RTI reveals Central Bank inefficiency in regulating finance companies at expense of public for years
Suspended Swarnamahal Financial Services (SFS) Private Limited admitted to the Central Bank of Sri Lanka (CBSL) as far back as February 2011 that it was accepting deposits from the public without authority, documents obtained through a Right to Information ( RTI) application show.
In a directive issued to the company, the Central Bank identified the three companies which had taken deposits in this manner: EAP Networks ( Pvt) Ltd, Swarnamahal Property Developers (Pvt) Ltd and Universal Consultancy Services (Pvt) Ltd.
By November 2012, Swarnamahal Jewellers had accepted Rs 7.2bn worth of deposits from the public when it was not licensed to do so. Meanwhile, Edirisinghe Trust Investments Ltd (ETI) already had off-balance sheet assets, liabilities and undisclosed deposits liabilities of Rs 6.48bn.
Off-balance sheet items are assets or liabilities that do not appear on a company's balance sheet. Liabilities are a company’s financial obligations, including unpaid debt.
The regulator turned down our request for SFS’s or ETI’s response to its directives on the basis that the third party did not consent to its disclosure.
On Thursday, ETI Directors Jeevaka Edirisinghe, Nalaka Edirisinghe, Asanka Edirisinghe and Deepa Edirisinghe were interviewed at the Criminal Investigation Division in Fort. A Presidential Commission of Inquiry is looking into allegations of wrongdoing, irregularities and malpractice leveled at the company.
Last month, an official from the CBSL Financial Intelligence Unit claimed at the Commission that ETI had suppressed that it held Rs 8.6bn in hidden accounts. This official participated in an on-site examination of ETI in 2012.
A request was made under RTI for all CBSL directives issued to ETI and SFS or any other management related to these two finance companies from 2009 onwards. As early as January that year, an on-site inspection showed that SFS-which was collecting deposits from the public-- was transferring far too much money to Swarnamahal Jewellers Pvt Ltd and the Swarnamahal Group.
The total outstanding accommodations granted to Swarnamahal Jewellers were Rs 311mn when it was only permitted to give Rs 23.5mn. Separately, the aggregate of total accommodations granted to the Swarnamahal Group was 325.7mn when the permitted amount was just Rs 31.4mn.
Financial accommodations typically include loans and advances. None of these transactions was reported to the CBSL Director of Supervision of NonBank Financial Institutions. Also that year, CBSL observed that SFS was hiding some bad loans. When those were added up, the company’s non-performing assets (NPA) shot up to Rs 321mn and its NPA ratio increased to 48.7 percent.
“When the actual loss position and the additional provisions for NPAs are considered, the company’s core capital reduced to Rs 151.3mn,” the regulator pointed out.
In February 2011, the ETI Director Board met CBSL Deputy Governor P D J Fernando. The Board was directed to provide a long list of information to the regulator, including particulars of all schemes operated to mobilize funds and lend or invest such monies.
CBSL issued directives to ETI and SFS again in March, September and October 2011. It was found that SFS had continued to grant financial facilities to companies and related parties within its own Group. The regulator ordered it to recover these monies within three months of the directive issued in March 2011.
In November 2012, CBSL proposed a restructuring plan. It called for the personal assets of the four ETI Directors and former Chairperson--valued at nearly Rs 18bn--to be transferred to ETI to meet its heavy deposit liabilities.
CBSL also ordered ETI to show how it
The regulator turned down our request for SFS’s or ETI’s response to its directives on the basis that the third party did not consent to its disclosure
pays back these deposit liabilities by selling those personal assets. And it called for a letter of undertaking by the four Directors that they will provide additional assets to ETI in case of a shortfall in order to eliminate the negative net worth ( where debts are higher than available assets).
But despite the dire financial situation, the regulator allowed SFS and ETI to continue taking deposits from the public.
In July 2014, CBSL warned ETI not to use new deposits to pay current claims of depositors as it would “cause further risk to the depositors”.
The Monetary Board ordered ETI to sell all its non-earning assets and to recover at least Rs 3bn in three months.
CBSL also called for the appointment of a new Board of Directors to ETI and indicated that loans were still being granted to related companies and not being recovered.
An onsite examination in May 2015 revealed multiple related-party transactions “carried out in violation of the provisions of the law”, a CBSL letter to SFS states. These were “conducted purely in the interests of related parties”. They compromised prudent credit administration standards, were not arms-length, and were detrimental to the interests of the company, its depositors and stakeholders while significantly jeopardizing its financial soundness.
Even then, it was found that SFS had a deposits liability of Rs 3.9bn when the CBSL had capped it at Rs 2.5bn. A loan of over Rs 541.7mn had been granted to Swarnamahal Jewellers and was outstanding as at the date of the on- site examination. It was continuing to take deposits through pawning centres.
SFS was also engaging in transactions with related parties in a manner that granted such parties “more favourable treatment” than that according to other similar constituents of the finance company. It had also rented investment properties ( which were meant to bring returns to its depositors) to the EAP Group of Companies and, in some cases, not collected rent amounting to millions of rupees.
A directive sent in September 2015 shows that, despite repeated Monetary Board orders, ETI did not follow the restructuring plan. For instance, it entered undisclosed and unauthorized deposit liabilities worth Rs 13.bn into its books. But while it was reflected on paper, it appeared that the actual asset transfer did not take place.
Documents show that deposits were continuing to be taken in at 45 pawning centers despite orders to stop. ETI had also over-valued its real estate stock, compelling the regulator to order a reassessment. CBSL ordered the company to sell a long list of non-earning assets--including properties in Rajagiriya, Minuwangoda, Borella, Colombo 7 and 8, Maharagama, Nuwara Eliya, Grandpass, Nugegoda, Sea Street, Moratuwa, Bentota and Maradana. And it imposed a cap of Rs 31bn on accepting deposits.
CBSL imposed a penalty of Rs 500,000 on ETI for non-compliance with and continued violation of earlier directives and supervisory concerns. But t allowed ETI to continue taking deposits. In November 2015, it even increased ETI’s deposit cap to Rs 32bn.
In March 2017, however, the Monetary Board revoked its directive to sell the non-earning assets of ETI or its subsidiaries in order to facilitate the restructuring of the company. And it also imposed a penalty of Rs 7mn for 14 “major violations” arising from non-compliance with special directives issued by the Monetary Board.
Since 2011 and till much later, CBSL kept issuing directives to ETI and SFS but there is no evidence of the companies having rectified the situation.