Wed | Jul 18, 2018

Editorial | Regulate PC Bank like other credit unions

Published:Friday | February 24, 2017 | 12:00 AM

Karl Samuda, the agriculture and commerce minister, is right to have sacked the directorate of the Agricultural Credit Board (ACB). It has long proved itself incompetent. But Mr Samuda shouldn't be casting himself as a hero for discovering, at the eleventh hour, as he suggests, that a task assigned to an ineffectual lot hadn't been completed.

Yet, the more important matter in this episode is the fact that the mischief the government intends to cure by merging the ACB and the Department of Cooperative and Friendly Societies, which has more robust oversight of the National People's Cooperative Credit Bank, won't be achieved by this mechanism. So, even if the administration feels impelled to proceed with its plan, regulation of PC Bank should fall to the new entity.

The immediate background to this issue is this week's revelation that Mr Samuda had disbanded the ACB, whose chairman is the agricultural official, Hugh Graham. Apparently, they failed to act, or have not acted expeditiously, on directives towards the creation, by the end of March, of the new oversight agency for agricultural loan societies and other co-ops, to which the Government is committed to the IMF.

Others factors may have contributed to this policy, but the most compelling was the ACB's ineptitude in fulfilling its responsibility, in law, of regulating the PC Bank, a mutual with assets of more than J$4 billion in 36 mostly rural branches and borrowers who are mainly rural residents or farmers.

The PC Bank has a habit of running into trouble and being rescued by taxpayers. It last happened in 2015. The cooperative couldn't account for nearly J$666 million, an amount equivalent to more than a fifth of depositors' money. It transpired that its managers and the board were cavalier in how they handled their members' money. Loans were made to the bank's governors without following agreed procures, then restructured at lower interest rates when they were about to become delinquent.

The mess came to light only because the Development Bank of Jamaica, which itself was lax in protecting its money, was about to write off J$1 billion of loans to the PC Bank, threatening the latter's solvency. It was only then that the ACB ordered a deep review of the PCB.

But an indication of how clueless the ACB had been was Mr Graham's admittance last September that his board "did see signs" of poor governance at the PC Bank, had asked for information, but was "unable to obtain satisfactory information as to the affairs or assets" of the society. They were energised by a forensic probe and eventually took control of the PC Bank when the current finance minister, then in Opposition, made a public scandal of the affair.

Mr Graham and his fellow board members should have been sent packing then.

As to the way forward, as we argued previously, while the failure of the PC Bank would perhaps not have systemic consequences for Jamaica's financial system, it is not an inconsequential institution. Its collapse would hurt many people and affect confidence. Moreover, it is active in the market and is likely to grow.

Indeed, the PC Bank possesses the same characteristics of other cooperative credit unions, which used to be self-regulated, but because of their increasing significance in the financial system, are being brought under the intense regulation of the central bank. So, too, should be the PC Bank.