By Hema Senanayake –
Central Bank Failed Once Again To Safe Guard Depositors – Billion Rupee Financial Institution, the CIFL, Is In Crisis
In fact I wrote this article on August 15, 2013 and was saved in my computer hard drive at 3.51 p.m. I wrote the first paragraph as follows. “Please correct me if I am wrong in this analysis. In fact I wished to be wrong here. My objective here is not to make public and depositors pessimistic about the financial institution they trusted. Trust is an essential element for banks and financial institutions especially that entertain deposits. The trust of customers, especially depositors is important to any financial institution than the Capital Adequacy Ratios stipulated by the Bank of International Settlement (BIS) which is responsible in making global conventions which are known as Basel 1, 11 and Basel 111 to ensure the stability of banking and financial institutions in each member country of BIS and Sri Lanka is a member country as far as I know.”
The article was about the grave liquidity crisis of Central Investment & Finance PLC (CIFL). My wife did read it. After reading the first paragraph, my wife insisted that I should not send it to Colombo Telegraph, by then. Her opinion was that if I sent it, then depositors would be panicked which would lead them to withdraw deposits and any significant withdrawal might lead to the collapse of CIFL even if the company could have been restructured successfully. I obliged to agree with her opinion. I did not send the article. But the CIFL has collapsed a few days ago without my involvement. Therefore, I am sending the same article now. The analysis I made by that time is still valid and shows the CBSL’s failure to take precautionary actions as far back as 2012. Also, let me put the entire article within inverted commas in order to intimate that I am quoting it.
“The financial institution I am referring to is the Central Investment and Finance PLC (CIFL). It is a billion rupee company in terms of assets and liabilities. By March 31st, 2012 total assets amounted to Rs. 3.6 billion and out of this amount deposit liabilities amounted to Rs. 2.6 billion. This means people have deposited Rs. 2.6 billion in CIFL. In 2011 it successfully launched its first public-share-issue (Initial Public Offering) amounting to Rs. 400 million which was oversubscribed; oversubscription is in general considered as a sign of the strength of the company. Yet, barely in two years since the Initial Public Offering (IPO), the institution is in a dire liquidity crisis. A liquidity crisis means a situation that it cannot meet its short term monetary obligations. In order to remedy such a situation the company needs new inflow of cash to keep afloat until the management takes steps to improve the situation. The management tried to mobilize USD 12 million (roughly over Rs. 1.5 billion) but it failed and the failure was duly reported to the Colombo Stock Exchange.
By now the situation of the company did not go unnoticed to the Central Bank of Sri Lanka (CBSL) which is responsible in ensuring the stability of the financial system. Collapsing of banks and financial institutions is bad for the stability of financial system. Therefore, CBSL is required to monitor and intervene decisively if a financial institution is in trouble.
Accordingly, CBSL took a decision to appoint an agent to manage CIFL. A press release issued by the CBSL says “The Monetary Board has appointed People’s Leasing and Finance PLC as the Managing Agent of Central Investment and Finance PLC (CIFL) with effect from 01st July, 2013 … considering the prevailing liquidity and management issues of the CIFL. The Managing Agent will be expected to improve the financial status of CIFL within a reasonable period of time, and Central Bank will closely monitor the progress.”
From the same press release CBSL threatens to the Board of Directors of CIFL. Press release says, “…all present members of the Board of CIFL would be expected to extend their full co-operation to the Managing Agent to resolve the current issues faced by the company, while they would also be held responsible for the settlement of liabilities of depositors and other creditors prior to the appointment of the Managing Agent.”
I think, CBSL’s intervention was too late and threatening to the Board of Directors of CIFL now is not productive. How they themselves were to settle depositors money amounting to Rs. 2.6 billion if depositors decided to withdraw. Perhaps CBSL could put the directors in jail but it is not productive. They did a terrible mistake and made wrong choices in investing depositors and others money but what is necessary now is to save the company if possible or liquidate it in orderly manner in order to protect the people’s deposits and investments. This should be made the role of Managing Agent. I think, the country does not need another “Golden-Key” crisis.
CIFL’s risks and problems were quite clear from the annual report issued by 31st March, 2012 if the CBSL monitored the company’s performance carefully. If CBSL did the monitoring good, perhaps better preventive actions might have been taken earlier. I am not sure whether CBSL had analyzed the risks CIFL was facing as far back as early 2012.
Standard method of minimizing risks of financial institutions is to ensure them to have capital adequacy ratios stipulated by Basel conventions. By 2012, it was mandatory that each financial institution must declare its Core Capital Ratio (Tier 1) and Total Capital Adequacy Ratio (Tier 1 & 11). These ratios are used to protect depositors and to ensure the stability and efficiency of financial system in a country. Accordingly, CIFL reported in its annual report of 2012 that both ratios for the company were above 20% which percentages were more than two times what was stipulated. This means that the company was on sound footing. During the monitoring process, CBSL might have thought that it would have been the case. How on earth such a company within months went into liquidity crisis that cannot be solved by itself, needing the CBSL to appoint a Managing Agent?
For any careful monitor the problem of CIFL was abundantly clear from its annual report of 2012. But you may not found it in the risk monitoring ratios of capital adequacy; instead you may find it in the company’s balance sheet and elsewhere.
One cardinal rule is that no non-commercial banking institutions should use high amount of short-term funds for long-term investments. By definition commercial banking institutions are banks that authorized to operate current accounts for customers while accepting deposits. These banks operate under a special set of rules in which they themselves can create money by using deposits. CIFL is not a commercial bank. It is a financial institution that is authorized to accept deposits.
By the end of March, 2012 the company (CIFL) had deposits amounting to Rs. 2.6 billion. Maturity period of the most of those deposits were one year. In other words people could possibly withdraw their deposits within one year. Those are short term funds and must have been invested predominantly in short term such as leasing, hire purchases, short term loans and advances. For an example, in a recent balance sheet of the People’s Leasing which is the appointed Managing Agent for CIFL, when deposits amounted to Rs. 12,386 million, the amount invested in just leasing and hire-purchases amounted to Rs.60,000 million. Clearly, deposits of people are very safe. This should not be the rule of thumb but compare those figures with the figures of CIFL. When deposits amounts to Rs. 2.6 billion the company had investments in leasing, hire-purchases, loans and advances etc. amounting to Rs.1.05 billion. Almost amounting to the value of the half of the deposits has been invested in projects known as Joint-Venture-Projects which are usually long-term projects. This is a bad choice on the part of Board of Directors of CIFL and a recipe for a minor liquidity crisis to become a Tsunami.
Having understood the risk of depositors, I wanted to see the nature of joint-venture-projects in which CIFL had invested heavily. Again I looked at the balance sheet of 2012 but I found no reference note attributed to the joint-venture-investments. I could not found information as regard to investments made amounting to Rs. 1.3 billion, nearly over one third of total assets.
Whatever the case is the Managing Agent of CIFL has a daunting task. According to my thinking what is needed now is to reorient the nature of investment structure of CIFL. In other words, put the short term deposits in short-term investments while liquidating part of long term investments. In fact this is nothing new for the CIFL itself, they have been doing this before 5 or 6 years ago and they were doing well by that time. Rather than threatening the Board of Directors, CBSL must passively help the Managing Agent to revive CIFL for the best interest of depositors and the stability of the financial system.” (End of the original article).
On or around 05th September, the JVP Parliamentarian Anura Kumara Dissanayake said in the parliament that the Central Bank has failed to prevent the CIFL company from going bankrupt and over 6,000 depositors are facing difficulties due to the company’s bankruptcy.
Now, my conclusion is that CBSL must duly accept responsibility for its lack of professionalism in the department for the Supervision of Non-Bank Financial Institutions. Capital Adequacy Ratios solely do not reveal the real risks faced by financial institutions.