Hylton justifies interest policy as compliance tool
Published:Sunday | July 10, 2011 | 12:00 AM
Patrick Hylton, the former managing director of FINSAC Limited, said that the agency decided not to waive interest accrued on bad loans before its intervention in several financial institutions because it did not want to incentivise other debtors to stop paying interest on their loans.
He said the interest rates imposed at the time FINSAC intervened in the institutions and took over the loans ranged between the high 20s and 30 per cent for Jamaican-dollar debts, and about 12 per cent for US-dollar loans, but they were in line with the charges applicable to Treasury bills, plus one per cent.
Hylton was responding to questions raised as to why FINSAC included recovery of interest that the legacy institutions had accrued before the intervention, given that FINSAC only paid for the principal sums.
Testifying on Tuesday and Wednesday at the commission of enquiry into the financial sector meltdown of the 1990s, which continued at The Jamaica Pegasus hotel, New Kingston, Hylton said FINSAC was legally entitled to collect such interest as it could as the contract included such collection in the terms and conditions.
"The fact that FINSAC paid only the principal reflects a discount on the value of the purchase price of the contract, but in no way affects the entitlement under that agreement," the former managing director said.
To have waived such interest, Hylton said under examination by his attorney, Dave Garcia, would have created a moral hazard in that it would have been unfair to persons in the same or other banks' portfolios who had paid, or were paying, their interest to see it being waived automatically for those who had not paid.
In addition, "To waive such interest would serve as an incentive for persons in the performing portfolio of the same banks to stop paying interest for several months in order to have their loans purchased by FINSAC, and in so doing, obtain a discount on their repayment obligation," said Hylton. "This would certainly be inappropriate."
However, the former managing director said the charging of such interest did not create a constraint on FINSAC's ability to negotiate a settlement, including the waiving of such interest where appropriate, or as dictated by the circumstances.
Moreover, some debtors had not paid - sometimes neither principal nor interest - simply because either no pressure, or insufficient pressure had been put on them to repay.
Hylton also addressed a question posed, since he testified before the commission in May, as to how FINSAC could rely on the accuracy of the calculations for loan amounts outstanding from the intervened banks when it had highlighted that a feature of the operations of those institutions was poor documentation.
While acknowledging that there was indeed poor documentation with respect to some of the loans in question, the witness said the balances represented the amounts the institutions' banking systems showed as being due from their customers.
Annual audits
Another consideration governing FINSAC's reliance on the balances given was that on an annual basis, those banks' external auditors would conduct tests on the accuracy and reliability of the loans systems "and could not have signed off on their accounts if such systems were fundamentally flawed".
Hylton said FINSAC found no evidence that the transaction histories were generally unreliable. However, there were cases in which there were legitimate disputes surrounding some transactions.
"The major complaint by persons disputing their balances was around the applicable or agreed rate of interest, and whether or not they had been informed of changes in the rate of interest being applied by the banks," he said.
"In instances where we found evidence that the rate of interest that had been applied had been communicated to them, or where required agreed by them, that would quickly settle the issue," the former FINSAC executive said.
Hylton said, however, that in most instances, and in the absence of information to the contrary being available, the loan balances were reworked on the basis of what the customer said they understood to be the applicable rate.
But he added that while some persons settled or agreed new repayment terms on the basis of the recalculated amounts, others failed to pay or to agree new repayment terms.
Hylton also gave evidence detailing some of FINSAC's dealings with Thermo Plastics and Plas Pak, which was placed in receivership to recover a debt, and which was subsequently reopened under a joint venture between plastics manufacturer Omni Industries and the National Investment Bank of Jamaica (NIBJ).
However, under cross-examination by attorney Anthony Levy, who is representing Thermo Plastics and associated companies, Hylton admitted that there were some directors common to FINSAC and the NIBJ at the relevant time, but denied the company was transferred to a connected party at a price grossly below the market value.