All eyes on CB

Thursday, 20 October 2016 00:00 -     - {{hitsCtrl.values.hits}}

Top officials of the Central Bank this week took a stand to pay nearly 12,000 depositors of four insolvent finance companies a jaw-dropping Rs. 16.5 billion, which deserves applause with reservation. The reason the public should feel reservation is because such repayment, partly done with the use of Government Securities, needs to be a one-off occurrence and the Central Bank has to ensure that those responsible for the mismanagement of these companies are punished before the law. 

The monetary authority has to also carry through on its pledges to improve regulatory oversight on existing finance companies and ensure that they do not use unauthorised instruments to gather deposits, as was done by these finance companies. 

Three of the four finance companies are The Standard Credit Finance Ltd., City Finance Corporation Ltd. and Central Investments and Finance Plc. All three companies got into a chronic financial position in 2008 and 2009 due to fraud and mismanagement of funds and therefore did not have assets to pay off deposits. 

The fourth, Entrust Securities Plc, a company with a primary dealer license to trade government securities, had close links to the family of former President Mahinda Rajapaksa. Entrust famously had top Rajapaksa supporters on its board and openly sponsored rugby tournaments that were the darling of MP Rajapaksa under the previous administration. They were also accused of having misappropriated welfare funds from the Ceylon Electricity Board (CEB) that amounted to over Rs. 3 billion. Entrust got into a chronic liquidity and insolvency crisis during the latter part of 2015 as a result of the fraudulent use of funds placed by customers for investment in government securities.     

The whole sorry state of affairs came to a head earlier this year when Chanuka Ratwatte, along with four others, were arrested by the Financial Crimes Investigation Division (FCID) over alleged financial fraud charges committed by them at Entrust Securities Plc. They were remanded on charges of having misappropriated Rs. 4.2 billion worth of government funds under the Public Property Act though reports indicated that investigations had indicated three times that amount had been embezzled. Clearly such a blatant situation should not be allowed to ever happen again. 

Economists who had received news of a potential bailout for finance companies from the Government, decried the move, pointing out it would be unfair to privatise profits and nationalise losses. They insisted that officials who often collect hefty salaries and perks when a company is doing well should not be absolved of their responsibilities when their decisions result in massive losses. Such a valid point has to be driven home by the Central Bank. 

So far as part of its new measures the Central Bank has pledged to set up a new Enforcement Division in the Department of Supervision of Non-bank Financial Institutions to institute legal action against directors and managers who have been responsible for fraud and the misappropriation of funds and to make every effort to recover such funds from them.  The Enforcement Division will also introduce a routine procedure to take legal action against parties that have committed similar fraudulent practices in existing companies, in the event such instances are detected by the examination staff. 

Further, action will be taken to address lapses in the Central Bank and to strengthen regulatory and supervisory mechanisms on a priority basis to ensure the safety and soundness of existing institutions. Successful implementation of such a crucial project could well restore the institution’s dented reputation. It is now time for the Central Bank to walk its talk.    

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