Untitled Document

Confidence in financial system shaken
The hapless depositors of Pramuka Savings and Development Bank appear to have adopted an activist attitude towards their predicament in trying to resolve the crisis faced by the institution in which their money is stuck.

They have formed a Pramuka Depositors Association and are trying to mediate between the bank and the Central Bank in an effort to have the bank re-opened. Without Pramuka being re-opened depositors are unlikely to have a chance of getting their money back any time soon given the lengthy delays that litigation involves if the Central Bank decides to liquidate the bank.

It was on the initiative of the Depositors Association that Pramuka chairman Rohan Perera last week addressed members of the public who have money in his bank. Till then individual depositors felt that their concerns were being ignored since they could meet neither Pramuka executives nor Central Bank officials.

Perhaps it is time for depositors of other banks and finance houses to form similar groups to get better information about the health of the institutions to which they have entrusted their money since they would have more clout if they act in a collective manner.

This is because the usual mechanisms that are supposed to function in crises such as this do not appear to be working. This is not the first time the Central Bank appears to have failed in its duty to ensure a sound banking system that safeguards the public's money. Readers would recall the collapse of finance companies in the 1980s.

Depositors of these failed companies are yet to be compensated adequately. This is the fate that Pramuka's depositors are trying to avoid. The Depositors Association is also prepared to appeal to other depositors and give a guarantee that depositors will not pull out money for at least a year.

This is to avoid a run on the bank, if and when it re-opens, because if that happens Pramuka would surely collapse.If the Central Bank had done its job properly it should have detected problems at Pramuka sooner and not let matters deteriorate to the extent that it was forced to suspend the bank's operations.

It seems that the Central Bank's early warning systems, which it recently said had been improved, were not good enough. It is also ironic that shortly before the Central Bank suspended Pramuka, this bank was in the list of deposit taking institutions licensed by the Central Bank that was published in the media. Surely, the Bank Supervision Department would have known about the looming problems at Pramuka?
It can always argue, as it already has, that the public deposits its money at its own risk and that the Central Bank is not liable for any failure. Furthermore, it has also warned the public to beware of the lure of unusually high interest rates.

Not giving parate execution rights to Pramuka and judging it by the same yardstick as banks which have parate rights is obviously unfair and does not make sense.
The Central Bank certainly owes an explanation to the public why this was done, although Pramuka's defence is also weak, since it went ahead with its business despite the restrictions.

The crisis at Pramuka raises questions about the health of other small banks.
There are reports that some depositors are quietly pulling out money from other banks. It seems that the entire banking system is in trouble going by the parate execution advertisements in the media.

Considering the crisis that another regulator, the Securities and Exchange Commission, the financial markets watchdog, is embroiled in, with allegations of insider dealing against its own chairman, what is at stake is the public's confidence in the entire financial system.

Back to Business