Perceptions on the delicensing of Bramer Bank: collective wisdom of individual ignorance

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“It is better to know nothing than to know what ain’t so.” The hackneyed indictments of the Bank of Mauritius (BoM) for having revoked the banking license of the Bramer Bank Corporation Ltd (BBCL Ltd) in April 2015 under my stewardship have morphed into blistering invectives. Seven years after, the BoM continues to be maligned for the demise of the BAI Group. Unchallenged, the disparagements, hammered repeatedly, have fixated a perception that the BBCL Ltd was sound and robust and, therefore, the revocation of the banking license was unquestionably ill-motivated. The BoM is, thus, continually shown in the light of a conspirator that made the first step in an alleged plot to demolish the BAI Group. Many of the allegations have been like a touch of insanity in a well-bred family. The corruption of the balance sheet of the BBCL Ltd largely aggravated by funds made available to loss-incurring sister companies in the Group (see nTan Report in the BoM website which is a condensed version of the main Report with more than 10,000 pages, including annexes as evidence) is kept out of the picture by argumentative folks. The detractors have seen the forest but deplorably missed the trees. If left without a fitting response, I am afraid, the opinion cartel supporting the view that the BoM was an ally in an alleged conspiracy would go down in history as accepted archival materials. It would be remiss of me to allow the collective intelligence of individual ignorance to prevail indefinitely. Towards the end of this exposé, stridently unfashionable in the central banking community, I have made a proposal regarding transparency and accountability for any political party to consider, if at all a jurisdiction that inspires trust in its regulatory authorities and business confidence are found to be desirable goals. I have downloaded a 7-year old event from my memory. My apology if the time of occurrence of events and data in the text turn out be somewhat imprecise. Any imprecision would not change the substance of this exposé made for the record.

The banking license of the BBCL Ltd, operating on a deposit base of around Rs15.0 billion, was revoked in April 2015, five months after my second appointment. The bank was regulated and supervised by the BoM. The regulation and supervision of the BAI Group (excluding BBCL Ltd) fell under the purview of the Financial Services Commission (FSC). It, of course, goes to say that the BoM is not accountable for the acts and decisions taken by the FSC. 

In the exercise of its regulatory and supervisory responsibilities, one of the main objectives of the BoM set in the BoM Act and the Banking Act is to preserve and protect the interests of depositors with banks. The potential loss of Rs15.0 billion of deposit money at BBCL Ltd avoided by the BoM in April 2015 is conveniently passed over in the outcries raised over the demise of the BAI Group. Very selectively, aggrieved folks pick up only those points that wall them off from inconvenient truths. The total disregard of the successful rescue of depositors’ money at BBCL Ltd in favour of the mostly greed-led seekers of interest rates far above prevailing market rates says a lot about how objective and honest some critics are with regard to what is considered right and proper. 

A fair question by critics would go as follows: was the revocation of the banking license of the BBCL ltd the cause for the demise of the BAI Group or was it the consequence of incestuous financial relations with loss-making sister companies in the Group that further corrupted the already weak balance sheet of the bank? In what follows, I outline some crucial leads in the form of questions (for reasons that are obvious) that should amply clear the clouds and help formulate a balanced and objective view about the decision taken by the BoM in April, 2015. I have refrained from listing questions that might touch the raw nerves of some and discomfit a couple of personalities engaged in the entire BBCL Ltd story. Confidential files at the BoM speak hard-core truths. All men have eyes; only a few have the gift of penetration. The BoM does hold incriminating documentary evidence in connexion with the questions set below.

(i) Was the BBCL Ltd in dire need of liquidity even long before January 2015 and why? 

(ii) Why was the BBCL Ltd the only bank having difficulties obtaining overnight funds on the interbank money market to tide over liquidity shortfalls long before January 2015? Why had inter-bank money market participants found lending to the BBCL Ltd exceedingly risky, even on an overnight basis? Why was this view on the BBCL Ltd upheld persistently by the market even before 2015? 

(iii) How many billions of rupees did the BoM advance to the BBCL Ltd and were still outstanding in April 2015? Why did the BoM make advances to the BBCL Ltd when all other banks kept away from it? Didn’t it mean to the BoM that there was something fundamentally wrong with the BBCL Ltd? (Read Walter Bagehot’s classic Lombard Street) How much of the advances extended to BBCL Ltd satisfied the conditions stipulated in the BoM Act? How much of the advances did not meet the legal requirement? If not, why? Had the BoM ever ‘bailed out’ the BBCL Ltd without calling it a ‘bail out’ before 2015? 

(iv) The principle, based on sound central banking arguments, underlying BoM advances to banks (as was established by Bank of England envoy as Managing Director of the BoM as far back as in 1967) goes as follows: an advance by the BoM could be made to banks on an overnight basis. It could be for more than 24 hours up to 14 days. Such advances are granted to banks so that they could tide over temporary liquidity shortfalls that occur from time to time in the ordinary course of businesses. BBCL Ltd borrowed from the BoM in such amounts that represented a very high proportion its deposit base. The advances made to the bank remained outstanding for long. This was a red flag raised well before 2015. Why the deputy Governors responsible for the day to day management of the BoM never questioned the BBCL Ltd? 

(v) How many billions of rupees the BBCL Ltd had made available to its loss-making and other sister companies in the BAI Group? Did the BBCL Ltd finance the sister companies against collaterals or no collaterals at all? Were loans being made on ‘tap’ to sister companies? Who had decided to make the loans available to the sister companies? Importantly, did the Credit Committee of the BBCL Ltd observe the BoM Guidelines governing related party lending? Were the loans being duly serviced? 

(vi) The nTan Report does not cover the interactions between the BBCL Ltd and its loss-making sister companies. nTan did not have access to BBCL Ltd. The statement that the Scheme operated by the BAI Group was a Ponzi-like scheme was based on a partial picture of the Group. Once the related-party lending by the BBCL Ltd is drawn into the big picture of the BAI Group, the Ponzi-like scheme clearly assumes the structure of some family member of Ponzi schemes littered in economic and financial literatures. Inarguably, the big picture shares the essential characteristics of Ponzi-schemes. One cannot say for sure if the similarities with Ponzi Schemes were by design or just accidental. 

(vii) Before the banking license of the BBCL Ltd was revoked, the bank was required, after a rigorous onsite examination, to inject capital into the bank by a certain date. Deadline expired and capital was not injected. The BoM had not rushed to revoke the banking license of the BBCL Ltd as one would have hurriedly done in a conspiratorial plot. Never was the revocation of the license a pre-considered regulatory option by the BoM. At that point in time, the fate of the bank depended more on how successfully it would contain the liquidity crisis than on capital injection. In the world of banking, it is widely known that a bank can survive capital-deficiency for quite a length of time but it cannot survive a liquidity crisis even for some hours. Roadside politicians, not conversant with the history of bank failures, should be mindful of their limitations before making nonsensical allegations. I can understand politicians taking advantage of such events for winning votes. But describing someone who has been a devout and faithful public servant in words that open dead wounds is the height of incivility. Many of the politicians who have been slinging mud may not be aware that simple settlement failures by one party in a banking transaction have given rise to liquidity problems and brought down huge banks within hours. (Read about Herstatt’s risk) The BoM had thus extended the deadline for capital injection by one month. But daily reports submitted by the BBCL Ltd to the BoM continued to show a deterioration in the rate of withdrawals of deposits.

 (viii) How many Board Directors of the BBCL Ltd withdrew their deposits from the bank after the bank was requested to inject capital in the bank? Did the Staff Pension Fund of the Group withdraw its deposit from the bank? The signals could not have been clearer.

 (ix) At around the time, I had received an unexpected phone call from the Governor of a central bank in the eastern and southern African region. After the usual exchange of courtesies, the Governor said, “Governor, I just received three Mauritians who are proposing to set up a Fund for US$200 million. They say that they are from the BAI Group of Mauritius. I am conducting due diligence on the three persons. Do you have an idea of who these people are?” I was left totally flabbergasted. Nonplussed, I had asked, “Do you really mean US$200 million?” “Yes, indeed, Governor.”, said the Governor. The sound wave of this fabulous sum of US dollars was powerful enough to make someone at the receiving end fall off his chair. Instantly, BoM’s hope for capital injection in the BBCL Ltd dissolved. Confidence in the people who the BoM was interacting with busted. The Governor mentioned the names of the three persons. They were actually three known top officers in the BAI Group. The travel details of the three in the region were verified. Subsequently, I had asked the Governor to forward the names of the three persons to me. I did receive them in an email much later. While leaving the BoM in January 2018, I had handed over a copy of the email to my successor. 

(x) Why would the three Ganges-soaked monks from the Group be out together on a pilgrimage in the region with an earthen pot of US$200 million carrying a plan for growing money trees at a time when the Group was starved of capital to inject in the BBCL Ltd? Why was the US$200 million not used for repayment of the massive non-performing loans with the BBCL Ltd as well as for repayment of the massive advances made by the BoM? This would have improved the balance sheet of the capital-starved BBCL Ltd, thus, obviating the need for capital injection. Where did the fabulous sum of US$200 million hail from? Who actually owned the money? Why would the three Ganges-soaked monks prefer a foreign land to their own home country with a prospering financial centre for planting a Fund of as much as US$200 million? (Read ‘BCCI Bankrupt’)

 (xi) Elementary prudential norms require of any bank to avoid deposit concentration. Any bank is highly vulnerable to crises if a few corporate bodies or high net worth individuals hold oversized chunks of its deposit liabilities. Often it takes only a few corporate bodies or even one or a few individuals holding substantial deposits to trigger a liquidity crisis or a collapse. How many parastatal bodies held deposits at the BBCL Ltd and what were the amounts? Was the BBCL Ltd prudent enough? 

(xii) The BAI Group (minus BBCL Ltd) was incurring massive deficits year in, year out. The BBCL Ltd financed a sizeable part of the deficits to the detriment of its own balance sheet. In turn, the BoM (taxpayers) financed the BBCL Ltd by way of advances. Worshipful of the BAI Group everywhere in the media, savers/investors in BAI Schemes had expressed satisfaction that their deposits at maturity plus interests could always be cashed in time. Where did part of the money come from for facilitating the encashments does not require elaboration. Indirectly, taxpayers partly paid for the exorbitant interests offered to savers/investors in BAI Schemes. Only a stupid Government would cause taxpayers fully compensate the investors for their bad decisions. In a free market economy, consumers, savers and investors are often punished for their bad decisions. Should the greedy investors go unpunished for their bad decisions, recurrence of such bad decisions by individuals cannot be ruled out. Question is: who were the brilliant brains at the FSC and the BoM who allowed and fuelled the circular flows of capital within the Group, with the BoM meeting for shortfalls from outside? Who regulated ‘shadow banking’ in the country?

Add to the foregoing sinister mix, the run on the BBCL Ltd that had gained traction. The swamp got murkier. Within hours, the BBCL Ltd was past the tipping point. It was foolhardy to win a penny in a gamble but lose a pound in the bargain. BBCL Ltd was not a question of penny and pound; it was a Rs15 billion event. Losing lock, stock and barrel was not an option for the BoM. Preventing the Rs15 billion deposits from melting away under its watch is what the BoM Act imperatively requires of the BoM. Massive advances, taxpayers’ money, made by the BoM to BBCL ltd before 2015 had to be rescued. The BoM was left with no option other than to pull the plug, the sequel of which was far from an enviable responsibility to fulfill. As per the law of the land, the Board of Directors of the BBCL Ltd was allowed the specified time period to make representations. The BoM had patiently waited for a representation until midnight of the last day. The BoM did not hear from the Board. Nor did the Board make any formal representation. The BoM had scrupulously followed each and every step of its regulatory rules and the laws of the land. 

Politicians mis-spoke the day after. A damning mélange of inexactitudes, preposterous flip-flops, blame deflection, self-serving lies and professions of innocence cast the revocation of the banking license in a poor light. In such situations, politicians ought to have stepped back and let the regulators take the lead. Compellingly, the BoM stayed out of the melee. (Way back in 2003, in a similar situation astute Finance Minister, Hon P. R. Bérenger, then Minister of Finance, had set a good example. It had happened to be crisis resolution by a regulatory authority, not by a politician. A collapse of the payment and settlements system, the lifeblood of the Mauritius economy was avoided.) Obviously, the revocation of the banking license was fateful for the BAI Group but was never the cause as is so often construed. Regarding decisions about the remaining companies in the Group, the BoM was walled off. The BoM, regulator of a delicensed sister company in the Group, was viewed as a disposable partner in the crisis resolution, not even worthy for consultations. Sadly, what the BoM possessed as intelligence remained unshared. With a studied modesty, the BoM, in the tradition of regulatory authorities, chose to go by the unwritten principle of discretion, the elegance of which clashed with the inelegance of outcries that drowned the truths about the delicensing. 

The cumulative massive losses made by companies in the BAI Group, external auditors’ mis-leading balance sheets of the Group, outrageous regulatory forbearance, etc. have been tucked under the carpet to this day; in contrast, the light has continued to be shined on the BoM as the poster-boy enfant terrible. Thankfully, the BoM has a seasoned team of unimpeachable bank supervisors. Only the mischievous would dare assign any of the regulatory lapses to the team. Any untoward remark would not do justice to their competence and sense of commitment to their duties for the buck always stops somewhere else, not at their level. The records on BoM files are telling. The demise of any big financial corporation brings with it lessons on pitfalls that could unexpectedly threaten the lives of such corporations in a small economy. A Commission of Inquiry with comprehensive terms of reference would provide the lessons and do justice to whoever deserves it. 

Although the BoM had adequately explained the underlying reasons for the revocation of the banking license of the BBCL Ltd several days after, some folks have allowed themselves the luxury of more than a sensible latitude for vilifying the BoM. Facts have turned out to be like underpowered antibiotics. Untruths have been consistently blasted in the media with greater force of credibility; they have made gullible folks cling to misinformation with even greater conviction. What emerges from the on-going outcries are the palpable deficiencies of our democratic system with respect to transparency and accountability of key policy making institutions in the country. There are tried and tested avenues for eliminating the possibility of information in the nature of speculation and fake news from not only eroding confidence in our domestic financial markets but, equally importantly, from harming the jurisdiction. 

The idea of making the Governor accountable to a Select-Committee of the National Assembly was mooted in 2004 in the context of the drafting of the BoM bill. The ball was played imperfectly; the idea perished. Five main considerations militated in favour of the proposal: firstly, monetary policy and regulatory decisions made by the BoM are, too, technical. Left to someone not so conversant with economics, banking and finance to suitably inform the public via the National Assembly about monetary policy and regulatory decisions made by the BoM, often one can only expect a dismal performance. After all, one must not expect anyone of us to be omniscient. Secondly, absent a full brief through official questions and answers by the representatives of the people in an established legal framework, the risk of spin-doctored and fake information gaining popular acceptance over truthful information is clear and present. Thirdly, once a Governor is aware that he will be grilled by a Select-Committee for his acts and decisions even after his retirement, he would find himself in a compelling position to exercise due care in making policy decisions and in extending favours that could be detrimental to the economy. Fourthly, in a democratic system, the public would be kept informed. And, finally, the Governor would be safely positioned to reveal more than what I have covered in this exposé and bickering avoided. 

In a democracy, decisions made by the central bank necessarily have to be scrutinized, but not politicized. In a world of populism and rising distrust, the public is increasingly demanding to know the truths underlying decisions taken Governments. The continuing bigotries spewed out in the aftermath of the demise of the BAI Group are illustrative of the need for transparency and accountability of our regulatory authorities. Only an apparatus like a Select Committee of the National Assembly would keep unnecessary politics and bigotries off the screen; it would set municipal righteousness and prevent situations of deep-seated unreason from settling as a permanent human condition in our society. It is now, or never.

I would be prepared to face the Select Committee of the National Assembly.

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