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Pramuka’s crisis and bank supervision
The Central Bank last week announced that it has decided to liquidate Pramuka Savings and Development Bank (PSDB) after its investigations revealed “several serious irregularities” in its accounts. This came after a two-month investigation following the bank’s suspension in October.

The Central Bank’s announcement about its decision to close the bank and to distribute available assets of Pramuka among depositors and creditors makes some startling disclosures about the conduct of the bank’s management. It has told Pramuka’s board of directors that it was “mismanagement, unsound, improper and imprudent practices at the bank by those responsible for the affairs of PSDB” that had resulted in PSDB being insolvent.

Pramuka’s board of directors, on being informed of the findings, had not objected to the Central Bank’s findings and observations. Instead they had had the cheek to suggest that Rs 600 million be pumped in to revive the bank – a sum they themselves were not ready to provide. It appears they expect the public to bail them out. The Central Bank and its auditors have found that a much larger sum would be required to revive Pramuka.

Pramuka’s founder-chairman Rohan Perera is said to have fled abroad, apparently before the court order preventing the bank’s directors from travelling overseas. It seems that the posturings and pronouncements made by Pramuka’s senior management, including the new chairman, Udaya Nanayakkara, that the bank was sound, was ready to re-open and that the media had made a fuss over nothing, were mere bluff.

The news of the closure of Pramuka would be a big blow to those depositors who had deposited their hard-earned money in the bank, lured by high interest rates. It would also be painful to the bank’s employees. These stakeholders have been trying their best ever since the bank’s operations were suspended to get it reopened as that was the only way they had any hope of recovering their money and saving their jobs.

Pramuka’s management has tried to blame its troubles on last year’s difficult economic environment and its restrictions on the use of parate execution to try to get borrowers to repay their loans. Undoubtedly this would have created some difficulties but Pramuka’s management and owners can’t escape the fact that the Central Bank probe has found serious irregularities in the way they ran the bank’s affairs.

Pramuka troubles have wider implications that could lead to a crisis of confidence in the financial system. Already public confidence in the system has been undermined – first by the accounting scandals that have tarnished corporate America and revealed some of the icons of market capitalism to be not the “men of standing” they were thought to be and subsequently by the unprecedented allegations of insider dealing against the head of our own market watchdog, the Securities and Exchange Commission, and the chairman of the Colombo Stock Exchange.

Already there are questions about the health of other small banks with rumours floating around that some of them are also in trouble, piling up losses. And there are persistent reports that depositors are quietly withdrawing their funds – a run on these banks would only aggravate the situation.

Pramuka’s failure also raises the question as to what the Central Bank was doing. In the past it had spoken highly of the efficiency of its supervision. How come the Central Bank missed the warning signals emanating from Pramuka and allowed the situation to deteriorate to the extent that ultimately it had no option but to close the bank?

To be fair by the Central Bank it did warn the public to be careful in investing its money and to be not fooled by offers of unusually high interest rates but these warnings came too late to help the depositors of Pramuka.

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