How can a financial institution that just a few months ago boasted about a “liquidity of 40% of the total assets or 47% of members’ funds, a position exceeding the approved industry standard” – whatever that means – suddenly start telling current and potential loan customers to come back in six to eight months time? That is what a staff member of Ram & McRae was told after he had applied for a modest loan from the New Building Society. When he related this to me I thought he had it wrong and suggested that he return to the Society and seek confirmation and some details. He came back with the same message. Then someone contacted me from abroad complaining that his mother had a similar experience. I said that I had heard of reports of the NBS restricting lending. Then I received a letter dated September 15, 2009 purportedly from a member of the staff complaining generally about the state of the Society and that “since August the Society had stopped giving loans and has been telling loan applicants to go to GBTI or Republic Bank.”
I have independently confirmed this, which the commercial banks have found a dramatic reversal from the position not too long ago, where the NBS was actually poaching the banks’ commercial customers with the lure of lower interest rates made possible by the tax exempt status of the Society. What then is the cause of this development whereby the Society has ceased or severely restricted loans, described only a few months ago by the Society’s Chairman Dr Nanda Gopaul as its core business? In fact Dr Gopaul had earlier gone further, boasting of the reduction of mortgage rates from January 1, 2009 to 6.95% and 4.95%, in the case of low income loans.
Again quoting the Chairman from the 2008 Annual Report, “the Society has always adopted responsible and prudent approaches to its operations to counter any adverse development in the economic and financial environment.” What indeed could have gone so wrong so quickly that persons are now seeking advice on whether or not to withdraw their money from the Society and why the inaction from the ever so silent Bank of Guyana and the not usually silent Chairman Dr. Gopaul?
I wrote the Society’s Director Secretary asking him to provide me with unaudited half-year financials for this column but he has not even acknowledged my letter. He is part of the same board that complains that commentators and analysts should first contact them before writing.
So, is it that the rules are so restrictive that the Society cannot lend or is it the result of what concerned members of the Society have feared as bad governance by a team of seven with no prior experience of a private sector organisation let alone a multi-billion dollar financial institution? Forced by the media to comment on the development, Dr Gopaul gave as the reason for the sudden and unannounced development “the result of a One Stop Shop campaign by the Ministry of Housing and Water wherein numerous persons are being issued with house lots.” The reality of course is that the ministry has been giving many more house lots for more than a decade and there was no cessation of loans to existing members, so that explanation has a hollow ring about it.
Senior staff members of the Society have been advancing a totally different reason which can have serious implications for the Society – and that is a hardly ever considered provision on the New Building Society Act. A proviso to section 7 of the act restricts to no more than two-thirds, the relationship between the aggregate of deposit and loans raised, and the amount of mortgage loans by the Society. In other words if there is $100 out on mortgages, the Society should take in on deposits and/or raise by way of loans, no more than $66. Mortgage loans at December 31, 2008 amounted to $19 billion so that amount of deposits (there were no loans raised by the Society) at that date should have been no more than $12.7 billion. The rest it seems should be raised by way of equity. Under what appears to have been the broad definition used by the Society over the decades, deposits amounted to $30 billion at December 31, 2008, an excess of $17 billion, if the proviso is applied.
As I sought to assimilate this provision I realised that it was as elegant a formulation of the thin capitalisation rule as I have ever seen. The problem it was designed to prevent is the Society having customers’ deposits and lenders’ loans tied up in long-term assets beyond a certain level, so that even a significant level of withdrawal should not have a fatal effect on the Society’s operations.
Logic and rationale
To understand the logic one also needs to understand the rationale behind the New Building Society Act. It certainly was not to support any government policy or to make commercial loans, as this current Board seems to think. Under section 6 of the NBS Act the Society is a “Housing Association for purposes of the Housing Act” which defines a housing association to include a society whose objects include the construction, improving or managing or facilitating or encouraging the construction or improvement of houses for the working class.” These are not my words but those of the act and it was on that basis – referred to in taxation jargon as mutual trading – that the NBS has been granted tax-exempt status. One has to wonder whether the Minister of Finance Dr Ashni Singh considers this provision when he authorises increasing lending limits well beyond the reach of the working class. An earlier statement by Chairman Gopaul calling for a significant increase in the lending limit “in an effort to meet the demands for the construction of more middle income houses” shows that he is not too familiar with the NBS Act or its mandate.
And this is, if not entirely, certainly a big part of the problem. In 2005, the largest loans accounted for $105 million; now it is $234 million. More dangerously, they now include what are patently commercial loans granted to persons with good connections, but at least one of whom left a bad record with the GNCB. Because the Bank of Guyana seems impotent in regulating the Society there is, unlike for the commercial banks, no single borrower restriction so that one borrower can abuse the single loan limit. Had the rules which apply to the banks applied to the Society, it would not have been able to make the Bridge investment, plain and simple.
Another development is the spirited efforts to attract deposits with offers of rates of interest that suggest that the Society is willing to offer very high rates on borrowed funds. That is never a good sign and one only has to look at recent experiences at Clico and Stanford to appreciate the inherent danger. In fact the rates currently being offered by the Society are almost in line with what is being charged on the low-cost housing loans, so that on a total cost basis, those loans have minimal or no profitability. Not only is this strategy dangerous, but it also means that sooner rather than later, the rates charged even on existing loans and mortgages would escalate with consequences for affordability and considerable bad debts. Again we note the lack of urgency with which the Bank of Guyana has approached the NBS which operates without any statutory deposit or loan provisioning guideline to which commercial banks are subject.
The Bridge and the Head Office
Then we come to that other serious and questionable matter – the purchase of Berbice River Bridge Bonds of $1.5 billion dollars to help bail out the sinking Clico whose CEO and the NBS Chairman are fellow directors on the Guysuco Board. The Bridge has not achieved the optimistic revenues projected and many suspected that the belated payment of interest on its bonds for 2008 was made to stem concerns about its viability. Let us recall that Mr Winston Brassington who used some very unorthodox methods to raise money for the Bridge Company was a prominent attendee at the NBS’s Annual General Meeting (AGM) in Cotton Tree earlier this year at which he played up the performance of the Bridge. Nothing more has since been heard about that performance and efforts to obtain a copy of the company’s 2008 annual report from Mr Brassington and the Bridge Company’s Vice-Chairman were referred to its CEO who did not take or return any of my calls. So much for transparency and accountability.
The NBS Board, made up almost entirely of persons close to the ruling party, has shown a remarkable stubbornness that in normal circumstances would guarantee their removal. The way the NBS is run is certainly not normal. The directors have illegally refused to carry out the mandate of the last AGM for the repatriation of the Society’s Pounds Sterling investments and more than likely, the setting up of a Loans Sub-Committee, both of which may have helped to prevent or at least minimise the current problems in the Society.
They are persisting with the construction of a new Head Office with no firm arrangements for the disposal of the current one. With the large network of branches being constructed the pressure on the existing Head Office would have reduced significantly but the Society is set to spend close to $900 million on a spanking new structure with no customer parking! The combination of the politically expedient investment in the Bridge Bonds coming right on the heels of the $900 million Head Office and the unwillingness to repatriate the Sterling Investments explains why the Society is in its current mess.
Another misjudgment of the board is yet to be made public but members should worry about developments following the decision by the board prior to the last AGM to change the long-standing auditors Jack A. Alli, Sons & Company in preference for a relatively new auditing partnership, Solomon and Parmessar. This partnership is splitting up even before it can complete a single audit and the board, which has not a single accountant among its seven, would now have to decide whether to go with one or the other of the partners, or indeed go back to its former auditors, the reason for whose removal was never shared with the members.
It is hard not to worry about the sloth of the Bank of Guyana in relation to the NBS. The central bank appears to have learnt nothing from Globe Trust and Clico which it now supervises. It has categorically refused to meet members of the Society whose fears have proved more than justified and it has been promising for close to ten years to bring the NBS under its supervision.
Members of the Society may need to consider how best to protect their funds and the Society from those whose management of it seems dangerously lacking. I would caution against any precipitate action by members however and am yet hopeful that the directors would get to grips with reality. The board needs to do something to reassure members that they have the situation under control.
Note: I am a former member of the Board of the NBS.