Financial Times

Killer punch for Pramuka Bank
Depositors to vigorously pursue compensation claims
By Quintus Perera
Depositors of Pramuka Bank last week described the Central Bank move to substantially raise the minimum capital requirements of all banks as another frustrating attempt to scuttle efforts by desperate depositors to revive the failed bank.

"Many people in financial circles feel that this latest move is the third piece of legislation or regulation specifically designed to meet the Pramuka Bank situation.

“The scale and timing of this increase in capital requirements for all banks points to the Pramuka Bank case," noted K.C. Vignarajah, President, Pramuka Bank Restructuring Committee representing the concerns of the depositors.

He said the new rules meant no one would be interested anymore in taking over Pramuka. "No one is going to invest more money in the bank as capital requirements," he said adding, the depositors would now be putting all their resources into pursuing the damages claim against the Central Bank, Pramuka directors and the auditors, KPMG.

The depositors are claiming Rs 6 billion each from the three parties in Colombo's District Court. The case will next be heard on May 25. The Central Bank recently said commercial banks should raise their capital to a whopping Rs. 2.5 billion from Rs. 500 million in a bid to provide security for depositors' funds. The banking regulator has given time to December 2006 for banks to raise 50 percent of the capital and till 2007 to raise the balance. In 1996 the minimum requirement was Rs 200 million.

The minimum capital requirement for licensed specialized banks was a sharp 650 percent increase to Rs 1.5 billion from Rs.200 million. "Nowhere in the world has a Central Bank raised the minimum capital requirements by such steep levels," noted Vignarajah.

A Central Bank spokesperson dismissed Vignarajah's claims saying, "the need to increase capital has been an on-going dialogue over at least the last five years with commercial bank CEOs at the monthly meetings by the Central Bank." She also said this measure was taken largely in the interests of all depositors of commercial banks to insulate them against over-leveraged banks without adequate capital to cushion such leverage, the consequent exposure of the banks to risks and the ensuing threat to the depositors.

She said the only proposal (to revive Pramuka) considered by the Central Bank with a capital infusion of Rs.500 million was found to be untenable. The Monetary Board's decision to reject the proposal was based on the superiority of the liquidation option for the depositors over this proposal and was taken purely in the interests of the depositors.

"At no time did the depositors bring a proposal to revive the Pramuka Bank as a commercial bank in a viable manner," the spokesperson said.. Vignarajah said under the revival plan the depositors wanted to convert their deposits into equity bringing down the Bank's liability by about 50 percent and increasing the core capital by the same amount. This measure itself would have brought in a capital infusion of approximately Rs 1.4 billion. "There were also new investors willing to come forward with about Rs 500 to 600 million," he added.

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