By Chandeepa Wettasinghe
The Central Bank on Tuesday revealed a host of measures to bring the illiquid, mismanaged, non-banking financial institutions (NBFIs) in the ETI Group back into liquidity within six months, after placing the management of the parent company in the hands of an expert panel.
“We are confident that this will succeed,” Central Bank Governor Dr. Indrajit Coomaraswamy said Tuesday evening while being questioned critically by journalists at a hastily organised media briefing over the regulatory actions taken against the NBFIs, which have been in trouble since 2012.
ETI Group’s ETI Finance Ltd and Swarnamahal Financial Services PLC (SFS) have become illiquid but aren’t insolvent, as they are asset-rich, according to the governor.
“It was seriously mismanaged. It is asset-rich so there’s no reason for it to have got to this situation,” he said.
He requested the depositors of the two firms not to panic, as the Central Bank has put together a six-month programme to make available over Rs.22 billion in liquidity to ETI Finance, during which period, all interest due on deposits would be paid.
ETI Finance, which is the parent firm with Rs.33 billion in assets, is worse off than its subsidiary SFS, which has Rs.2.5 billion in assets, Dr. Coomaraswamy said.
ETI Finance has 33,000 depositors with Rs.33.5 billion in deposit, while SFS has 2,300 depositors with Rs.2.4 billion in deposits, he said.
The largest liquidity support is expected to come from an unnamed potential foreign investor, who is currently in negotiations with the ETI board to invest up to US $ 75 million or Rs.11 billion to acquire nine ETI Finance subsidiaries, including SFS, Dr. Coomaraswamy said.
He said that the only qualifications of any investor are to prove their credibility, existence and source of funds and transmit the funds through formal banking channels.
This highlights the heightened concerns in the Central Bank after a string of bogus investors attempted to invest in local NBFIs recently.
Dr. Coomaraswamy said the interested foreign party has already given a US $ 2.6 million loan over the past several months as liquidity support for ETI Finance, while another US $ 8 million will be required as investment in the negative net worth SFS, placing the total funding requirement at US $ 85 million.
Some of the nine ETI subsidiaries however are involved in industries such as media and cinemas, which aren’t open to foreign investment and Dr. Coomaraswamy said that options will be explored to facilitate the investment without breaking the laws.
Another Rs.6 billion is expected to come in through lease and pawning interest income and some minor investments over the six-month period, the governor added.
“On top of that, the Central Bank is negotiating with a bank to have a standby credit line of up to Rs.5 billion that the Central Bank will guarantee,” he said.
Ironically, the liquidity crisis hit the lowest and prompted strict regulatory action after the news reports on the ETI Group being sold to a potential foreign party were published, resulting in a number of deposits being withdrawn from the two firms, Dr. Coomaraswamy said.
The Central Bank has appointed a three-member panel comprising former Central Bank Assistant Governor Sepala Ratnayake, former Bank of Ceylon Senior Deputy General Manager P.A. Lionel and former Bank of Ceylon Assistant General Manager H.M. Thilakarathne, to return the companies to normalcy.
“We are fortunate to get, at such short notice, a set of people who have the correct skills and expertise required to do this job,” Dr. Coomaraswamy said, noting that Ratnayake is an expert on NBFIs, while Lionel is an expert on government securities and Thilakarathne is an expert on pawning.
Most of the ETI Group’s financial operations are based on pawning and to a lesser extent, on leases.
All powers of the ETI board have been vested with the panel—expandable upon requirement—except for the powers to liaise with depositors, to convert deposits to shares and to conduct negotiations with an investor.
ETI and SFS depositors however have been restricted from prematurely withdrawing their funds, while all maturing deposits within the six-month period would be renewed for a further six months, in order to reduce outflow of funds.
ETI would also be restricted to investments in government securities and deposits in banks and NBFIs, while restrictions have also been placed on dividend and retained earnings payouts.
Dr. Coomaraswamy said that six members of the Central Bank NBFI Supervision Department will be on site at ETI Finance for several weeks to ensure that the directives issued yesterday would be followed properly, since the group got into trouble for mismanagement and not following the previous directives issued in 2012.
If the six-month programme is not successful, the ‘nuclear option’ of liquidation is available, Dr. Coomaraswamy said.
ETI Finance and SFS represent just 0.3 percent of the assets in the Rs.11.2-trillion banking and NBFI industry.
“So the systemic risk is miniscule,” Dr. Coomaraswamy said.
Political interference waning that blocked action on finance firms
The Central Bank has experienced a five-month period of regulating the financial system minus political interference, according to Dr. Coomaraswamy and a number of initiatives have been undertaken to improve the Central Bank’s regulatory capacity.
“We have lacked political interference for about four to five months,” he said.
He explained that the Central Bank had been constantly criticized, specially for its attempts to regulate the financial system, at the sittings of the Cabinet Committee on Economic Management (CCEM) and that he had each time explained that political interferences had resulted in regulatory forbearance.
“So, they said they would end political interferences,” Dr. Coomaraswamy said.
Although initially describing the situation as a ‘carte blanche’ being extended to the Central Bank, he later took back that description.
The Central Bank, which should regulate the financial system and set monetary policy independently, had regularly been a victim of poor fiscal policy and Machiavellian finance ministers looking to expand power.
Controversial former Finance Minister Ravi Karunanayake, who just last week lashed out at the Central Bank, had quite openly attempted to take the Central Bank operations under his wing in early 2017, before he was forced to vacate his post.
Meanwhile, Dr. Coomaraswamy said that the culture is now changing, due to a lack of regulatory restraint stemming from political interference.
He said that the RED (Resolutions and Enforcement Department) unit has been set up within the Central Bank to investigate criminal mismanagement in financial institutions.
Central Bank Deputy Governor Dr. Nandalal Weerasinghe meanwhile said that expeditious legal action by the Attorney General’s Department would be preferred going forward when the Central Bank requests legal action to be taken against financial crimes.
Dr. Coomaraswamy said that a team would be set up in partnership with the Attorney General’s Department, comprised of a criminal lawyer, a civil lawyer and several other legal professionals, to ensure efficiency in the legal processes.
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