Editorial: Mr Graham’s case for new PC Bank oversight
If a case is to be argued for new regulatory arrangements for the National People's Cooperative Bank (NPCB), it can't be more persuasively made than by the remarks last week of Hugh Graham, the chairman of the Agricultural Credit Board (ACB), whose name, until then - and like those of his fellow board members - was among Jamaica's best-kept secrets.
For the avoidance of doubt and the perpetuation of ignorance, the PC Bank is not a government entity, as it is widely believed to be. It is a mutual organisation, owned by its members. It functions very much in the manner of a credit union, catering primarily to farmers and rural residents and is registered with the government agency that oversees cooperatives and friendly societies. But as a financial institution, the PC Bank is regulated by the ACB, which falls under the agriculture ministry, and which, by law, has that job with regard to agricultural loan societies.
Recently, the ACB, as it has the power to do, put the PC Bank under management after an internal audit discovered that it could not properly account for more than J$650 million of depositors' money; that its governors loaned themselves money without appropriate collateral; that their projects needed not be feasible for them to receive credit; and that the restructuring of each other's debt was done almost on whimsy.
Which brings us to Mr Graham and his regulatory agency. "We did see signs [of the governance crisis]," he told reporters. So, as early as March this year, the ACB issued warning letters to the management of the PC Bank. The board wanted the PC Bank to become compliant, but its request for certain information "was not forthcoming", even up to the time for the renewal of their registration with the Department for Cooperatives and Friendly Societies.
In the end, the ACB moved against the NPCB under Section 17 of the Agricultural Board Act, which gives it the power to intervene when, among other things, an agricultural credit society fails to collect its debts or the ACB has been "unable to obtain satisfactory information as to the affairs or assets of such society". But the ACB acted only after the shadow finance minister made a public scandal of the PC Bank's management of its affairs.
The point is that the ACB appears neither to have been proactive nor pre-emptive. And with assets of around J$4 billion, it is not an inconsequential organisation, especially for one whose roots are among mostly poor farmers. If the ACB was paying attention, it might have noticed the PC Bank had, for years, been accumulating deficits, reaching J$1.5 billion in 2011, and that it skirted insolvency in 2012 with a revaluation of its property, netting the bank an unrealised $338 million.
We know little of Hugh Graham and of his colleagues on the ACB, but in an increasingly sophisticated and interconnected financial market where contagion is an ever-present possibility, financial institutions demand more rigorous oversight than is offered by the ACB and is required by the law that establishes it. It matters not who sits on that board. They need only be appointed by the minister.
It is the fear of contagion that has moved the central bank to bring the island's mostly well-run credit unions under its regulatory umbrella. The historically poorly run and regulated PC Bank makes a more compelling case for its oversight.