The rise and fall of The Finance Company | Sunday Observer

The rise and fall of The Finance Company

27 September, 2020

The Finance Company (TFC) was one of the premier financial institutes in Sri Lanka which was incorporated in 1940 and was managed by a Board of Directors appointed by the shareholders of TFC. In 2008 the Central Bank of Sri Lanka (CBSL) took control of TFC and entrusted its administration to Lankputhra Development Bank Ltd., as the management agent of all affairs of TFC by the Monetary Board of CBSL under the advice of the Expert Group appointed by the Monetary Board of Sri Lanka on March 6, 2009.

The reason for taking over of TFC by the CBSL was attributed to the fact that TFC had severely been impacted by the failure of a number of financial institutions within the Ceylinco Group in 2008. While the CBSL talks of companies under the Ceylinco Group being financially unstable in 2008 it did not see any financial instability with TFC.

It is questionable as to why the CBSL had to take over TFC when in 2008 TFC was financially stable, had a sound client base of depositors who had confidence in TFC, high value of TFC shares, considerable assets. Up to the time of take over there wasn’t a single complaint by a depositor against TFC as TFC made payment of their interest on their deposits in time and on a regular basis.

TFC was a company that was registered as a PQ1 company in 1940 and possessed a proud history of 79 years and was the first finance company to be set up in Sri Lanka. Since the establishment the company has played a major role in providing financial and other assistance and sustaining the livelihood of Sri Lankans and has also been a useful partner in uplifting the economic stability of Sri Lanka.

A large number of persons have placed deposits with TFC. The majority of those who have deposited monies with TFC according to the statistics provided by TFC officials are elderly persons in retirement and others who would have placed their deposits with plenty of expectations for the future such as for their medications, surgical operations, children’s education, to purchase properties commence a business and/or for several other important reasons. It is estimated that a large number of dependents of the depositors who had hopes for their future with the monies saved by their parents or relatives is not in a position to reap the benefits that would have been available to them.

TFC depositors recognised and had the confidence to place their deposits with TFC given the stability of TFC which possessed a large number of assets and was the premier financial institution in Sri Lanka.

In 2009 the administration of TFC was vested with the government to be administered under the CBSL. The CBSL appointed Directors to manage and operate the business of TFC from time to time.

TFC is the only financial institution to which a Board of Directors was appointed by the CBSL. Consequent to the takeover of TFC by CBSL, depositors of TFC did not panic and did not rush to withdraw their deposits similar to the situation when Golden Key Credit Card collapsed.

In fact depositors were happy that the CBSL had intervened and were confident that their deposits were secure. However, since the takeover of TFC by CBSL there was a steady decline in the financial stability of TFC except for the period September 2014 to August 2015 during which period the Board of Directors at the time took appropriate action and made correct decisions that were conducive to the revival of TFC. For unknown reasons the Directors which were appointed and who were responsible for bringing about stability of TFC were removed.

Depositors are of the view what has transpired at TFC since the appointment of Directors by CBSL are attributed to bad management, wrong decisions, no plans or suggestions to revive TFC. It was apparent that the Directors of TFC had no intention of reviving TFC by providing funds. Instead during discussions between officials of TFC, CBSL it was stated by CBSL that they are looking for an investor.

On May 24, 2020 the Deputy Governor of the Central Bank of Sri Lanka said that 93% of the local depositors of TFC will be compensated via the Central Bank’s Deposit Insurance Scheme and the remaining depositors will be settled after the liquidation of the company’s assets.

While the Deputy Governor of the Central Bank is happy that 93% of the local depositors have been settled which is not the precise position regarding TFC deposits. The table set out below shows the accurate position regarding TFC depositors as at January 2020.

Liquidity Support Insurance Fund

According to the figures available with TFC out of the 145,172 depositors, 135,100 hold deposits less than Rs.600,000 equivalent to Rs,4,693,690,017.

The remaining 10,072 depositors hold deposits amounting to Rs 22,567,744,770. The 93% of depositors totaling 135,100 depositors whose problems have been solved as stated by the Deputy Governor amounts to only 17.22% of the Deposits.

The remaining 10,072 depositors hold 82.78% of the deposits amounting to an amount in excess of Rs. 22 billion.

In terms of the payments made by the CBSL under the Liquidity Support Insurance Fund 39% of the deposits have been settled by the payment of the sum of Rs.600,000 according to CBSL which leaves a balance of 61% totaling deposits of Rs. 16 billion to be settled.

The Monetary Board of the Central Bank of Sri Lanka decided to cancel the license issued to The Finance Company in terms of the Finance Act no: 42 of 2011with effect from d May22, 2020.Accordingly the Deputy Governor said that TFC is not permitted to engage in finance business under the FBA with effect from such date.

The Deputy Governor states that currently TFC has 145,000 depositors with a deposit value of Rs.26 billion. The Deposit Insurance Scheme is allowing to pay Rs.600,000 per person and therefore can settle Rs 11 billion of the total Rs.27 billion. He further states that people will ask what will happen to the balance. He states that the balance would be settled using the liquidated funds.

The Deputy Governor states that the asset base of TFC has a book value of approximately Rs. 20 billion which its recoverable value is estimated to be around Rs.10 billion which would be used to settle the remaining depositors.

If even under a process of liquidation of TFC assets according to the Deputy Governor only Rs.10 billion could be recovered whereas the 6.1% or 7% of the remaining deposits amount to a number in excess of Rs.16 billion. The CBSL should clarify how it is going to meet this shortfall to settle the amounts due to the balance seven percent high deposit customers.

Compensation payment will be made through the People’s Bank as the agent bank appointed by CBSL for this purpose. The first phase of the compensation payment for individual depositors having a single payment commenced on June 7 at People’s Bank branches in locations where TFC was previously operating.

In 2008 CBSL stated that the administration of TFC had to be taken over by the CBSL as a result of TFC being severely impacted by the failure of a number of financial institutions within the Ceylinco Group –not TFC. If that was the decision of the Directors appointed to TFC by the CBSL in 2008 they were aware that TFC could not be revived basically the Directors did not have a plan to revive TFC and the only feasible task and option that was available to the Directors was to perform the last rights on behalf of TFC i.e. closure. Having comprehensive knowledge of the situation regarding TFC no alarm bells rang of any unhealthy situation at TFC so there was no need for the depositors to panic the reason being the Directors did not portray the true position at the time. In a way one would consider that the silence of the Directors of TFC in not highlighting the true facts regarding TFC saved the country from a calamity because if the depositors were made aware of what was happening at TFC they would have panicked and rushed to withdraw their deposits which would have been a disaster for the government.

Notwithstanding the actual situation that prevailed at TFC, TFC with the approval of CBSL commenced a promotion from January1, 2019 to mobilize one billion rupees in one month with the promotion period starting on January 1, 2019 and ending January31, 2019.

A detail of the scheme was circulated to all branches and staff of TFC on December 31, 2018 under the signatures of Kosala Wimalasiri and Nimal B. Mamaduwa –ED/CEO.

The scheme entailed the objective of providing value additions to depositors of TFC and offered gift vouchers to the deposits under six deposit slabs. Branch Managers were given the responsibility of handling the gift vouchers and were authorized to purchase the gift vouchers from the nearest Cargill’s outlet.

This scheme by TFC with the approval of CBSL was called “Special Deposit Campaign to collect 1 Billion in one month”.

In terms of this scheme which was promoted by TFC a total of 2,474 depositors placed deposits amounting to Rs.947 million from January 1-31 2019 deposits breakdown as set out in Table 3.

However, to the surprise and dismay of these 2,474 depositors and other depositors on February15, 2019 the CBSL sent a letter to the Chairman of TFC. Wasantha Kumarasiri under the signature of . Ranaweera Director CBSL informing TFC to take steps under the Regulatory Actions submitted by the CBSL as follows:

a) TFC refrain from granting or making any further disbursements of loans, credit facilities or other types of financial accommodation except with the written approval of the Director Department ofSupervision- Non Banking Financial Institution.

b) Refrain from investing money whatsoever of the company.

c) Refrain from distributing profits retained overseas except with the approval of the Monetary Board.

d) Refrain from entering into any transactions for consideration or otherwise.

Financial crisis

Consequent to the Regulatory Actions of the CBSL depositors who placed their deposits under the Special Deposit Scheme were informed that their deposits have been frozen and will not be permitted to withdraw their deposits on maturity. The depositors are of the view that the promotion of the Speed Deposit Scheme by the Board of Directors of TFC with the blessings of CBSL is a fraud perpetrated by the TFC and CBSL.

Having achieved its target of collecting Rs. 1 billion in one moth, 15 days later the CBSL issues an order under the Regulatory Actions on `15th February 2019 freezing all deposits of TFC. The question that is being posed by the depositors is why the TFC and CBSL had to promote a scheme of this nature bearing in mind the financial crisis of TFC if there was a crisis since 2008 which prompted CBSL to take over the administration of TFC. Having collected 1 billion at the end of January 2019 what did TFC do with this money?

Several transactions perpetrated by certain Directors have taken place particularly assets belonging to TFC have been sold. Large amounts of TFC money have been invested in entities to which certain Director were affiliated to.

These illegal transactions perpetrated by certain Directors does not seem to have drawn the attention of CBSL may be for some very good reason. Whatever the cause may be these illegal transactions have all contributed to the downfall of TFC.

(Written on behalf of People’s Forum to Protect Financial Stability in Sri Lanka)

(To be continued next week)