BAI & The Liquidity Trap

Is this liquidity injection of Rs 4 billion by the BoM in a group under administration, backed by the shares of perhaps an over-valued foreign company, a better deal than the Rs 350 million that the Bramer Bank was in need of in order not to precipitate the catastrophe that the British American Group has now become?

In the background of this article, let us recall some recent events.

In the night of 2nd April 2015, the Bank of Mauritius (BoM) decided to revoke the banking licence of the Bramer Bank, a bank belonging to the local British American group.

The reason for revocation was given out as the inability of the bank to inject Rs 350 million of liquid funds in it, as requested by the BoM. It needs also be recalled that the bank was thrown into the liquidity crisis some time before 2nd April after a few public sector bodies inexplicably withdrew their deposits en masse from it.

In the face of its liquidity crisis, the Bramer Bank requested an advance of Rs 1 billion of liquid funds from the BoM against the security of its immovable property. The BoM refused this request on the grounds it did not want to go beyond regulatory limits. This could be interpreted to mean that, by acceding to the request, the BoM would be acting against some laid-down rules. The licence was therefore revoked on the grounds the bank was unable to raise the amount of liquidity called for by the BoM (Rs 350 million).

Once the Bramer bank’s licence was revoked, this precipitated the downfall of the British American Insurance (BAI) and finally that of the entire BAI group itself. The assets of the group are now lying in the hands of two Special Administrators appointed by the financial regulator, the Financial Services Commission.

Shortly after the revocation of its licence, the Bramer Bank was revived under a different appellation, National Commercial Bank, after government injected 200 million rupees of capital in it. Since then, there’s no mention of the original bank’s immediate liquidity problem of Rs 350 million, cause of the revocation.

In the face of the mounting tension among employees and policyholders of the BAI as this drama unfolded, starting from the Bramer Bank episode, the government gave certain assurances. It assured all policyholders of the BAI, including those who had been issued a policy going by the name of Super Cash Back Gold (SCBG), that they will also be fully repaid as from the 30th June 2015, contrary to what had been intimated before concerning them. A large amount in the billions is involved.

According to a report appearing in Le Maurcien of 24th June, one of the two Special Administrators of the BAI Co (Mtius) would have stated that the supply of liquidity to pay the BAI’s SCBG insurance policy holders was ready. Accordingly, the Special Administrators would have secured a line of credit of Rs 4 billion from the BoM, obtained at a rate of interest below the BoM’s Key Repo Rate.

The line of credit would have been provided against the security of a 23.34% shareholding the BAI holds in Kenyan company, Britam Ltd, on the basis of its share price quotation on the Nairobi Stock Exchange. The term for which the credit has been granted is not specified and there is no communiqué from the BoM to explain the reason behind this transaction but the information appearing in the newspaper has not been denied. According to press reports, the BoM would have granted the Rs 4 billion facility to the BAI Administrators after obtaining the government’s approval for the same. The latter statement has also not been denied.

Section 9(1)(d) of the Bank of Mauritius Act 2004 states that the “Bank shall not … grant loans upon the security of any shares”. Shares are highly volatile and central banks do not venture on this market, least, grant advances against the security of shares. That being the case and assuming the press reports are true, the government should have somehow prevailed to cause the BoM to accord this big facility against the security of shares, despite the contrary legal provision.

Part X of the Bank of Mauritius Act 2004 deals with the BoM’s relations with the Government. There is no provision in this section for the BoM to be “directed” to do any act by the Government; at best, the Minister of Finance may seek advice from the BoM on financial matters and the BoM may at its own initiative advise the Minister on matters concerning the achievement of its objects as laid down in the Act. In the present case, therefore, the Government was not empowered to cause the BoM to grant the line of credit to the two Special Administrators of the BAI group. The decision should consequently lie entirely in the hands of the BoM and its Board, at its own risks and perils.

Clearly, the government had a hot potato on its hands, having failed to obtain the necessary funds to overcome the liquidity situation following its commitment to honour dues to all BAI policyholders. It was rumoured recently that the government was thinking of roping in the National Pensions Fund to be able to honour its commitment given to BAI policyholders. Before long, there were protests in the public that that NPF money belonging to pensioners should not be used to make good liabilities of dubious worth.

This should explain the recourse to the BoM in view of the imminent deadline, 30th June, to pay back policyholders. But the question still remains as to how the shares of a foreign company which might have got inflated by a piece of creative accounting, can meet the test of extreme rigour that the BoM was giving itself when refusing a much smaller amount, Rs 350 million, to save a local bank from an unexpected liquidity crisis.

There have been previous cases when the BoM was made to grant special advances to particular sectors. In November 2000, the BoM provided a “Special Line of Credit to the EPZ sector to help EPZ companies modernize their equipment” at a rate of interest 5% below the rate at which it ordinarily lent money to banks. Similarly, in November 2001, a Special Line of Credit for an amount of Rs 1.5 billion was given to support the “restructuring of the sugar industry”, again at a below-market interest rate, This amount was raised to Rs 2 billion subsequently. The government then in place may have influenced the BoM’s decision behind the scenes to grant these lines of credit but it is the BoM which took the decision, according to law, “in its own deliberate judgement”.

In these cases, however, the money was made available by the central bank to commercial banks for them to on-lend to their client beneficiaries. It was not lent directly to Special Administrators of a business group under administration. The Administrators have a passing role, unlike the banks in the previous cases cited. Ultimately, therefore, all rests on how the Kenya company’s shares behave on the volatile stock market and whether there is substance enough in that company to which the central bank can have recourse to recuperate its money back by realizing the security it has taken for the lending. Companies are prone to accidents.

We can only hope that, with or without the government’s blessing for doing the deal, the BoM’s money will not go down the drain eventually. Is this liquidity injection of Rs 4 billion in a group under administration, backed by the shares of perhaps an over-valued foreign company, a better deal than the Rs 350 million that the Bramer Bank was in need of in order not to precipitate the catastrophe that the British American Group has now become?

 

*  Published in print edition on 3 July 2015

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