Comparison of two finance companies and startling revelations

Friday, 20 January 2012 00:18 - - {{hitsCtrl.values.hits}}

BY Analyst

Newspapers recently carried the six month results of two licensed finance coming under the purview of the Central Bank of Sri Lanka. Careful examination of the two sets of accounts reveals glaring violations by company “A” seriously compromising the trust of its deposit holders.

Both companies appear to be equal in size with shareholder equity being Rs. 643 million in company A and Rs. 555M in company B .The fixed deposit base of company A stood at Rs. 4.5 billion whilst company B had Rs. 3.3 billion. However the similarities of the two companies ended at that point with a starling disparity in profitability.

Company A recording a measly Rs. 34 million as profit for the six month period and company B recording a profit of Rs. 196 million for the same period. Closer examination of the two sets of accounts reveals the following causes for the huge disparity.

Directors emoluments

The directors of company A have paid themselves a whopping Rs. 20 million for the six month period whilst company B paid its directors a modest Rs. 2 million. The irony being company A paid its directors only Rs.1.2 million in the previous year. A 16 fold increase with no apparent improvement in profitability.

In fact, profitability decreased from Rs. 85 million in 2010 to Rs. 34 million in the current year. Other personnel cost of company is almost twice that of company B. It is interesting to note that company A has appointed a Central Bank retiree as its Chairman perhaps in gratitude for covering its past sins.

Dealing securities

The Central Bank guidelines are extremely clear on this and no company is permitted to invest in excess of 5% of its own capital in such securities. It appears that company A has totally disregarded these guidelines by investing Rs. 537 million when the permitted amount is only Rs. 32 million. Furthermore this sum is equivalent to a staggering 10% of its total deposit base.

It appears the Central Bank have continuously ignored this violation placing the deposit holders funds at enormous risk particularly in the present volatile market conditions.

No realistic provision has been made to the fall in value of investments and the company is allowed to place fancy advertisements in the print and electronic media further risking the deposits of gullible investors. It is also rumoured that the company is delaying interest payments due to the deposit holders in the recent past further confirming its present status.

Listing of shares in the stock exchange

It is a mandatory requirement of the Central Bank for all finance companies to list its shares in the Colombo Stock Exchange and most companies have already done so. However this company has hoodwinked the entire public and the Central Bank by listing some debentures and calling itself a public company.

In the light of the above the appointment of a senior Deputy Governor as its Chairman no sooner he retires from the Central Bank can be seen as an attempt to circumvent the violations as stated above. Appointment of ex Central Bankers to such positions needs to be looked at more carefully by the authorities in order to prevent a recurrence of the debacle faced by the industry in the recent past.