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Sri Lanka Equity Forum » Stock Market Talk » CB’s power to bailout troubled finance companies challenged

CB’s power to bailout troubled finance companies challenged

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Manager - Equity Analytics
Manager - Equity Analytics
[size=32]CB’s power to bailout troubled finance companies challenged[/size]

Former Deputy Governor Wijewardena says notion of taxpayers’ money being used to pay defrauded depositors flawed

Monetary Act Law doesn’t allow Central Bank to print money and pay depositors 
The Central Bank’s plan to bailout three fraud-hit finance companies and a primary dealer is against the Monetary Law Act (MLA) as the provisions of the MLA allows the bank to lend only to licensed commercial banks in the case of liquidity requirements but not for providing redress to the defrauded depositors, according to a former Deputy Governor of the Central Bank. 

The Central Bank last week announced its plans to repay close to 12, 000 deposit holders and investors in these four companies by spending as much as Rs.16.5 billion along with interest beginning from 2017. 

While part of these depositors will be repaid using the Central Bank’s deposit insurance scheme, the balance will have to be repaid by printing money and this money will be placed in a Special Purpose Vehicle (SPV) without any collateral of security. The fund will be managed by Seylan Bank PLC.    
In this backdrop, former Central Bank Deputy Governor Dr. W.A. Wijewardena, a respected economist, whose newspaper Op-Eds are widely read, casts his doubts over the implementation of the Central Bank’s resolution to provide liquidity support to repay the depositors of three finance companies and investors of a primary dealer. 

“In terms of the Monetary Law Act, the Central Bank does not have the powers to do so. So, I don’t know how this plan is going to be implemented,” Dr. Wijewardena said, delivering the keynote address at the inauguration of the Sri Lanka Economic Association’s (SLEA) annual sessions last Friday.  

The Central Bank plans to repay as much as Rs.4.9 billion to 11, 878 depositors of The Standard Credit Finance Ltd., City Finance Corporation Ltd. and Central Investments and Finance PLC and a further Rs.11.6 billion to 131 investors of Entrust Securities PLC. 

However, Rs.3.1 billion of investments secured with the government securities invested through Entrust would be settled during the forthcoming weeks, according to the Central Bank. 
Further Dr. Wijewardena asked why as a taxpayer anyone should be paying for the wrong investment decisions made by those depositors and frauds committed by the owners/directors of these companies because money printing equivalent to bailing out costs are borne by the country’s taxpayers.  
“The resolution is good but of course the way the resolution had been done is bad. The Central Bank is planning to print money and bail-out four financial institutions,” he said in reference to the Central Bank’s plan. 

According to government data, the Treasury has allocated as much as Rs.5 billion to repay the depositors of the collapsed Golden Key Credit Card Company, of which the funds were alleged to have been misappropriated by the owners/directors. This was another instance where taxpayers’ money was used by the authorities to pay a section of individuals for their imprudent investments decisions.  The move also indirectly helped the owners/directors who brought these financial institutions down though mismanagement and fraud to claim no responsibility of their actions as depositors tend to cease their campaigns against these individuals since the government is paying them. “We have become a country which has bailed out problematic finance companies because they have become problematic because of fraud.  

“So, instead of addressing the frauds in these financial institutes, what we have done is we have got the taxpayers to pay money to the people who have lost their money in these financial institutions,” he charged. 
Asked why the Central Bank could not use the deposit insurance scheme to settle the entirety of these defrauded depositors, he said it could set a wrong precedent if the Central Bank did so.  At present the deposit insurance scheme has a balance of Rs.25.0 billion of which the largest contributors are the commercial banks.  

The entirety of the fund in the scheme is also not sufficient because these are not the only distressed finance companies which are in need of money.  Further Dr. Wijewardena said these depositors and investors who have already waited for over eight years with no return on their investment will further have to wait an undisclosed period and after which time the promised receipt of moneys by the Central Bank would have only a scant value considering the time value of money, as the value of money gradually depletes over time with inflation.  
The Monetary Board at its meeting held on October 14 approved to repay deposits and investments annually commencing from 2017 within a reasonable period of time with a fair interest rate during this repayment period.


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics

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