crisis and bank supervision
The Central Bank last week announced that it has decided to liquidate
Pramuka Savings and Development Bank (PSDB) after its investigations
revealed “several serious irregularities” in its accounts.
This came after a two-month investigation following the bank’s
suspension in October.
Bank’s announcement about its decision to close the bank and
to distribute available assets of Pramuka among depositors and creditors
makes some startling disclosures about the conduct of the bank’s
management. It has told Pramuka’s board of directors that
it was “mismanagement, unsound, improper and imprudent practices
at the bank by those responsible for the affairs of PSDB”
that had resulted in PSDB being insolvent.
board of directors, on being informed of the findings, had not objected
to the Central Bank’s findings and observations. Instead they
had had the cheek to suggest that Rs 600 million be pumped in to
revive the bank – a sum they themselves were not ready to
provide. It appears they expect the public to bail them out. The
Central Bank and its auditors have found that a much larger sum
would be required to revive Pramuka.
founder-chairman Rohan Perera is said to have fled abroad, apparently
before the court order preventing the bank’s directors from
travelling overseas. It seems that the posturings and pronouncements
made by Pramuka’s senior management, including the new chairman,
Udaya Nanayakkara, that the bank was sound, was ready to re-open
and that the media had made a fuss over nothing, were mere bluff.
The news of
the closure of Pramuka would be a big blow to those depositors who
had deposited their hard-earned money in the bank, lured by high
interest rates. It would also be painful to the bank’s employees.
These stakeholders have been trying their best ever since the bank’s
operations were suspended to get it reopened as that was the only
way they had any hope of recovering their money and saving their
management has tried to blame its troubles on last year’s
difficult economic environment and its restrictions on the use of
parate execution to try to get borrowers to repay their loans. Undoubtedly
this would have created some difficulties but Pramuka’s management
and owners can’t escape the fact that the Central Bank probe
has found serious irregularities in the way they ran the bank’s
have wider implications that could lead to a crisis of confidence
in the financial system. Already public confidence in the system
has been undermined – first by the accounting scandals that
have tarnished corporate America and revealed some of the icons
of market capitalism to be not the “men of standing”
they were thought to be and subsequently by the unprecedented allegations
of insider dealing against the head of our own market watchdog,
the Securities and Exchange Commission, and the chairman of the
Colombo Stock Exchange.
are questions about the health of other small banks with rumours
floating around that some of them are also in trouble, piling up
losses. And there are persistent reports that depositors are quietly
withdrawing their funds – a run on these banks would only
aggravate the situation.
failure also raises the question as to what the Central Bank was
doing. In the past it had spoken highly of the efficiency of its
supervision. How come the Central Bank missed the warning signals
emanating from Pramuka and allowed the situation to deteriorate
to the extent that ultimately it had no option but to close the
To be fair by
the Central Bank it did warn the public to be careful in investing
its money and to be not fooled by offers of unusually high interest
rates but these warnings came too late to help the depositors of