Friday, October 3, 2008

Central Bank and failed finance companies

In light of the failures of financial institutions, we must face reality. Sri Lankan borrowers, be it individuals, banks, or finance companies, are inherently unreliable. So a lender or depositor must always be wary.

A credit guarantee for a million rupees per name per institution, must be backed by the Central Bank, and for this backing to be given, stringent oversight powers must be given. This seal will then be the only guarantee an individual has of the safety of his or her investment.

As an ex-auditor with over 11 years of experience internationally, I know how easy it is to hoodwink the most seasoned auditor, if one is to perpetrate a fraud. So the Central Bank, which does not have people with common sense, just overqualified prima donnas, and bureaucrats who are promoted on seniority, is easily misled. The onus is on the bank therefore to improve their audit practices to prevent abuse of the system for which they don’t appear to take any responsibility, and not even a statement from the governor of the regret or lapse on their part has been broadcast to date.

There has been the failure of Mercantile Credit, primarily a lender for auto financing, and then latterly Pramuka Bank and even more recently the pyramid schemes and there appears to be no forewarning until the horse has already bolted. The Central Bank has been caught napping in all these cases.

It is time, people are advised of the risk whatever the statements made by institutions on the security of the deposit. The Central Bank can only realistically do so much due to a skill shortage of people able to understand basic truths and deal with perpetrators of fraud who are extremely cunning.

The strict oversight of the remaining financial institutions, will then strengthen their credibility, and before there is a bubble that bursts on the Colombo property market, steps should be taken to examine critically, all loan portfolios primarily on real estate developments before there is even one bank failure. This could then have a knock on effect on the others. A credit crunch and withdrawal of deposits will stifle investment and growth, both of which we badly need having an adverse impact on the economy.

Governor you are in a make or brake moment, and how you command yourself in this critical juncture determines the future course of this nation.

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