Black money politics and finance companies
View(s):In the last update of the financial consolidation policy of the Central Bank (CB) issued last month, the regulator said that a total of 29 proposals from seven banks and 22 non banking financial institutions (NBFIs – finance and leasing companies) have ben approved. The announcement said that consolidation plans of seven more NBFIs and one bank are being finalised and would be announced shortly.
The objective of this consolidation process which began earlier this year is aimed at reducing the number of banks and NBFIs to make these sectors stronger and enhance public trust in the financial sector which constitute the (in most cases hard-earned) money of the people.
While these intentions appear to be honourable, the nagging questions that have been raised are whether limiting the number of banks would create a monopoly situation and/or whether the takeover of ailing NBFIs by well managed firms would burden the latter.
While the reduced number of 20 banks is unlikely to create any monopolies, the bigger issue lies with the acquisition of badly-managed NBFIs. The regulator has licenced more than a dozen NBFIs in recent years of which quite a few are struggling.
Depositors at NBFIs like the failed CIFL are still desperately trying to recover their monies with no clear payment plan on the horizon.
In a recent commentary on the CB exercise, stock market research unit TKS Securities welcomed the move “as long as the regulator does not enforce the NBFIs with high asset quality to acquire weaker entities in order to safeguard the industry as a whole.”
It said the best possible action would be to assist the ailing NBFIs (probably around six) to capitalise them though fresh capital or let them go under but with guarantees to repay the depositors which may be at the expense of the tax payers.
“The fear is that by trying to salvage the few NBFIs that are in trouble you might endanger the other stable NBFIs if they are encouraged to take over. In this scenario, our take is to let those institutions solve the issues on their own, with fresh capital that does not come from other better managed companies,” TKS Securities DirectorDanushka Samarasinghe was quoted as saying.
The Business Times has received several letters from reader-investors in banks and finance companies who have raised the propriety of ‘solid’ banks and finance companies buying into lesser known and struggling units. The need for more information to shareholders and depositors in buying institutions on the financial health of the firms they are buying has been urged. In one such letter, a reader says most (buying) banks are under obligation to their shareholders and depositors to explain the rationale of buying a (failed) institution with cash that comes from within (shareholder and depositor funds), irrespective of CB directives. Eventually it is the shareholders and depositors who would suffer if the deal turns sour, the reader says, while the bank or finance company will shrug it off as a bad debt like an NPL (non performing loan).
In this light, one particular CB-approved transaction between a buyer and seller that has drawn attention is the acquisition of Newest Capital Ltd for Rs. 300 million by Senkadagala Finance PLC.
In a media release issued by Senkadagala Finance, it is stated that Janaka Ratnayake is the majority shareholder and chairman of Newest Capital. As reported previously by the Business Times and other newspapers, Ratnayake has had more than a few scrapes with the law (Supreme Court, etc) and depositors of Senkadagala Finance have a right to more information as to the financial health of Newest Capital and whether the borrowers were bad debtors, etc, which if so makes it even more difficult for the new owner to recover those loans. Whether this is the status of Newest Capital (and many other companies that were bought over) is unsure. In the absence of a clear and no-holds barred transparency of these acquisitions (where information dished out to the public is not entirely … “the truth, the whole truth and nothing but the truth, so help me God”!), the public would never know.
Full transparency in transactions (example of the many deals happening) where the public has a right to know has never been Sri Lanka’s strongpoint either in the public or private sectors.
In today’s edition of the Business Times there is an interesting article from India on the black money economy and how the world’s largest democracy is struggling to cope with this malady which in many ways reflects a situation here.
At one point Prof. Arun Kumar, an expert on India’s black economy, is quoted as saying: “The point is (that) there is no dearth of knowledge about how black income is generated, how it is taken abroad, and how it is round-tripped. But we don’t have specific names”. The Sri Lankan scenario is slightly different – the biggest black money culprits have powerful government connections and thus are protected; it is only the small fry or those connected to anti-government groups who are hauled up in court.
Though still a hidden phenomena, Sri Lanka’s black money economy is as huge as India (in population ratio terms) where a lot of money is stashed in foreign accounts and tax havens (Read Sunday Times exclusive — http://www.sunday times.lk/120701/news/swiss-francs-85m-invested-in-swiss-banks-by-sri-lankans-last-year-4986.html). There are accusations that the recent focus on the Seychelles as a lucrative window to the African continent for trade and investment purposes could also be to siphon out undeclared money which rightfully must go to the Tax Department’s depleted coffers.
The media and other public-spirited organisations have been banging on the wall over the need for more transparency and governance in the plethora of state and private sector deals. Either no one is listening or no one cares. There is little doubt however that it’s the second malady that afflicts this country. Nevertheless the ‘banging on the wall’ strategy must continue as the tide will turn, one day, when truth prevails.