Dilemma of depositors

(February 098, Colombo, Sri Lanka Guardian) The anxiety continues. Throughout the week, this newspaper received anxious calls from investors in several deposit-collecting institutions, some registered with the Central Bank, some not. This has been the case, in fact, for many weeks now after Sakvithi and the Golden Key Credit Card Co. collapsed.

Many were at a loss about what to do as panic crept into the financial sector and depositors sought to withdraw their money fearing a collapse of the entire non-banking financial system, which is actually not the case.

The problem has been compounded by the fact that the Ceylinco Group, in which Golden Key is a subsidiary, has a massive exposure to the real estate and property market. Most of its investments are in property which has fallen with the economic uncertainty, locally and internationally, and the conflict. Lacking in liquid cash, the Ceylinco Group has been grappling with growing demands by depositors to pull out their money, some as it matures and others before it does, putting a lot of pressure on the Group. In fact any company for this matter would be unable to withstand such pressure on withdrawals.

Among companies in the Ceylinco Group that are delaying payments or sending depositors around the bend (asking them to come on several occasions, promising payment) are the F&G group, Ceylinco Building Society and others.

The crisis has spread across the finance sector and many finance companies are facing premature withdrawals and declining deposits. In many ways, the system has unfortunately turned into a kind of Ponzi or pyramid scheme – where deposits are being refunded as and when new deposits come in, which is not happening. With most of the deposits invested in related companies or property, Ceylinco is going through its worst times. The new promotional campaign by Seylan Bank says it all – its steering away from the Ceylinco brand, as far as possible to cut a new, clean image.

The campaign ad says, “Seylan Bank towards a new era guided by a new chairman and board of directors.” It must be a difficult pill to swallow for Ceylinco Consolidated Chairman Lalith Kotelawala who would never have in his wildest dreams imagined his empire would come to this – hunted by angry depositors. Kotelawala’s office was stoned this week by a group of protesting depositors who were promised an appointment to see him, only to find he was not in the office.

Kotelawala has projected himself as a saviour of the poor with many schemes like the Ceylinco Grameen project modelled on the lines of Nobel prize winner Prof. Mohamed Yunus’ ground-banking Grameen banking initiative in Bangladesh. How he would emerge from his worst-ever crisis as the saviour of the depositors remains to be seen.

The Ceylinco troubles are spreading across like wildlife and engulfed the non-banking sector, so much so that President Mahinda Rajapaksa had to step in and instruct the Central Bank to take action to ensure finance companies don’t collapse.

As a result, a Central Bank-approved stimulus package was due to be announced this week to provide it some protection. The finance companies indeed need some re-assurance from the government and the Central Bank, a kind of government guarantee that could be used to convince depositors that the sector is safe.

Such an assurance – apart from the normal guarantee of finance companies being regulated and coming under the umbrella of the Central Bank – is vital at this stage. For all purposes, the public has lost faith in the Central Bank to stem any collapse and questions – like in the case of the failed Pramuka Bank and the fact that Seylan Bank had many issues before it was rescued – are being constantly raised.

The Central Bank however deserves some credit for stepping in and taking over the management of Seylan Bank before a Northern Rock-type situation occurred as there was concern of a run on its deposits. The financial crisis in the UK in 2007 was triggered by the collapse of the Northern Rock bank. During the whole month of September, people across the UK wanted to take their money out.

The mad rush to withdraw money drained out 8 % of the bank’s total deposits worth 28 billion pounds in a week’s time. The UK government then stepped in to save the bank from collapsing. What went wrong? Excessive lending and a liquidity mismatch, among other matters. While the Central Bank is not the panacea for all the ills of this sector, the public too has a responsibility to invest their money in institutions that are governed by the regulator or have a good record of governance and accountability. Nevertheless, the moot point being raised is that many depositors live on interest income and what is obtained from standard banking deposits is not enough to pay the bills. Thus they tend to put their money in high-risk, unregulated institutions which belong to what the public believes is respectable companies like Ceylinco, and now see what has happened.

Call it whatever you like – bad decisions, etc or investing at your own risk – the dilemma and somewhat a government responsibility is that interest income is lower than the rate of inflation and not enough to live on, giving little choice to hapless depositors. Some are so desperate that they have pulled out deposits from Ceylinco-related companies and other organisations and re-invested in places which are also unregulated!

The financial crisis will continue for a while. The key to the crisis is whether Ceylinco has the assets (and whether these could be cashed) to refund the depositors at Golden Key in a sum seen as exceeding Rs 20 billion. With angry depositors turning violent, the Central Bank will have a tough job on its hands to handle an evolving situation and ensure it doesn’t spread.

-Sri Lanka Guardian