15 December, 2017

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Billion Rupee Crisis: Central Bank Failed Once Again To Safe Guard Depositors

By Hema Senanayake –

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.

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Latest comments

  • 0
    1

    CBSL should stop all these finance companies accepting people hard earned money. It should be passed to well established banking system.

    How many times we had seen the finance companies go bankrupt?

    It is Insanity: doing the same thing over and over again and expecting different results.

    When CBSL play gambling on public money with greek bonds what can you expect from them.

    So people have to get smart. DOn’t be greedy for extra Rupee from finance companies and get played out. Put the money on banks which have good financial back ground. Since politicians started playing with government banks I would even advise not to use them. Go for private banks like commercial, HNB etc..

  • 0
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    Not only CIFL,the whole country is going to go bankrupt when the pyramid scheme of getting a chinese loan to pay back yet another chinese loan stops and the chinese demand a piece of real estate called hambantota.

    • 0
      1

      get lost you bloody tamil without talking about our country.

  • 0
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    Lets wait to see how the black money hidden in overseas accounts will not turn up in the form of pseudo BOI investors to salvage the remaining assets of the company at fire-sale prices.

    This way the bribe money gets laundered and when the assets are monetized they become clean money, useable in less restrictive countries.

    Did anyone seriously believe serious International investors were playing the Colombo stock market ? If you did, then you deserve the consequences of such naivete.

    Look at the names at the top of the 10 biggest companies in Sri Lanka and try to figure out their education, financial status a mere 10-15 years ago and where they stand today.

    If any one of them started Google or designed an algorithm, I might give them the benefit of the doubt. If not, one wonders how they earned the millions needed to buy up significant portions of these publicly traded companies.

    Of course they can’t accomplish this alone. There is a whole army of directors, secretaries, facilitators and politicians who grease the wheels of corruption in exchange for benefits. No one will talk lest they lose out!

    Sri Lankan needs honest citizens and a few brave souls, with access, to reveal the truth.

  • 0
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    I am a senior citizen who deposited all my earnings with CIFL. I did so because I had faith in the Central Bank. The CB advertised in the media the names of the companies registered with them. So, naturally I thought my money would be safe with CIFL. I am now left destitute with no income of my own.(CIFL used to bank my interest monthly to my account). So far I’ve managed selling my meagre belongings to live. I am desperately in need of money to live.I hope the CB would take speedy action to pay us Senior Citizens a monthly stipend at least.

    • 0
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      There are many respectable, law-abiding citizens like Ms Romanie Amerasinghe who trusted the care, efficiency and effectiveness of the Govt to keep their entire earnings, post-GKCC-Kotelawala robbery, in the safe hands of Deposit Companies recognised (and so advertised) by CBSL. The only reason they chose these private finance companies is the higher interest gained. Few of them do this to by-pass the taxman. They do this largely to cover themselves against galloping inflation, which the Govt has failed to control for decades.

      I hope Mr. Cabraal’s team in the CBSL will do a better job in the case of CIFL depositors than the sad fate that befell the 10,000 depositors of Kotelawala’s GKCCC. In the case of the latter cronies of the regime are said to have made a killing in gobbling up GKCCC assets of Rs.28 billion at give-away prices. Even the Rs.200,000 3rd payment Mr Basil Rajapakse and other officials promised these depositors will be in their hands many months ago – never saw the light of the day. Nothing is spoken of this except to trap 2 key agitators of GKCCC depositors into the Board of a new outfit. Since then these two ladies keep silent and the families of the depositors, estimated to be over 50,000 – suffer and are in tears. The regime clearly has other priorities to attend to in their own personal interest than worry about these duped 10,000. Will Mr. Cabraal make a statement in the matter of both GKCCC and CIFL matters.

      Senguttuvan

  • 0
    0

    It is pity that these organisations are failing due to such blatant errors in risk management. The lack of information on the 1.3 Bn JV projects is troubling. Shouldnt the CBSL conduct regular audits of these financial organisations to ensure transparency?

  • 0
    0

    Thanks for this analysis but the economists have failed us.
    The entire DEVELOPMENT STRUCTURE of Sri Lanka and DISPROPORTIONATE allocation of funds to the HAMBANTOTA region which has amassed a massive NATIONAL DEBT needs to be re-assessed and changed.

    Harsha De Silva the UNP point man on economy and the UNP opposition only talk about failed financial companies and deals in Colombo the capital.
    There has been NO analysis of larger picture of DEVELOPMENT – that with an unskilled human resource base and population of 300,000 people international ports and airports in Hambantota are unviable now and forever. THe brain dead Sajith who is MP for Hambantota has not uttered a beep too!
    The Hambantota White ELEPHANTs should have been STOPPED before they were started and huge amounts of loans dumped to build and maintain them. Today the Rajapassa regime continues to throw good money after bad in Hambantota.
    Similarly there is need to reassess and DOWN SIZE the military which is a massive WHITE ELEPHANT and drain on resources now that the LTTE is smashed. Today the military is running amok and needs to be right sized for the country.
    The fact is that it is the Rajapassa Hambantota white elephants that are the cause of MOST of the DEBT, and the crashing rupee and economy have not been analyzed comprehensively by any economist..

  • 0
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    The Central Bank is run by a RajaPox stooge. RajaPox looks after all his stooges and nothing will happen. Serves the people right for voting and still continuing to support this despotic family government.

  • 0
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    invest with the Rajapakses !!! your money is safe.

  • 0
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    Rather than throwing absurd accusations it will be more appropriate if the depositors join up to sue the CBSL. Most depositors like me put in money in Finance Companies because of the CBSL approved list of such companies. As mentioned in the above article if CBSL had properly monitored CIFL then this catastrophe could have been averted. It is ridiculous for CBSL to now state that depositors should be reading the annual report of the company,. Most depositors have no financial know-how to monitor such reports. It should have been upto the CBSL to monitor and put out a warning NOT TO deposit in a FC which shows potential problem or at least to STOP SUCH A COMPANY FROM ACCEPTING ADDITIONAL DEPOSITS If depositors form as association to fight CIFL / CBSL please contact me at the above email address

    • 0
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      CIFL is not liquid as at now, but this does not mean that there is no value in CIFL assets. Therefore, the first thing that should be done by CBSL to protect depositors, creditors and investors is to stop sale or transfer of assets at devalue prices until the company is restructured fully. If the assets are devalued and sell to friends of CBSL Officials nobody’s investment will be safe. I will soon write on this matter. Thanks.
      Hema

  • 0
    0

    The writer’s analysis is much appreciated and I look forward to his articles which are interesting, informative and easy to understand.

    Whilst it is accepted that the Central Bank’s monitoring is poor, it is increasingly becoming obvious that citizens cannot depend on any branch of this government and have to depend on their own skills in unravelling the convoluted data in the quarterly and annual reports. It is up to us to study up.

    Readers must be alerted to the fact that even our state banks are not safe as earlier thought. Political appointments, bad decisions and manipulation of funds, large non performing loans, and hidden debts, have brought them to their knees.It was reported some time ago that large amounts of the debts of CEB and CPC are hidden in the balance sheets of the state banks.

    Hard earned savings of retirees must be invested without putting all the eggs in one basket, and bear in mind that state banks too can crash.

  • 0
    0

    Thanks you Mr Senanayake for your valid and very appropriate comments but does Mr Cabraal and his minions at CBSL and their friends listen to sane advise when they could make millions out of the misfortune of others for which they are directly responsible. I very much doubt it and strogly advocate legal action against CBSL and the directors of CIFL

  • 0
    0

    Of concern are the finance companies who have not submitted their annual reports.

    The following companies have been placed in the default board:

    Asia Capital, The Autodrome, Ceylon and Foreign Trades, Central Investment and Finance, CT Holdings, East West Properties, Huejay International Investments, PC House, People’s Merchant Finance, Radiant Gems International, Standard Capital, Asia Asset Finance, Orient Garments, PC Pharma, PCH Holdings, Ramboda Falls, Tess Agro.

    Other Crisis at Touchwood

    The Securities and Exchange Commission (SEC) yesterday took a tougher stance on Touchwood Investments Plc, (TWOD) imposing a freeze on its non-current assets, a first-of-its-kind move on a listed company.
    The capital markets regulator also issued two other tough directives in addition to extending the suspension on the trading of TWOD shares by a further three days from 10 September, bringing the total to six.
    On Wednesday last week during trading hours, SEC suspended TWOD shares following completion of preliminary investigations whilst emphasising a full-scale probe was ongoing. SEC action is because TWOD has a public holding of over 90% and to protect interests of investors.

    There appears to be a real problem with many companies which is not being addressed by CBSL.

  • 0
    0

    What are the other finance companies that are failing

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