The Sunday Times FT -Over 30 ‘deposit-taking’ firms probed by the CB

The Central Bank, is battling against a score of companies trying to dupe the public through attractive interest rates for ‘deposits’ in doubtful schemes, say some firms mislead the public by publishing the company registration number to look like a Central Bank approved institution.

According to CB sources, currently over 30 institutions are under investigation by the Bank while 13 other institutions have been declared as not being approved to accept deposits. Legal action has been filed against 11 companies.

In a separate interview, L.K. Gunatilake, Director, Department of Supervision of Non-Bank Financial Institutions at the Central Bank (CB) said registering as a company does not authorize an institution to accept deposits from the public and to carry on the business of banking or finance.

In a detailed interview on counter measures by the Bank against dubious schemes, Gunatillake said the Bank has published many notices advising the public to be cautious when investing their money in institutions offering very high interest rates.

She said it has been observed that in many areas of the country, institutions and persons are mobilizing funds from the public, offering very high interest rates and attractive returns and the notices serve as eye openers to the public who inquire from the CB whether it is advisable to place funds in these institutions.

While the current Treasury bill interest rate is approximately 10%, the rates offered by unauthorized institutions are at a relatively high and unrealistic 24%. “It is questionable why they cannot go to banks and borrow money at lower rates. Why do they offer very high rates and borrow from the public?” asked the CB director.

She said to circumvent the requirement of registering with the CB, institutions unauthorised to accept deposits refrain from using the word “deposit”. Instead they use terms such as “debenture” and “investment”. According to Gunatilake, the definition provided in the Banking Act is very wide and thus, even if they do not use the word “deposit”, if the characteristics of a deposit are to be seen, the CB investigates to see if the institution is in fact, taking deposits. The current deposit to register as a finance company is Rs. 200 million. Most unregistered companies do not have capital, systems and controls. Further, their directors are not qualified and the businesses are not run prudently and thus, are not suitable to be registered as finance companies. “There are some institutions that were investigated and determinations made. After that the Board directed them to register and they fulfilled the requirements and are functioning as registered financial companies,” she said.

When asked if there are any laws coming up in the future to prevent ‘bogus’ institutions from conducting businesses, Gunatilake said, “The CB has recommended amendments to the Finance Companies Act to deal more effectively with these institutions.”

These unauthorized institutions function by servicing the old deposits with the money coming in from new deposits.

Once the inflow of new deposits dry up these schemes collapse and the public who have placed funds under such schemes lose their money.

Gunatilake said that in such an event depositors can seek legal advice and file action for breach of contract but it is very doubtful if they can recover their money as there are no assets to repay it with.

“People should be aware that very high returns are associated with very high risks,” she added.