By Rusiripala Tennakoon –
Given below is a recent episode, involving a not so smart maneuver of banking procedure at a state bank, hereinafter called P bank for easy reference, leaving nothing but the real names, and that only because of possible further stunts to crucify the crusaders using the state funds to gag them through clumsy litigations engaging the sharks awaiting to appear in any suit for sums well above normal limits, which this particular bank is quite used to, and go back to the period September 2020 when the key players of the stunt, were enjoying their early stages in retirement after several years at the helm of affairs in this institution.
Mr. X and Mr. Y were two well-known characters associated with many controversial happenings in the P bank. The episode extends to the period of Jan to Feb. 2020 during which the events preceding the compulsory retirement of X was in the offing.
Anuradhapura is a historic city where many important landmark historical events have taken place. A newly appointed big wig to a State Bank is hosted in this historic city and due to the influential engrossment of an ex-employee with a sordid record, despised by many in the said institution, the new big wig gets the rare opportunity of visiting the sacred Bo-tree accommodated to step into the highly restricted area now only reserved for VVIPs. Mr. Y aspiring to be the successor to X plays a key role in this Anuradhapura Tour of the Big Wig promoted by the sordid ex-employee. Finally X goes with an exceptional retirement package offered to him to compensate for all the services he rendered during his tenure at the P bank to cover up many sins.
Now the story;
Mr.X obtains a loan of Rs.10 Million @ an interest rate of 11% from P bank on or about 19/8/2020.
Against what security has to be established by anybody who wishes to get to the bottom! But it is rumored that this facility was granted against a Fixed deposit of Rs.12,250,000/= that Mr. X maintains at the PLC which is paying him an interest rate of 15.2% per annum.
Normally banks can lend against the security of valuables held elsewhere on suitable guarantees and acceptable liens offered to the bank on account of such valuables. But the bank cannot accept such a deposit as a security of cash in hand to consider a special rate of interest for any lending against it. Even in a case, where the deposit is held by the Bank the interest rate that would be applied for any lending against such a deposit would be 2.5% more than what the bank pays on account of the deposit. Eg. If the 12,250,000/= deposit was with the Bank direct at 15.2% interest, then the loan facility will have to be at a rate of 15.2%+2.5%. ie. 17.75%.
Mr X has been given a facility of 10Mn @11%. If that was against the deposit he was having with the PLC it deserves to be examined further how and why and who granted the authority to grant this facility? Bank cannot treat money held elsewhere outside the Bank as cash values held by the bank.
If banks follow this as a common practice then there would be a bonanza accruing to people who can deposit a sum at a higher rate of interest in PLC or any finance company and take a loan from Pbank at a much lower rate against that deposit. It also yields to another highly hypothetical possibility of the depositor becoming eligible to repeat his exercise as follows.
1. X deposits 12.250,000 at PLC @ 15.2%
X takes a loan of Rs.10 mn. against this from P bank @11%
His margin of Interest income would be 1,906,250/= earned from PLC less 1,100,000/= paid to P bank for his loan equal to Rs.806,250/=
2. Now he can deposit this 10mn. Again at PLC @15.2% and earn 1,525,000/=
If he decides to take a loan facility again from P bank as before he can obtain about 9,000,000/= @ 11% which would make him pay 990,000/= as interest while earning 1,525,000/= from his PLC deposit. His Interest profit margin would be 1,525,000- 990,000= 535,000/=
3. If he decides to continue this exercise with his influential blessings by continuing the exercise about 14 times until his deposit becomes about 3 mn. And entitling him to obtain a loan of about 2.5mn. his total investment income would be around Rs.13 mn. while the amount he has to pay P bank as loan interest would be approximately 8.4 mn.
Reader, don’t get alarmed, during a period of about 1 year and 30 days he would earn a sum of Rs.4.7mn as interest profits!!!!!!!
So Mr.X has enunciated a theory , we can call it Rasa,s theorem like that of Pythagoras we learned during our elementary maths dates!!
We like to get some clarifications before we apply this theory.
a) Will the PLC give this high rate of interest to all or is it only to Mr. X?
b) What is the security Mr. X offered on 19/8/2020 to obtain this loan of 10Mn. From P bank?
c) Will the authority who approved this concession to Mr.X grant the same to us all?
d) Did the P bank accept the deposit at PLC as security for the loan granted by them?
e) Was the rate 11% the normal lending rate applicable to all or special only to X?
f) Will there be someone competent at the P bank to look into this matter ?
g) Is there any internal audit function in place at the P bank to look into such matters?
h) Will it be a matter for concern of the Bank Supervision Dept. of the CBSL?
Strange , not as a coincidence , Mr X’s successor Mr.Y, too has done the same magical exercise now widely discussed by whistle blowers in the P bank discreetly as follows;
Mr. Y deposits Rs.4,000,000/= with the PLC @ 11.25% and obtains a POD facility from P bank on 17/9/2020 @ 9.5%
Again Mr.Y deposits 5,750,000/- with the PLC @ 11% and obtains a POD from the P bank on 21/9/2020 at a interest rate of 9.5%
Are these God given gift packages only to X and Y by the P bank?
What about several millions of other customers? Is there any thing called banking practices? Do they become applicable ipso-facto to all?
Some people benefit and continue to benefit extraordinarily from some people’s banks!
Sent to me with a request to share by “Eagle Eye”