The role of the media, as the public watchdog, in highlighting the crisis in some finance companies and deposit-taking institutions is a case of ‘damned if you do, damned if you don’t’.Either way – publishing views and concerns of depositors about current ones, impeding disasters, and ‘crisis’ situations waiting to happen or hiding the truth [...]

The Sundaytimes Sri Lanka

Firm action against errant finance companies


The role of the media, as the public watchdog, in highlighting the crisis in some finance companies and deposit-taking institutions is a case of ‘damned if you do, damned if you don’t’.Either way – publishing views and concerns of depositors about current ones, impeding disasters, and ‘crisis’ situations waiting to happen or hiding the truth – is not going to help the victims of these bankrupt institutions who have taken depositors for a ride.

Reporting the facts and ‘glaring’ truth often triggers a huge run on deposits of the institution and some other, reliable ones too, as depositors’ panic, which is not the intention of this newspaper. On the other hand, acting responsibly (sensibly) and failing to disclose the facts in the hope that the situation would improve is also not helping depositors who have a right to know.

Thus rather that ‘closing the stable door after the horse has bolted’, the Business Times has chosen not to err on the side of caution believing that it is better to alert the public rather than stay silent, and this week too focuses on the crisis and offers some options on the way forward.

Sri Lankans increasingly are becoming disillusioned with the management of the country’s financial sector, particularly in finance companies and other regulated investment avenues as a crisis unfolds, at least once a week in recent times.

A joint Business Times (BT) – Research Consultancy Bureau (RCB) poll this week shows that while many depositors are in favour of investing in banks compared to other options, doubts are being expressed as to the effectiveness of the regulator – Central Bank (CB).
Many vent their fury on the CB saying the regulator steps in only after the crisis has unfolded, and by that time it is too late – citing the Golden Key (an unregulated deposit taking institution) and other finance companies as examples.

Some depositors are now also shaky with investing in state banks even though these are secured and guaranteed by the state, given concerns over recent developments at the National Savings Bank and the two main state commercial banks, where government borrowings are very high.

This view is contrary to a similar BT poll in April 2009 where the question asked was “What is the safest investment … between state and private commercial banks?” The majority voted for state banks.

A well-managed financial system is a cornerstone of an efficiently-run economy where savings play a vital role.

While the CB deserves praise for the repeated warnings to the public on the need to invest in registered financial institutions and not dubious ones with lists of registered institutions regularly published in the media, the dilemma to investors is where to put their money in to attract the most favourable interest terms.

The options are limited and with the public facing high spending – rising cost of living and goods; education and tuition costs; medical bills in private hospitals with state hospitals unable to cope -, investors have just one choice; invest in finance companies or other non-banks to get the best monthly return.

Most of the investors are retired workers in the private sector, pensioners and others seeking to invest a lump sum on reasonable interest terms. Many, as the BT and other media have reported, use the monthly income to fund their day-to-day expenses, meet medical bills which are rising owing to the prohibitive cost of private healthcare (another sore issue in Sri Lanka) and to finance the education of their children in a private university here or abroad. Tuition, fast becoming compulsory, is also a drain on the family income while some invest to raise money for their daughter’s dowry during marriage.

While the costs are going just one way – UP -, the crisis facing finance companies is bound to be a recurring one based on past experience. About 2 to 4 companies crashing in Sri Lanka every 2-3 years, has occurred now in the past six with eight years and depositors are struggling to recover their depositors. In most cases, they have lost the monthly interest and now live in hope to recover the capital only.

In some cases, depositors are compelled to consent to deposits being converted to shares as a face-saving solution. “What use is a piece of paper when we need a monthly income,” one irate depositor said during this week’s poll.

There is no easy solution to the crisis as the public has learnt from the past. The CB, as the public alleges, is more likely to intervene only after a crisis evolves.

On the other hand, the regulator is in a way encouraging situations like this by endorsing new directors of these institutions under ‘fit and proper’ rules, some of whom have been involved in fraud, cheating and other white collar crimes.

In fact in some cases, such dubious directors have been drawn into failed companies as new investors!

One of the ways to halt this crisis and ensure safer investment avenues is to create a strong civil society group to protect the rights of depositors. Such an umbrella organisation could have ‘mini’ associations in all finance and other-investment companies to ensure these companies are managed according to CB rules. To legitimise such bodies, they may have to come under the CB or even create a separate regulatory authority that would manage non-bank institutions including forestry management institutions, etc and entirely remove or reduce that authority from the CB.

If the system governing finance companies has failed, then alternate solutions need to be sought. A strong society of depositors, acting as a watchdog, and a separate regulatory authority could be the way forward.

Furthermore holding directors of these investment institutions accountable through penalties, seizure of their assets and even jail terms would ensure more governance, transparency and accountability from those holding these funds in public trust.

Trust and faith are the key words towards restoring a credible group of finance companies. Depositors of HPT which crashed many years ago are still waiting for their money. The public strongly believes the system has failed and change is needed and quickly to restore public faith in the financial system.

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