Heading off a financial crisis

(December 28, Colombo, Sri Lanka Guardian) The run on deposits at Golden Key, a Ceylinco Group company, and fears of a run in all group companies have brought into focus once again the role of the Central Bank (CB) vis-à-vis companies that collect deposits.

Opponents of the current policies of the Central Bank led by Governor Ajith Nivard Cabraal say the CB is not doing enough to nip in the bud the growing number of failures or crises in companies involved in financial services, even though they don’t come under the financial regulator’s ambit. Apparently the CB had asked ‘some questions’ from Golden Key in 2003.

Several depositors of Golden Key have desperately tried to withdraw their monies only to be told that it would take time. In one case, an investor from an out-of-Colombo branch who was told he could withdraw the money in a month, sat down to fill the application. By the time he finished, he was told that it would take six months time.

In another case, an investor who hurried from abroad to withdraw the money was offered an apartment as a swap which he is now saddled with given the shrinking demand for apartments. Lalith Kotelawala, the powerful Ceylinco Group chairman often described as ‘our beloved chairman’ by deputy chairman and directors in the companies, has publicly accused the Golden Key Credit Card Co Director/CEO Khavan M. Perera of mismanagement and suspended the latter who has been with the group for over a decade. On Tuesday, at a noisy meeting at the BMICH he assured customers that all deposits will be met. But many are unsure about these assurances and would have to wait the next few weeks to see whether the company delivers on its promise to start paying small investors first by January under a bailout package.

Unlike the Sakvithi scandal, the crisis at Golden Key is a wider issue for the economy and financial stability at large with the global crisis slowly hitting Sri Lanka. There have been warning signals of a gradual impact in the local markets and the crisis at Golden Key could be the first – even though it’s an internal problem. Further, the bailout package would have to come from Ceylinco companies which would weaken their bottom line and in turn impact on banks and the stockmarket. Ceylinco is exposed to many sensitive investments like housing, property and real estate – all of which are getting hit globally as the financial –cum-economic impact takes root.

Thus aren’t these the warning signals that the Central Bank should take seriously and nip in the bud – even though the company doesn’t fall into the basket of financial services or deposit-collectors?
The crisis might with the exposure estimated at over Rs 5 billion and unofficially Rs. 20 billion, trigger some instability in the markets where it would then be the CB’s mandate to get involved. Already there are reports of depositors checking out or seeking clarification from Ceylinco companies on the status of their investments, etc.

It is also essential for Ceylinco companies where public money is being held and all in trust, and in particular the insurance sector, to issue a statement or take out advertisements, independently, reassuring the public that their monies are safe. Any delay in such an assurance will lead to unnecessary anxiety and panic. This newspaper has also been fielding calls from the public on the status at Golden Key and other Ceylinco companies including Seylan Bank. While there may be no cause for alarm, a general lack of governance and transparency in the private sector and concern about accountability has led the investing public to believe no one unless there is proof and evidence to back statements of fact, coming even from the most trusted Chairman,CEO or director.

With the latest crisis, further anxiety by investors in finance companies will grow. The Central Bank may stick to its guidelines and regulations but there is a bigger issue here of financial stability, in addition to loss of depositors’ funds – which the company vows it will return.

The CB needs serious re-thinking on its role – where it will be compelled to step into many such situations in coming weeks, regulations or no regulations – to ensure the markets are stable and not unruffled by serious ‘rumblings’ of this nature. - Sri Lanka Guardian