the findings states.
Despite the damning report, the CBSL, which is the regulator, allowed CIFL to continue canvassing for and accepting deposits from the public till June 2013. A copy of the document was filed with the Court of Appeal on Friday, when a petition by CIFL depositors complaining of unlawful activities in breach of the Finance Business Act was heard.
Petitioners are seeking a writ order to compel, among others, the Monetary Board, the Central Bank Governor, the Finance Ministry Secretary, the Central Bank and the Director of Supervision of Non-Banking Financial Institutions to take measures to ensure CIFL pays back their funds and interest.
The Sunday Times saw the report as well as a letter sent by the CBSL to the directors of CIFL in July 2011, describing the findings of its on-site examination. The inspection found that, “CIFL, which is in the Aspic Group, continues unethical, fraudulent business practices specifically with respect to real estate transactions similar to those found in the other group companies such as Industrial Finance Ltd (IFL), a distressed RFC (Registered Finance Company).”
The CBSL report has highlighted key weaknesses in the Company’s credit administration including the absence of a Credit Committee; the non-availability of an officer-in-charge (OIC) for the Credit Division; inadequacy of information received for CBSL examination; non-availability of proper customer evaluation; unethical credit-related practices and recoveries not properly monitored.
The report also pointed out that the Company was not charging a default interest or documentation fee; showed inaccurate interest computation; had deviated from Board approvals; had incomplete credit documentation; and had granted loans exceeding the value of pawned articles.
“The Company does not hold legal ownership for six properties amounting to Rs. 984 million of the balance sheet and 97 per cent of the real estate assets,” the CBSL observes. “The Company holds ownership of only three properties worth Rs. 42 million.”
The CBSL had held meetings with CIFL’s Board of Directors in 2011 to discuss violations and supervisory concerns. However, it is not clear from the submitted documents what actions were taken by the Company to remedy the situation.