BAI: The Debacle Continues

Thousands of people had invested massively in the BAI’s so-called Super Cash Back Gold (SCBG) insurance policy and in the Bramer Asset Management (BAM) schemes, lured by tax advantages and excessively high returns promised to them.

Distorted public policies

Government policies partly helped to drive people into those schemes. Taxing of ordinary bank depositors’ interest earnings and successive actions of the Bank of Mauritius’ Monetary Policy Committee led to successive reductions, to a low bottom, of the interest paid by banks and other financial institutions to savers – from which returns on insurance policies and capital gains on investments were exempt. This setup helped BAI garner a big pot of money from savers through its schemes. Savers/investors threw ordinary caution to the winds as they headed for those investments.

Any policy-maker would have clearly seen the concentration of risk being created in one unduly aggressive seller of financial products this situation was giving rise to. While a financial regulator can draw attention to this serious risk – at high risk to himself/herself — he/she cannot override political decisions, if any, which have the effect of shifting market operations. Decisions of the sort are often prompted by vested interests who wish to pay lower interest on their accumulated large debts in financial institutions and wish to get the rental income from a depreciating currency arising from the adopted tax and monetary policies.

“Fools rush in where angels fear to tread”

The crisis that had been building up in the process came to a head when it was decided to hurriedly dismantle the BAI group in April 2015. So doing, the new government unwittingly perhaps – remember, it was promised that not a single rupee of public money would be employed to reimburse BAI clients after the dismantling – brought upon itself a catastrophe waiting to happen. It was only after the dismantling that it was realised that there was a gaping hole in the finances of the BAI.

Yet, it should have been evident from years of previous aggressive marketing of the products by the BAI group that something was going wrong. Indeed, a horde of aggressive salesmen of BAI products going across the country to as many possible buyers into the schemes as possible, was a red flag. It pointed to a massive shortage of cash in the company, which was sought to be bridged up now by those continuous takings from new investors/policy holders.

Averting the crash

The cash so mobilised was badly needed for the BAI not to default on liabilities to the public as and when they matured. The group could not afford to invite loss of public confidence in it if ever it failed even once to honour its obligations. It could crumble at once if it did so.

Ordinary buyers of insurance policies and small time investors could not guess that this was the state of affairs. And that they were putting themselves in peril. Some amount of financial literacy is required to see this kind of danger.

The signal that this was actually the case was also coming from the fact that the BAI group was ever expanding into newer businesses. The expansion might have been meant to mask the fundamental significant cash flow problem faced by the group, thereby painting in public a brighter picture of its seeming success. All these incremental businesses must have themselves added to the need for large sums of money to be injected into the business, at any cost. Hence, the recourse by the group, through aggressive product sales, to raise funds extensively from the public – at any unrealistic price.

Let alone members of the public subscribing to those policies being lured into the schemes. A major bank had to write off several hundreds of millions lent to the group as irrecoverable advances in 2015. It had to recast its previous years’ accounts – because the bad debt had not been recognised at the material time, maybe out of creative accounting or skilful financial engineering for it not to be discovered so soon. That advances were given only to be written off later shows possible pressure was made to bear on the bank to go in a direction defying prudent common sense. In such cases, even regulators can go up to a point, but no more, to straighten up things. The pain would thus fester until breaking point is reached.

Unintended consequences

It is not surprising therefore that members of the public were victims of the situation. Before stepping into this pit of snakes in April 2015, even the main heroes of the present government could not guess the gaping financing hole mismanagement of the group would have left behind. If they had exercised care and caution, they would have proceeded with much more caution than the rash and dramatic manner in which they intruded upon it.

They would have proceeded by first making a serious but discreet inventory of the available group assets with which to meet its liabilities and put all avenues of recovery – including prior legal coercion of the owners and managers of the business to bring back hidden assets — on their side. No, they preferred going the theatrical police route rather than the pragmatic route to first recover all overt and covert assets for a sounder resolution of the situation.

The consequence? It is only after the event, realising the big gap in the group’s finances, that the authorities are now doing the asset tracing activity with the help of a specialised asset tracing investigating team. This could have been the first very discreet step before regulatory action was actually initiated. The more so, as the central bank was fully aware of Bramer Bank’s frequent borrowing from it to shore up the group’s recurrent liquidity shortfalls. The previous extensive track record of distressed fund raising on the market by the group was also a clear signal that the matter needed to be handled with utmost care.

It must be realised that asset tracing is coming in the wake of the recent hunger strike by insurance policy holders and investors into BAI group entities, victim of the situation, to protest non-payment of their dues. We do not know the precise extent of the BAI group’s financing gap – nobody knows since hidden assets are being traced only now — but the government has offered to pay an aggregate sum of Rs 6.5 billion to the SCBG and BAM victims as partial compensation of the amount due to them, maybe also the final. The Rs 6.5 billion is to be drawn up by the government apparently from a special fund of its own, not BAI’s.

The group’s financing gap must have been quite big if we add to this sum being disbursed to policy holders and investors, the previous injection of Rs 3.5 billion by the Bank of Mauritius to help shore up the capital of the now-defunct Bramer Bank at the start of the dismantling. That brings it to at least Rs 10 billion already, not reckoning the remaining compensation amount not being paid to policy holders and investors into the group.

Gaps like this don’t arise in a single day or month or year. Nor can they be attributed solely to any untimely sell-off at lower than realisable value by Special Administrators of whatever assets have been identified and disposed of. The group’s management, accountants and internal controllers should have been aware of this untenable financing gap over all the years they’ve been scouting the market – banks and members of the public — to raise much needed liquidity.

They must have been aware of this structural flaw within the group and the reasons therefore. Even before the blame for this catastrophic situation is cast on outsiders, what did the top responsible guys inside do internally to restore prudent management and a sounder financial health? And, if they didn’t do so, what incentives did they have for not doing their duties? The SCBG and BAM victims may actually be the victims of this loose top management, perhaps a situation deliberately created by some at the top to shield from view the on-going serious cashflow deficit over a much extended period of time.

Had the prior asset/liability tracing route been followed, the gap might have been filled up by coercing owners and top insiders to identify it first and pay up. The government would not have been in the weak position in which it is, let alone having to provide its own funds to partially pay up the SCBG and BAM victims.

Apparently, the hubris of power went to the head at that time in 2015 and it actually ended up turning the tables against the government whereas the latter should have been in a situation of control to cause those who have actually diverted the money away to pay up, not the government. Thus, even after its demise, the tragedy of the BAI group keeps adding to the numbers of its victims, notably also the public which contributes to government special funds.

Anil Gujadhur

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