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By Ravi Ladduwahetty

The Central Bank of Sri Lanka (CBSL) yesterday cautioned depositors and investors not to be duped by mushroom finance companies operating without legal authority. These institutions, the CBSL said come in the form of finance companies, investment banks and other voluntary organisations, offer very highly unpredictable interest rates which lead to their insolvency putting depositors in the lurch for which the Bank was not responsible.Three frontline private sector finance/ banking personalities also called upon the Government to arrest the problem expeditiously and as a matter of priority, one of whom, proposed that these institutions should be subject to a rating process.

This is a process where all institutions soliciting public funds should be rated on a mandatory basis which would assist people to make an intelligent risk/ reward decision based on the rating on the bank/ company, he said.Central Bank's Deputy Governor W.A. Wijayawardena told the Daily News yesterday that the public should be cautious in investing their hard earned money in institutions which are not supervised by the Central Bank. The fact that these promised interest rates are far higher than the market rates, by itself is a reason for caution, he said.

He said that depositors were advised that investments or deposits should be made in and registered financial institutions of which there are 25 each and fourteen licensed specialised banks and it is these which have been operating with the supervision of the Central Bank.He said that these institutions come in various forms such as finance companies, investment banks and voluntary organisations and the Central Bank is not liable for the disparity which arises from these fraudulent institutions. The Central Bank cannot be held liable when naive depositors and investors are duped, he said

With the sweeping financial reforms taking place in the country, the Central Bank as the regulator of the private sector, has been informed that there are certain finance companies that are advertising, offering very high interest rates which are unpredictable and whose credentials are sceptical which lead to depositors getting duped, Consultant to the Financial Reforms Program Dr. Wickrema Weerasooria said and added that this has resulted in these depositors losing their funds.

The 25 Licensed Commercial Banks are: American Express Bank, Bank of Ceylon, Commercial Bank, Deutsche Bank, Habib Bank AG of Zurich, Habib Bank, Indian Bank, Indian Overseas Bank, Mashreq Bank, Muslim Commercial Bank, National Mercantile Bank, Nations Trust Bank, NDB Bank, Pan Asia Bank, People's Bank, Public Bank BhD, Sampath Bank, Seylan Bank, Standard Chartered Bank, Standard Chartered Grindlays Bank, Hong Kong Bank, State Bank of India and the Union Bank of Colombo.

The Registered Finance Companies are: Alliance Finance, Arpico Finance, Asian Finance, Associated Motor Finance, Bartleet Financial Services, Central Finance, Chilaw Finance, Commercial Credit, Edirisinghe Trust Investments, Finance and Land Sales, Industrial Finance, Merchant Credit, Mutual Investment and Finance, Nanda Investments, Senkadagala Finance, Silvereen Finance, Sinhaputhra Finance, The Finance and Guarantee Co, The Finance, The Rupee Finance, and Trade Finance and Investments. The licensed specialised banks include: Ceylinco Savings Bank, DFCC Bank, Kandurata Development Bank, National Development Bank, NDB Housing Bank, Pramuka Savings and Development Bank, Rajarata Development Bank, Ruhuna Development Bank, Sabaragamuwa Development Bank, Sanasa Development Bank, State Mortgage and Investment Bank Uva Development Bank and Wayamba Development Bank.

There are also cooperative societies which are registered under the Cooperative Societies Law No. 5 of 1972 and building societies under the National Housing Chapter which are also authorised to accept deposits. The Central Bank has received complaints and inquiries from time to time regarding deposits and investments of money with financial institutions Central Finance Co. Ltd's Managing Director/Chief Executive Officer Eranjith Wijenaike said:" The Central Bank's decision to create public awareness on these mushroom finance companies and investment banks follows the recent meeting that the Finance House Association had with the Central Bank authorities.

Wijenaike, while welcoming the Central Bank's public awareness program, said that it was tragic that the current Banking Act, the Finance Companies Act, the Special Banking Act, all of which govern the regulations governing depositors, have yet not been empowered with the requisite legislative provisions to prosecute these offenders, which he said, was an essential prerequisite in the ongoing Financial Sector Reforms. The Central Bank should promote the creation of this vital piece of draft legislation which will serve as an impediment to these institutions plundering funds from unsuspecting investors, he said.

This is indeed a paradox that the banks and finance companies registered with the Central Bank are required to get approval for their advertisements by the CBSL, but these mushroom organisations are operating with gay abandon without laws to protect them, he said. Hatton National Bank's Managing Director/CEO Rienzie Wijetilleke said that these institutions attract the more vulnerable and naive segments of the society such as pensioners who welcome the high interest rates for their pensions as they are dependant on the earnings for their survival.

He said that it was surprising where these deposits were being invested which were targeted for such high returns, unless they were investing in the Pettah trading market.

This is a serious situation. It is also up to these registered finance companies to meet ethical standards, which is often not happening. It is up to the Central Bank to probe these institutions, he said. Chairman of the Sri Lanka Bank's Association and Citibank NA's Country Head in Sri Lanka /Chief Executive Officer Kapila Jayawardena said:" All institutions soliciting public funds should be rated on a mandatory basis. This will assist people to make an intelligent risk/ reward decision based on the rating on the company.

Mushroom Finance Companies and other deposit soliciting agencies will not get an investment grade rating. The creation of an instrument to rate these organisations will prevent people investing their hard earned funds in dubious organisations where there is high potential of losing the principal in lieu of a higher interest/return.

He said that there were companies which were soliciting funds from the public on tree planting campaigns, pledging them returns on investments in the longer term of periods such as 20 years. There is no monitoring mechanism to probe these companies on their funds. They are not accountable. How can investors be assured of returns if the trees die due to natural circumstances ? , he said.

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