We refer to the news item in the Business Times section of the Sunday Times last week under the heading “Sri Lanka’s Co-operative society banks face credit and deposit risks”.  It highlights the importance of urgent intervention by authorities to arrest the plague of corruption, fraud, malpractices and financial mismanagement of the cooperative administration that [...]

The Sunday Times Sri Lanka

Crisis at Sri Lanka’s Co-operative society banks


We refer to the news item in the Business Times section of the Sunday Times last week under the heading “Sri Lanka’s Co-operative society banks face credit and deposit risks”.  It highlights the importance of urgent intervention by authorities to arrest the plague of corruption, fraud, malpractices and financial mismanagement of the cooperative administration that has been overlooked by the financial authorities in the country giving two examples of cooperative banking institutions in the Colombo district.  It is unfortunate that the Provincial Department of Cooperatives, the state authority tasked with regulation of functions of cooperative societies is acting in a very lethargic manner in this regard.

If they had acted in time discharging their powers vested in them by the Commissioner of Cooperatives the fate of Wattegedera Thrift and Credit Cooperative Society and Gothatuwa TCCS would have been averted. There are several issues that hinder effective intervention and regulation by the Department of Cooperatives; (i) Lack of staff to carry out comprehensive audits of cooperative societies, (ii) the audit staff is technically not competent enough to query non-traditional projects such as big constructions of modern nature initiated by Coops, (iii) bribery and corruption and (iv) political interferences.

These are common to all cooperative institutions in the country functioning at provincial level as well as national level. Your news item however was an eye opener for all the people who are associated in one way or the other with the cooperative banking societies. It is in this context that we – a group of concerned members of the Kotikawatta Thrift & Credit Cooperative Society Ltd (KTCCS) – decided to bring to your notice and the public on the plight that has fallen on KTCCS which has been known over the past 10 years as the fastest growing TCCS in the country and a model worth to be replicated by other TCCSs operating in urban and sub urban areas.

Kotikawatte’s TCCS wealth has sunk
Kotikawatta TCCS has boasted about its wealth exceeding Rs. 2 billion over the past three years and it had reached an asset base at Rs. 2.6 billion by December 2015 according to its latest Annual Report. This was mainly due to its construction of commercial buildings. In 2006 it started constructing a six-storied building for its own use – to carry out its banking services and other businesses proposed to be conducted in other floors. However, apart from getting approval for proposed expenditure for the initial estimate of Rs. 40 million from the general membership no approval was sought from the Commissioner of Cooperatives which is a mandatory requirement.

In the end the Chairman utilised more than Rs. 200 million to complete the construction. The Chairman and the management committee had never submitted supplementary estimates of the construction for the approval by the membership at a general meeting.  The Department of Cooperatives though carried out its routine audits and found that large sums of payments have been made to contractors, sub contractors and some wholesale and retail sellers of construction related accessories but did not bother to question the management committee nor took any action against them over unsolicited expenditure.

Even until now the general membership or the shareholders of the Kotikawatta TCCS do not know the exact amount that has been spent on this construction. Due to the department’s inaction and some officers attached to its audit section acting in connivance with management committee, the KTCCS launched its second massive project to construct a leisure centre that includes a swimming pool, a reception hall, and 9-rooms for tourists’ accommodation. There was no selection process for the selection of an architect. The chairman handpicked the same architectural firm which had been retained for the previous project.

No official from the department was invited to join the panel for the selection of contractor. The architectural firm was given a free hand to select the contractor though competitive bidding process had been followed. The result was that the lowest bidder was overlooked to award the contract to the highest bidder. We later came to know that the contractor is closely related to the civil engineer of the architectural firm. The project was implemented in two phases. The first phase included the swimming pool and a reception hall with seating facilities for 300 guests and a small restaurant area.

The estimate presented for the approval by the General membership at a General Meeting was Rs. 140 million, which we believe was an over estimation on whatever standards. When some of our members consulted highly qualified civil engineers on this matter their opinion was that the project should not exceed Rs. 80 million. The project was entirely financed through a loan obtained by a private bank. The construction of Phase I was completed in 12 months in December 2013 and Phase II was launched thereafter without presenting its estimates for the approval by the members at a General Meeting or without explaining how the project was going to be financed.

The Phase II construction too – constructing nine rooms – was neither passed through a competitive bidding process nor cooperative commissioner’s approval process. It is now revealed that the Phase II construction was also financed by the same private bank with further sum of Rs. 100 million with the total loan amount released to the KTCCS being Rs. 250 million, and this was done by retaining two properties one being the 6-storied building at Kotikawatta junction and the other being the land and buildings of the new project as collateral for the mortgage bond. In addition a further amount of Rs. 100 million is said to have been spent for demolition and reconstruction due to design failures of the new construction and to purchase various equipment.

No tender process
No purchasing has been done through the tender process as required by Cooperative’s by-laws and circulars of the Cooperative Commissioner with regard to purchasing and constructions. For the entire loan amount of Rs. 250 million the Kotikawatta TCCS is said to be paying Rs. 5 million as monthly repayment installment. We are fully aware that the institution cannot afford this amount as it does not generate a profit at all. Over the last six months the organisation has been incurring a loss around a sum of Rs. 2 million per month. As such, the loan repayment is done with the depositors’ money in the banking unit of the KTCCS. This will definitely lead to an inevitable collapse of the organisation. With the information emerging from the staff of the management a group of members had lodged a complaint with the Commissioner of Cooperatives

Development and Registrar of Cooperative Societies (Western province) in early January 2016 requesting an urgent intervention to investigate into the allegations and take action to avoid the imminent collapse.  The result was that the department had sent its audit team for the routine annual audits. What the junior auditors did was a random audit under pressure from the high ranked officers in the Audit Section of the department. We have valid reasons to believe that auditors have suppressed the vital information provided by the concerned group of members to the Commissioner in their complaint. The audit report has still not been presented to the members at a General Meeting by the Commissioner which is a mandatory requirement by law.

Sakvithi-type fraud
All these things are now showing signs of a “Sakvithi type” institution. The situation is grave for the depositors of the institution. With the exposure of risks involved a large number of fixed deposits have been withdrawn or not renewed by the customers. The deposit base has started dwindling. As at end of December 2015 it had a savings deposit base of Rs. 2154 million (Rs.2.15 billion).  The chairman and the management committee are now struggling to strike a balance between demand for money by its customers and avoidance of collapse and are running the organisation on a People’s Bank overdraft of Rs. 200 million against a fixed deposit held with the bank. In addition, the loans over Rs. 200,000 provided for customers have been withheld until further notice. KTCCS has approval to provide individual loans up to Rs. 3.5 million by retaining immovable properties as collateral. The money put as a fixed deposit is also the savings of customers.

This means depositors are facing a risk of losing their money. In addition over the last eight months the management committee has increased the interest rates for fixed deposits four times to attract term deposits and to encourage customers to renew their existing deposits for a further period. New FD rates are much higher than the normal banking rates in the financial market. What the management of the institution is doing is trying to postponing the collapse. We are warning the Commissioner of Cooperatives (Western Province) that if you do not closely monitor the situation and take stern action against those responsible for mismanagement and fraud you should be ready to take full responsibility. for the security of savings of customers.  (Note: The group of concerned members say they have enough documents to prove that a fraud has been committed and their money being used to save the organization)

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