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Former Chairman of the liquidated Pramuka Bank Rohan Perera said in a statement that the Central Bank's actions in the Pramuka Bank issue require a complete investigation.

In a statement released from his residence in Longdon Place, Colombo 7, he said there are hidden motives behind the closure of the Pramuka Bank and alleged that two VVIPs had asked a large sum of money to reopen the bank.

"Two VVIPs (including one from the Central Bank) solicited a gratification of a large sum of money (Rs. 50 million) and promised to permit Pramuka Bank to re-open as a commercial bank with a generous line of credit from the Central Bank. As their demands were not acceded to, circumstances have led to the extreme step of liquidation of Pramuka Bank with disastrous consequences to all involved," Perera said.

He said: "A responsible Central Bank should do all in its power to re-structure a bank in difficulty by either promoting new investments in the Bank or merging it with another bank in order to save the depositors' money. A former Central Bank Governor, Dr. H.N.S. Karunatilleke demonstrated how a Central Bank should act the way he handled a complex issue in the closure of the BCCI bank. In contrast, in the Pramuka case, the Central Bank itself distorted facts and released misleading information to the press, making it even more difficult for Pramuka Bank to survive. In light of these facts, the Central Bank's actions in the Pramuka Bank issue requires a complete investigation."

The statement from Rohan Perera in full:

The following facts are addressed to customers, shareholders and counterparties of Pramuka Bank. Important aspects relating to the malicious acts and false allegations of the Central Bank of Sri Lanka and reported by certain sections of the media are responded to in this statement in order to present the true facts behind the liquidation of Pramuka Bank.

It further underscores the pre-meditated actions taken by the Central Bank to bring about the downfall of Pramuka Bank with serious consequences to a large number of customers and employees.

The main allegations which have been made against the management of Pramuka Bank are the following:

(a) Loss situation in the Bank

(b) High level of non-performing advances

(c) Alleged fraudulent transaction relating to the purchase of a house at Gregory's Road Colombo 7

(d) Complaint to the Bribery Commissioner that public officials have been given gratifications to bring in business to the Pramuka Bank

(e) Withdrawal of money by the Chairman, and by the Managing Director after serving of Suspension Order

(f) Alleged exchange of shares for land at the time the Pramuka Bank was established in 1997 and that the required minimum share capital had been obtained through this manoeuvere without an actual cash infusion

Loss Situation

Pramuka Bank's profitability was adversely affected from the inception, and on the facts, much of the blame lies with the Central Bank.

After granting approval in principle to open Pramuka Bank, the Central Bank did its utmost to prevent Pramuka Bank from commencing business. The actual reasons for this are still unclear but it is suspected that there were political or other forces behind it.

The management of the Central Bank did its utmost to frustrate the opening of Pramuka Bank by falsely alleging that its Chairman/CEO was involved in a major exchange violation allegedly committed at another bank. Extensive submissions were made to the contrary, but the Governor of the Central Bank insisted that a special due diligence be carried out on the Chairman/CEO by a retired High Court Judge to be selected and appointed by the Central Bank.

Despite an undertaking to commence this due diligence by August 1997 and to conclude same within two months in order to expedite the commencement of Pramuka Bank, the due diligence enquiry commenced long after October 1997. The Central Bank's continued delay in commencing the due diligence resulted in a petition to the Supreme Court under the fundamental rights provisions. In February 1998 the Central Bank presented to the Hon. Judges of the Supreme Court that after doing a comprehensive due diligence they were able to confirm that the Chairman/CEO has been cleared of any charges of wrongdoing regarding the alleged exchange violation and that he is fit to assume any position in the Bank.

Apparently irked by this petition to the Supreme Court the hierarchy of the Central Bank commenced a series of calculated acts of discrimination against Pramuka Bank which in turn had an extremely adverse impact on the Bank's stability and profitability, as given hereunder.

The Central Bank arbitrarily withheld approval for Pramuka Bank to open a single branch and as a result Pramuka Bank had to concentrate its business in the heart of Colombo and compete with large commercial banks without the facilities and powers of a commercial bank.

Pramuka Bank started as a licensed specialized bank on a business proposal to take banking to the villages on a new plan to fill a void in banking business in Sri Lanka's rural areas. The Central Bank approved a banking licence for Pramuka Bank on this proposal. However the very same Central Bank totally ignored the business proposal under which the licence was granted, in denying Pramuka Bank the right to appoint village co-coordinators and to set up rural based banking units.

Being limited to the City of Colombo, Pramuka Bank was then compelled to change its very character and business strategies for which the Bank requested approval from the Central Bank for certain types of businesses to be carried out which came within the scope of a licensed specialized bank. These approvals were also not granted.

A prolonged delay in granting approval for Pramuka Bank to commence business brought about large pre-operating losses.

Not allowing Pramuka Bank to embark on business lines according to its business plan and impeding the Bank from carrying on business within the city of Colombo as a city-based bank resulted in additional losses in its operations. This situation was accentuated by the disastrous monetary policies pursued by the Central Bank itself during 1998-2000.

It should be brought to mind that Central Bank's erratic interest rate policies by which Treasury Bill rates varied from 10.5% - 22.5% during the period, and a sharp devaluation of the currency, after the Central Bank officially informed the public during the South East Asian Crisis that the Sri Lankan rupee was the strongest in the region, rocked the business sector and the smaller banks. The fact that the country saw a negative growth rate for the first time since independence is no secret.

The discriminatory policies the Central Bank practised against the Pramuka Bank per se and the short-sighted monetary policies pursued by Central Bank in general had a severe impact on the profitability of Pramuka Bank and Central Bank should take a large share of blame for Pramuka Bank's losses.

Non Performing Loans

A very large percentage of so-called 'non performing' loans are fully secured by immovable property which the Central Bank has failed to take into account in their decision to suspend operations. Furthermore these non-performing advances do not mean that they are loss-making advances. However, Pramuka Banks records indicate that regular repayments are made with variations on the agreed quantum.

The high level of non-performing loans is due to the fact that Pramuka Bank has been seriously affected by the lack of Parate rights. The lack of these rights were brought to the notice of Central Bank in 1997 at Pramuka Banks inception. In July 2000 the Central Bank confirmed by letter that steps have been taken to grant this rights to all Licensed Specialized Banks (LSBs). Why have they taken so long to finalise this legislation? There is a discriminatory situation that out of thirteen LSBs in Sri Lanka nine have Parate rights while four do not have. Ironically, six LSBs which started after Pramuka Bank, have been granted Parate rights and the Central Bank itself is the majority shareholder of these Banks. Isn't this unethical?

If Pramuka Bank had been granted Parate rights, the level of non-performing advances would have reduced drastically and there would have been a proportionate positive impact in the Profit and Loss of Pramuka Bank.

On the question of a high level of non-performing advances, the Central Bank should take the blame. The Central Bank has indeed been negligent in not incorporating the required provisions in the Banking Amendment Act No. 33 of 1995, to give LSBs the required statutory rights in regard to Debt Recovery Special Provisions Laws as well as other statutory requirements.

Fraud Allegations

Much has been said about an alleged fraudulent purchase of a house at Gregory's Road, Colombo 7. A common customer of the Pramuka Merchant Corporation Limited (PMCL) and Pramuka Bank obtained credit facilities for the purchase of this house. The customer concerned first took a loan from PMCL, which was granted by that institution on a conditional mortgage of the property. Subsequently, Pramuka Bank granted a separate loan under a surety mortgage signed by PMCL on behalf of the customer concerned, and with the customer's consent.

Due to a delay in repayment, Pramuka Bank demanded payment under the surety mortgage and the demand was honoured by PMCL. Consequently, PMCL too demanded payment, and due to the reason that the debt was not paid, it acquired the property. Subsequently, Pramuka Bank proposed to set up a Business School and notice of it was given to the Central Bank.

The property at Gregory's Road was considered suitable for the purpose and Pramuka Bank purchased it from PMCL at its market value of Rs. 42 million with the purchase price to be paid in full on deferred terms to PMCL. however due to the fact that there were certain difficulties in obtaining UDA approval to set up the School, Pramuka Bank decided not to go ahead with the project and finalised the sale of the property without incurring losses.

This was clearly a business transaction involving the purchase of a property and the facts have been distorted by the Central Bank to justify the decision they took to suspend Pramuka Bank's operations.

Bribery

A complaint has been lodged to the Bribery Commission by the Director Bank Supervision, Central Bank, that gratifications have been given to public officers to obtain deposits. This is an aberration of the truth intended to intimidate the management of Pramuka Bank and to adduce further false reasons to justify Central Bank's arbitrary act to suspend operations. The management of Pramuka Bank did not give inducements or bribes to obtain business. Gifts of Gold Certificates given in appreciation to large depositors are being mis-interpreted as bribes.

Withdrawal of Funds After suspension

The allegations that funds have been withdrawn from accounts by the two working directors of the Bank after the Bank was suspended is totally unfounded. As soon as the notice of suspension was served a large contingent of officials of the Central Bank numbering over 30, took charge of vital areas of operations of the Bank, more notably the cash department and the IT department.

The suspension was imposed on salary day and there were large numbers of withdrawals by staff members including the two working directors. These withdrawals were before the suspension order was imposed.

Shares for Land

There have been allegations by the Central Bank that shares have been exchanged for land to bring Pramuka Bank's share capital to the minimum required level. Pramuka Bank reached the minimum required level of equity in March 1997 and Central Bank is well aware of it.

In or around October 1997 the Bank's Board of Directors decided to purchase certain lands for development purposes and connected therewith was an opportunity for the vendors to invest a part or whole of the sale proceeds in Pramuka Bank shares. The lands were bought for cash and the shares were sold for cash.

However, if this was not the case and if shares were in fact exchanged for land it still does not result in an illegal transaction as alleged by Central Bank. The Companies Act clearly provides for shares to be exchanged for land. This appears to be another instance where the Central Bank is attempting to distort facts to justify its actions.

The Hidden Motive The steps taken by the Central Bank in suspending the operations of Pramuka Bank were clearly malicious and unjust. If it was Central Bank's intention to protect the depositors, it should have first and foremost helped the Pramuka Bank to recover its debts with the required legislation and to stabilise the Bank's business position by removing the discriminatory embargoes placed on it.

The Central Bank has continuously examined Pramuka Bank's operations from its inception. The question arises how the situation at Pramuka Bank could have deteriorated to such an extent overnight, to warrant a suspension and subsequent liquidation. It is appropriate to mention that as recently as June 2002, the Central Bank listed Pramuka Bank amongst a selected group of banks for deposit of trust funds by the Public Trustee. This was gazetted on June 25 2002. The Central Bank had shortly prior to this, completed another of its frequent examinations of the Pramuka Bank. This indicates that either Central Bank had been inefficient in its examinations or malicious in its intentions to then declare four months after that the Bank was unfit for operations.

There are hidden motives behind all this. Two VVIPs (including one from the Central Bank) solicited a gratification of a large sum of money (Rs. 50 million) and promised to permit Pramuka Bank to re-open as a commercial bank with a generous line of credit from the Central Bank. As their demands were not acceded to, circumstances have led to the extreme step of liquidation of Pramuka Bank with disastrous consequences to all involved.

A responsible Central Bank should do all in its power to re-structure a bank in difficulty by either promoting new investments in the Bank or merging it with another bank in order to save the depositors' money. A former Central Bank Governor, Dr. H.N.S. Karunatilleke demonstrated how a Central Bank should act the way he handled a complex issue in the closure of the BCCI bank. In contrast, in the Pramuka case, the Central Bank itself distorted facts and released misleading information to the press, making it even more difficult for Pramuka Bank to survive. In light of these facts, the Central Bank's actions in the Pramuka Bank issue require a complete investigation.

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