Fri | Sep 22, 2017

Reckless management - PC banks taken over to protect depositors funds after high-risk loans uncovered

Published:Thursday | September 17, 2015 | 9:00 AMEdmond Campbell
Bernal Neil, chairman of the National People’s Co-operative Bank (NPCB), was informed that the Agricultural Credit Board would take over management and control of the NPCB, beginning on August 27 and until further advised.

An audit of the 110-year-old farmers' institution, the National People's Co-operative Bank (NPCB) has unveiled a litany of irregularities and weak management practices, which have placed the money of its members at risk.

The audit, conducted by the Agricultural Credit Board (ACB), which is the regulatory body for the NPCB, highlighted several weaknesses that have exposed the NPCB to high financial, reputational and information-technology risk.

It says loans to related parties, in particular, loans to board and committee members of the PC banks, revealed breaches and non-compliance in the granting and monitoring of the loans, pointing to an impairment of the governance processes and management controls at the institution.

In its report, the team of auditors said the current state of affairs at the NPCB "requires immediate attention by the relevant authorities".

More than $665 million, or 21 per cent of members' deposits, could not be accounted for by the NPCB, and lending from this portfolio had reached the stipulated 50 per cent limit.

A call for intervention by the "relevant authorities" has apparently been answered by the registrar of the Department of Co-operatives and Friendly Societies.

This oversight body, on August 5, issued a cancellation order, which was published in the Jamaica Gazette, that intends to cancel the registration of the NPCB unless it can be shown that the bank is conducting its financial affairs and management in accordance with its rules and the Industrial and Provident Societies Act and Regulations.

The Gleaner understands that the registrar, Errol A. Gallimore, has approved a three-month extension of the cancellation order.

At the same time, in a letter dated August 26, to the chairman of the NPCB, Bernal Neil, chairman of the Agricultural Credit Board (ACB) Hugh Graham served notice that the board has exercised its powers vested under the Agricultural Credit Board Act to take over the management and control of the NPCB, beginning on August 27 and until further advised.

The ACB advised that the notice was in keeping with Section 17(2) of the Act.

Citing reasons for the action, the ACB highlighted "reckless exposure of members' savings".

poor financials

It also pointed to unacceptable financial performance as confirmed by the 2014 audited financial statements of the NPCB and that of several years preceding.

The ACB said it was not satisfied with the information regarding the affairs and assets of the NPCB.

It said the findings of the final report of the special audit on the NPCB dated August 5 and the numerous breaches uncovered by the probe confirmed the high risks to members' savings and stakeholders' interests.

The audit stated that delinquent loans to some board and committee members of the NPCB were rescheduled before the loans reaching 180 days, which would mean they are in a state of delinquency. Directors or committee members whose loans surpassed the 180 days would face automatic disqualification as directors or committee members of the NPCB.

The Agricultural Credit Board review highlighted cases where the conduct of the board and management of the National People's Cooperative Bank (NPCB) in relation to the loan-approval process was in contravention of the approval credit administration policies and procedures.

It was revealed that a loan amounting to $170,000 from members' savings was approved for a board member to offset personal expenses and granted a 12-month moratorium.

A loan was also approved for a board member and was later rescheduled, and the grace period increased from the approved one month to 12 months moratorium, without proper supporting documentation and/or project appraisal.

In another instance, an approved interest rate on a loan to a board member was reduced three months after first disbursement from 15.5 per cent to 12 per cent while this was not applicable to other loans with a similar or higher interest rate.

Prescribed special condition (peril insurance) for loan was waived to a board member by management where the security offered was a property with dwelling house.

In the course of normal loan administration, this condition is a definite requirement before disbursement.

The audit also pointed to a case where a loan was disbursed to a board member before the payment of the requisite fees.

In addition, the audit stated that millions of dollars in loans were granted to a board member without the required voluntary shares as stipulated within the approved credit administration policies and procedures.

The audit revealed that at least one loan application, for which approval was declined by the Development Bank of Jamaica (DBJ), was approved by the NPCB and funded using members' savings deposits.

The loan file showed that the loan application, for which a loan of $50 million at 12 per cent per annum was made by the NPCB to a director of the bank and funded from the NPCB members' deposits, was declined by the DBJ.

The DBJ refused to provide the loan because the cash flow and assumptions appeared to be "overtly optimistic". It also felt that the security was marginal.

"It was observed that while the loan application was being processed by the DBJ, a bridge-financing loan of $10 million was granted to the borrower on November 4, 2011, from members' deposit."

bad-debt increase

The audit showed that the loan had interest arrears of $359,614.52 but was rescheduled and interest capitalised. The account reflected principal balance of $50.36 million as at May 31, 2015.

According to the audit team, this action could result in an increase in the bad debt of the PC banks, loss of interest income, reputational damage and erosion of members' deposits.

It urged the bank to incorporate risk assessment in the processing of its loans.

The audit also found instances where the rescheduling of loans to some board and committee members were in contravention of the NPCB Credit Policy.

edmond.campbell@gleanerjm.com