CIFL depositors blame Central Bank (CB)’s professional negligence for finance company collapse
View(s):Given the recent bleak record of several Sri Lankan unregistered finance companies and a few registered companies including the CIFL (Central Investments and Finance Ltd), in Sri Lanka, public confidence in the Central Bank as the regulator is eroding fast, depositors alleged.
Sameera Abhayawardena of the CIFL Depositors Association on behalf of all depositors revealed some valuable insights into the collapsed finance company in a lengthy statement made to the Business Times.
According to Mr. Abhayawardena over 6,000 depositors mostly senior citizens have lost their hard earned money amounting to a total of nearly Rs.3. 3 billion following the collapse of the finance company, not because of their fault but because of professional negligence of the CB officials.
The CB’s Department of Supervision of Non Bank Financial Institutions manned by a Director, two Additional Directors, two Deputy Directors, number of Senior Assistant Directors and Assistant Directors numbering 70 has failed to maintain “Financial System Stability” via avoiding possible collapse of financial institution through rigorous and effective risk based supervision mechanism aimed at safeguarding the interest of the depositors, he alleged.
Responsible CB officials are in charge of one or few registered finance companies (RFCs) like CIFL and it is their sole responsibility to ensure whether a particular RFC is in compliance with all rules, regulations and directions issued by the CB through a critical analysis of monthly accounts and other reports forwarded before the given deadlines by the respective RFCs.
This process should be carried out on a monthly basis for each RFC and a report called “Monthly Offsite Surveillance Report” should be forwarded to the Director through Senior Assistant Directors, Deputy Directors/ Additional Directors for necessary actions and considerations.
Especially in the case of the “Violation of Directions of the Central Bank”, the Director should take immediate remedial action against those RFCs, he said.
In addition periodic on-site examinations are regularly carried out visiting the selected RFCs in accordance with a pre-determined on-site examination plan.
Therefore, if these examinations are being conducted properly, independently and with an objective it is not difficult to identify transactions of fraudulent nature, violations of directions and early signals of possible collapse, he said.
Using the data and information gathered through these examinations, the particular CB division is empowered to conduct quick spot examinations on an ad-hoc basis suddenly visiting the selected RFCs without informing them.
It one makes a detailed analysis in respect of the collapse of the CIFL it seems that the CB has not performed a service towards safeguarding the interest of the depositors at least to the extent of the annual licence fee of Rs.500,000 it received from the CIFL, he alleged.
Mr. Abhayawardena noted that the CIFL has continuously violated the Finance Companies (Interest rates) Direction No.5 of 2012. It is well known fact that RFCs which pay higher interest rates violating the CB direction are very vulnerable to collapse/bankrupt.
Therefore one cannot say that qualified expert professionals at CB were unaware about this common fact, he said.
Another important direction, the Finance Companies (Liquid assets) Direction No.1 of 2009 has been continuously violated by the CIFL, he argued adding that since 2010, in accordance with the said direction every RFC is required to keep 10 per cent and 15 per cent, respectively from its Time and Savings Deposits as liquid assets.
But this was not adhered to by the CIFL, he revealed.
“Every finance company shall at all times maintain assets in the form of Sri Lanka Government Treasury Bills, Sri Lanka Government Securities and the Central Bank of Sri Lanka Securities equivalent to seven and a half (7.5) per cent of the average of its month end total deposit liabilities of the twelve months of the preceding financial year.”
Again CIFL has seriously violated this as well and even external auditors of CIFL have continuously paid attention to these serious violations of the directions issued by the CB as highlighted in their auditors’ report, repeatedly
In addition, in accordance with the Finance Companies (Provision for Bad & Doubtful Debts) Direction No.3 of 2006 every RFC should provide adequate provisions in respect of doubtful receivables.
CIFL has invested Rs.17, 034,069 in the Golden Key Credit Card Ltd, which collapsed in December 2008.
However, the CIFL again has violated this direction via not making adequate provision. Again External Auditors have disclosed this matter as well in their 2010/2011 Auditors Report.
It is being reported that a fresh cash infusion of Rs.1 to 2 billion will work out to get back CIFL into the business and in return to safeguard the interest of depositors as well.
Therefore, now the opportunity has arisen for the CB to show that they are really keen on one of their core objectives; “Financial System Stability” via injecting Rs.1 to 2 Billion out of the Rs.9.7 billion fund base which exists at the CB under the Sri Lanka Deposit Insurance Fund.
“Or else who can guarantee that this financial calamity will not provide grounds for a Rs.600 billion financial industry to crumble,” he asked
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