FINSAC still holds millions for Century depositors

McPherse Thompson, Assistant Editor - Business

Sixteen years after the takeover, Financial Sector Adjustment Company Limited (FINSAC) has about J$170 million under its control that has not been claimed by depositors of Century National Bank, but interest has ceased accruing on those savings since the interventions.

Although it should have been wound up more than eight years ago, FINSAC also has 12 employees managing its operations, which include ongoing litigation matters, pension-related issues for some of the intervened entities, and the management of a few properties for which the company is seeking purchasers.

Giving evidence at the commission of enquiry into the financial sector meltdown at the Jamaica Pegasus hotel, New Kingston, on Friday, Errol Campbell, general manager of FINSAC, said the deposits were being held by Financial Institutions Services (FIS), the precursor to FINSAC.

Campbell could not say what the corresponding asset being held against the deposits was.

Government liability

However, he said it was now a government liability, and if depositors came forward, FINSAC would make representation on their behalf. Depositors could make claims if they could prove they had the account. Proof can be provided in the form of an old passbook, or original certificate of deposit for fixed deposits, he said.

Worrick Bogle, the commission chairman, expressed surprise that such things were still on the books when FINSAC was supposed to have been wound up eight years ago.

However, he believed it would be more helpful if FIS published a list of the names of the depositors so that persons, including relatives of deceased depositors, "could come forward".

Campbell admitted that although interest was paid on the deposits up to the day of the intervention in Century National, none had been applied since then. This prompted Commissioner Charles Ross, an investment banker, to ask why FINSAC had continued to apply interest to bad loans and not to deposits.

Questioned further by Ross, Campbell also admitted that at the time FINSAC acquired the loans, it paid the banks for the face value minus interest.

Ross said that between the time the loans became delinquent and the time FINSAC took over the debts, interest had accumulated, which was not a cost incurred by either FINSAC, or the Jamaica Redevelopment Foundation (JRF), to which the debt was resold, and thus questioned the rationale for continuing to charge interest.

However, Campbell referred the commissioners to answers Patrick Hylton, former managing director of FINSAC, gave on Tuesday when he enumerated a number of reasons for continuing to charge interest on loans that were already in default or non-performing.

According to Hylton, it was important that debtors negotiate a settlement quickly, and continued interest accrual would represent a powerful incentive in that regard.

Notwithstanding, he said the accrued interest was no constraint on "our ability to write back that interest, as well as in some cases part of the principal, in reaching settlement within our policy framework".

Second, FINSAC had issued notes as part of the effort to fund the agency's ongoing operations after the initial cash support was depleted, and those instruments were accruing interest at market rates.

"These notes were used to fund the acquisition of the loans at their full book value," he said. "It was, therefore, also important that FINSAC apply and collect interest on those loans when it was fair and equitable to do so."

Third, to have stopped accruing interest would have had the potential of creating perverse incentives in the banking industry because "it would be seen as unfair on the face of it to the customers who continued to pay on performing loans in both the intervened and non-intervened banking sector," Hylton said.

"Worse than that," he said, "it could create a powerful incentive for performing borrowers to default, particularly in banks that were controlled by FINSAC, so that their loans could be sold to FINSAC, thereby giving them a break on interest accrual but creating worsening problems in the financial sector."

If they did not charge a rate commensurate with the market rate on the loans it bought, he said, "a delinquent borrower would be incentivised to sell assets, and instead of paying FINSAC, invest in government paper and earn those levels of interest from the same Government that bought his debt with an instrument on which the Government was accruing interest obligations."

But the commissioners did not appear to be satisfied with the reasons given for the interest charges on the debts.

The chairman has asked lawyers appearing for different parties to address the following question at some point: "In the circumstances of the cases before this enquiry where debts have been assigned or sold, do the assignees or purchasers have the right to charge interest on these debts?"

Still in control

Campbell also told the enquiry that FINSAC continues to operate because it is still in control of a few properties - fewer than 10 - acquired from financial institutions and their subsidiaries for which they were trying to find purchasers. These include a 16-acre property in Whitehouse, Westmoreland, which is owned by Ciboney, two properties in Drax Hall, St Ann, owned by Dyoll Life, as well as "some artwork".

In addition, although FINSAC sold the majority of the loans it acquired from the intervened entities to the JRF, it retained some government-related loans, including debts owned by the Sugar Company of Jamaica, which, he said, have since been repaid; other loans for financial institutions in which it got involved; and a few personal mortgage loans.

Campbell said FINSAC was also in the process of winding up three pension schemes operated by Jamaica Mutual Life Assurance Society and one for Eagle Merchant Bank and its subsidiaries.

While most of the staff is involved in administrative work, Campbell said one is attached to the JRF's head office in New Kingston where he acts as a securities custodian, opening the vault containing collaterals for the bad debts as required because all copies were turned over to the debt collectors in 2002.

mcpherse.thompson@gleanerjm.com