Financial Times

Now trouble brewing in Co-op Banks
New legislation to crack down on dubious Cooperative Societies

By Bandula Sirimanna

New legislation, hard on the heels of the Sakvithi financial scam and rising concern about other deposits in unlicensed institutions, is to be introduced to protect depositors in cooperative rural banks, thrift and credit societies and lending institutions.

Stern legal action will be taken against persons misusing funds in these institutions. The public outcry involving bogus financial institutions triggered by the Sakvithi scam continued to have a big impact with depositors throughout the island rushing to withdraw their investments in many institutions that collect deposits, some unregistered by the Central Bank and others governed by different rules and regulations.

At least two cooperative banks are in trouble and the sum of money allegedly misappropriated could reach Rs 400 million and over. Minister of Commerce and Consumer affairs Bandula Gunawardane told the Sunday Times FT said that he will soon initiate action to amend the Co-operative Societies Act No 5 of 1972 to give more powers to regional cooperative commissioners to oversee the functions of cooperative financial institutions which are mushrooming in the island. He added that he will consult Chief Ministers of all provinces before drafting new amendments as the regulatory structure of the cooperative banks in Sri Lanka is a complex one.

Mr Gunawardane disclosed that two cooperative societies registered with the Commissioner of Cooperatives, Central Province had been involved in misappropriation of public money and these two institutions have set up branches outside the province violating the Act. He pointed out that the Human Resources Cooperative Society in Mawanella and the Vehicles Cooperative Society in Kandy are involved in malpractices and these two societies have already set up branches outside the Central province to carry out financial transactions such as accepting deposits from customers and lending money and leasing of vehicles which is illegal under the Co-operative Societies Act. It has been revealed that the Mawanella institution has deposits of around Rs 400 million and it has already set up 101 branches. However the Minister said that all Cooperative rural banks other than these two rural financial institutions registered with the Regional Commissioner of Cooperatives are functioning smoothly as the Cooperative Development Department is monitoring and auditing the accounts of these cooperative societies.
Reports from Kandy said the Vehicles Cooperative Society had increased its interest rates to 30 % from 25 %.

Commissioner of Cooperative Development K.P.G Kithsiri told The Sunday Times FT that the Board of Directors is responsible for all financial transactions of the Cooperative Society. He noted that action could be taken against the management which is accountable for all transactions. Almost all cooperative societies are registered under the Co-operative Societies Law No.5 of 1972, by which they are authorized to accept deposits from public and lend monies to their members. In addition, there is a large number of Thrift and Credit Cooperative Societies, which are also categorized as Cooperative banks as they perform banking functions at grassroot level. At present, co-operative banking operations account for about 1.5% of the assets of the financial system in the country. He revealed that the total amount of deposits in 1619 Cooperative rural bank branches in the island stood at Rs. 25 billion and advances portfolio at Rs. 8 billion. Their deposits account for nearly 3% of total savings and time deposits of all deposit taking institutions.

he excess funds of the Co-operative Rural BANKS are deposited with the 14 District unions of the Cooperative Foundation. He added that around 7,000 rural financial institutions are functioning at present in addition to these Cooperative rural bank branches. He asserted that greater supervisory attention needs to be paid to internal risk management and control systems for better understanding by the management of risks and to consider market discipline as an effective tool in building confidence among depositors and other stakeholders.

Commenting on the financial crisis of the Mawanella bank, he said that the department will cancel its license and appoint a liquidator to settle the liabilities. All cooperative societies, whether they mobilize public funds or not, should register with te Cooperative Development Department which is headed by the Commissioner of Cooperatives. The Department is also the national level regulatory body. Some societies are registered with the Provincial Cooperative Commissioners. At the time of registration, all societies are provided with the rules and regulations and by-laws applicable to the cooperative sector.
Meanwhile Director Supervision of Non Bank Financial Institutions of the Central Bank, Sepala Rathnayake told The Sunday Times FT that six unregistered finance companies named by the Central Bank must obtain their registration before October 24 or face action.

However, he said the Bank cannot take action against Cooperative societies as they are permitted to collect deposits and lend to its members. The Commissioner of Cooperatives has been empowered to register such societies and to take necessary action against malpractices and fraud committed by them, he said, adding that the Central Bank has no authority over these institutions.

Of the six, three institutions are willing to register with the Central Bank and they have already obtained registration forms. These institutions and persons are Piyadasa Rathnayake, Hungama, D.K Ubayasiri and Sriyawi Homes. However Piyadasa Rathnayake was arrested by police on Thursday, produced before courts and remanded after depositors complained.

Mr. Rathnayake said that financial institutions must form a public company with at least six shareholders and show a capital base of over Rs. 200 million to obtain Central Bank registration.

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