Financial Times

Golden Key: System and investors to blame

Has the bubble burst at Ceylinco?
By Natasha Gunaratne

The collapse of the Golden Key Credit Card Company could signal a systemic collapse of some large finance companies as well as banks and could be the impetus for the global financial crisis to spill into Sri Lanka.

Reliable sources told The Sunday Times FT that the Central Bank (CB) called for an emergency meeting with the banks on Wednesday to discuss the crisis. Sources at the Securities and Exchange Commission (SEC) said the SEC had called a meeting with Ceylinco Shriram Securities on Friday to discuss the possible fallout from the Golden Key crisis but all of Shriram's directors were on holiday.

There are serious doubts being expressed about the mechanism through which deposits have been taken by Golden Key. Due to the fact that there are a lot of private companies which make up the Ceylinco Group, its exposure might be high. There are also problems when companies charge high interest rates in the range of 20 to 24% because they simply do not have a mechanism to get 30 to 40% returns except in leasing.

Moreover, there are various cross-holdings in most of the companies in Ceylinco Group so it is very difficult to ascertain where the money has come from and where it has gone, the sources said. Furthermore, analysts are saying Ceylinco's problems could have a serious impact on the market. Has the bubble burst?

Ceylinco Consolidated Chairman Lalith Kotelawala seen pacifying anxious depositors of the crisis-hit Golden Key Credit Card Co., who gathered at the BMICH, after he said his company will meet all the liabilities.

Public faith in finance companies and institutions which collect deposits will only worsen, say analysts. They expect more and more people to put their money into established banks. On the other hand, the point was also made that the people are to blame as well because they put their money into high-interest offering companies to get bigger returns.

Chandra Jayaratne, former chairman of the Ceylon Chamber of Commerce said that contrary to claims by the Central Bank and a majority of leaders with accountability for policy, governance and business, Sri Lanka is not removed from the impacts of the global economic crisis and financial meltdown. He said more than one bank, finance company and leasing company which is in any way connected to Golden Key could be in trouble.

Mr. Jayaratne also pointed out that if anyone has been watching the stock market from October to November, there have been certain company transactions that have taken place with large quantities of sales but the regulators and analysts have not inquired into who the buyers and the sellers are and if it was even between companies in the same group. Mr. Jayaratne said the CB in theory, cannot take any action against Golden Key because it is not registered but he claimed that the CB including big business players in Sri Lanka had been aware of its activities over the past 10 to 15 years.

The CB can take some regulatory or legal action against Golden Key even though it is not registered, Bankers Association Secretary General Upali de Silva said. He said that in the past, the CB had inquired into unregistered finance companies and although people were aware that Golden Key was a credit card company, the CB was preparing some guidelines for credit card companies and issuers of credit cards. He added that Golden Key had a major liquidity problem with a deposit portfolio of approximately Rs.20 billion. Seylan Bank has given some funds, but what happened to them was not known.

Mr. de Silva said the CB did publicize unregistered finance companies, particularly after the recent Sakvithi scandal. However, he said he believed that smaller banks would not be affected and that people still had confidence in banks such as Seylan Bank even though it was a part of the Ceylinco Group. "There hasn't been a demand for refund of deposits," he said.

Analysts and brokers told The Sunday Times FT that even though there were regulations for banks regarding these investments, they could indirectly give loans to related parties at agreed interest rates or concessional rates.

Global Financial Crisis & Sri Lanka

Mr. Jayaratne said effective risk management practices and contingency planning processes were not commonplace within the majority of governance and business regimes operating in Sri Lanka. Even in the operation and management of a majority of banking and finance sector entities, these practices are not effectively embedded within Enterprise Risk Management processes.

The level of expertise, knowledge of best practice and appropriate technology leverage, including computer systems and management information systems in practices within a majority of finance and banking sector entities, are below the desired operational benchmarks. In this context, Mr. Jayaratne said the level of risks exposure of these entities was high. Therefore, the possibility of a consequential systemic failure cannot be ruled out, especially at a time of a global crisis impacting finance and banking sector entities.

The potential risks impacting on Sri Lanka and the business sector in general consequent to the global economic crisis include a reluctance of banks to lend due to perceived market instability and negative risk assessments of developing countries.

Mr. Jayaratne said raising short term commercial borrowings was becoming difficult, expensive and demanding of high premiums, especially where macro instability, bad governance and perceived higher risks prevailed. There is also the risk of drying up of long-term credit lines, significantly lower foreign direct investments and lower aid flows to developing and underdeveloped countries. It is recognized that the impact on Sri Lanka of global economic and market issues have a lag period before taking full effect, Mr. Jayaratne said. Similarly the recovery period in Sri Lanka is longer than in developed markets and at times twice as long as the lag period enjoyed at the beginning of a crisis.

Kotelawala faces crisis of his life

Media personality and newly-appointed Sri Lankan ambassador-designate to Myanmar, Newton Gunaratne, seen here with other depositors at the BMICH. Mr. Gunaratne had also invested in Golden Key.

Thousands of angry depositors of the Golden Key Credit Company worried their deposits will vanish due to a crisis in the company, virtually manhandled Ceylinco Group Chairman Lalith Kotelawala when he tried to explain the plight of the company at a hurried meeting with depositors at the BMICH on Tuesday.

A visibly upset Kotelawala using a loud hailer told the large gathering of depositors including housewives some carrying children, engineers, pilots, business professionals, former MPs and retired government servants that he will repay all the outstanding monies within two months. He appealed to them to keep faith in him and that they won’t close down the company and run away and force depositors into difficulty like the Sakvithi collapse.

After a short address amidst lots of noise and shouting, the uneasy crowd then tried to surround Mr Kotelawala who was rushed to the adjoining S.W.R.D Bandaranaike museum accompanied by Ceylinco CISCO security guards, dressed in civvies. A spokesperson appealed to depositors who were in a very angry mood to disperse peacefully as she said the chairman will keep the pledge given to them and they should trust his word. In the meantime Mr Kotelawala left the BMICH from another exit amidst pleas of depositors to do something quickly to help them.

Stunned by the overwhelming attendance at the meeting and the concern of many depositors, the company cancelled a second meeting on Wednesday that was intended for outstation depositors. It was probably the worse nightmare for a man who even recently sought to bail out Sakvithi depositors, and has taken over some other ailing finance companies and turned it around, to find that a similar crisis was now at his doorstep – where he would need the help of others!

Investor reactions
Golden Key investors are hoping against hope that they will not lose the money they invested. For some investors, it is a large chunk of their savings, if not all. Panic has gripped the financial institutions in Sri Lanka as investors queued up at Ceylinco Finance PLC to also try and withdraw their funds. One long time investor in two finance companies said he will not be pulling out his money in the wake of the Golden Key setback. He told The Sunday Times FT that the amounts he had invested are relatively small and that there was no reason to panic.

However, he did say investors in Ceylinco finance companies may have reason to take out their funds as it is still uncertain on how the Golden Key issue will impact the rest of the Group companies. Another investor said he had decided to pull his money out of three finance companies during the second half of this year as he always felt it was safer to invest in banks. Given the predicament that faces so many finance company investors now, he feels he made the correct decision.

Payments from January
Golden Key (GK) has frozen interest payments on deposits from December but will pay depositors from January, according to a Ceylinco Group source. "We will start paying the small depositors first. The exposure of the entire crisis is about Rs. 5.7 billion," he said adding that the company has much more than Rs. 5.7 billion, but not as hard cash.

"GK has the hospital which is worth about Rs. 4 billion. (It had cost Rs. 1.8 billion to build). There is a teak plantation a little less than 100 acres, which is about Rs. 1.5 billion worth and 1.3 acre land at Kirimandala Mawatha worth more than Rs. 2 billion,” he said. "But it will take some time to realize these assets, because they are not in liquid form."

He said the company has mismanaged its funds. "GK has gone on an investing spree. Most project reports showed the projects to be lucrative but they are not so (as was found later)," he said. The source also said that the special hospital for women and children had been stopped. When company CEO Khavan Perera was questioned by Lalith Kotelawala along with some sector chairmen, he is alleged to have admitted to mismanagement.

Wrong model
Under the scheme that GK operates, a rebate is paid for deposits which are credited to the credit card or a depositor can encash the money at the company. "These deposits were invested in other businesses such as their ENT hospital, which did not give a return to cover the high interest rate costs on borrowing. This business model does not work," the Ceylinco source said. He said most people have used the credit card. "It will take 40-45 days to get the bills from the merchants. As it is, it will take 45 days to refund the depositors,” he noted.

Seylan Bank sound
Seylan Bank said the bank is ‘safe and sound’ after fears of a run on the deposits.
Ajita Pasqual, Director General Manager and CEO, confirmed that Seylan is not going through any issue. “There is no run on the bank,” he said. He also said, "Seylan is stable. All statutory requirements have been met and the bank is running at a profit." He said there is no co-relation between what has happened at Golden Key (GK) and Seylan.

Mr. Pasqual said that Seylan is in touch with the depositors. "We are also in the midst of a debenture issue which is ongoing till December 31. We have raised the first tranche of Rs. 400 million. We are close to raising our next tranche of Rs. 200 million," He said, adding this proves the depositors have faith in the bank.

When asked whether there were customers who wanted to withdraw the money after the crisis hit GK, he said, "There may have been a couple of depositors trying to get their money out, but the inflow of the money is higher than the outflow at Seylan, which is a standard." He also said that many customers have quizzed Seylan on GK. "We are an independent unit but part and parcel of the Ceylinco Consolidated Group,” he added.

CB shying away from responsibility
Some bankers like Rienzie Wijetilleke, Chairman Hatton National Bank, said the Central Bank is shying away from its responsibility. “The monetary authorities cannot deny any responsibility for what has happened just because they have a published list of authorised institutions (and GK is not in that list),” said Mr Wijetilleke. He said financial institutions have to carefully watch this situation. “The sooner the Golden Key authorities are able resolve this issue to the satisfaction of the investors the faster the exposure to the financial sector of the country is (will get sorted out).”

Another senior banker noted that the crisis will affect Seylan and gradually other Ceylinco Group companies.

CSE on changes
The Colombo Stock Exchange (CSE) said on Wednesday it has written to the Ceylinco Group seeking clarification on a public statement by its Chairman Lalith Kotelawala that he had handed over chairmanship in all companies to others.

In a full-page newspaper advertisement on Monday, Dr Kotelawala said he would continue as the mentor Chairman while others will run companies under the Ceylinco umbrella. This includes three or four companies listed at the CSE like Ceylinco Insurance and Seylan Bank.

“We are asking the Group to clarify the reported changes,” a CSE spokesman said on Wednesday. Stock market analysts said the CSE, as usual was slow, and should have sought clarification immediately on Monday as changes in the board is considered ‘material information’ that can impact on share prices.

In a letter to the CSE later on Wednesday in response to the clarification, Seylan Bank has confirmed that Dr Kotelawala continues on the Board as the Founder Chairman/Managing Director. The Chairperson is Mrs Sicilia Kotelawala.

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