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The Gleaner - April 17, 1998

FINSAC here to stay?

When Finance Minister Dr. Omar Davies announced the establishment of the Financial Sector Adjustment Company (FINSAC) in January, 1997, it was envisaged that this entity would be in existence only as long as it would take to clean up the books of the ailing financial entities and to get rid of the non-core assets acquired.

The Finance Minister in yesterday's presentation of the 1998/99 Budget, acknowledged that the extended period of high interest rates had an impact on the viability of the sector, but repeated his stance that management was largely to blame.

He said FINSAC's operation would be in three phases - intervention, rehabilitation and divestment. The intervention and rehabilitation phases have so far cost $62.4 billion, financed through FINSAC bonds, with interest rates ranging between 25 per cent and 29 per cent, and an estimated annual debt service cost of $16 billion.

According to two Ministry Papers tabled by Dr. Davies, some $73.5 billion has already been expended in public sector assistance to the ailing private sector companies. For fiscal 1998/98, the Minister said $16 billion, is the debt servicing requirement faced by FINSAC, with some $3.4 billion being cash. '

To the extent that it is possible to meet these obligations through the issuance of additional paper, this will be done and cash will be utilised only as a last resort.' Dr Davies said: '

It may be useful to note that FIS is itself managing a substantial amount of cash, at present approximately $1 billion.'

FINSAC has [intervened in] Caldon Finance Merchant, Fidelity Finance Merchant Bank and Horizon Group at an estimated cost of $3 billion.

The possibility of merging the operations and shares of Eagle Commercial Bank to Citizens Bank is being reviewed. FINSAC's intervention phase has also involved working with temporary managers, appointed by the Ministry of Finance to take over ailing banks. FINSAC is [currently] involved in providing support for depositors of Corporate Merchant Bank, Capital Assurance Building Society and Workers Savings and Loans Bank. Assistance to these three institutions total $8.5 billion to date', according to Ministry Paper No. 13.

It pointed out that Government's support of the financial sector through FINSAC had resulted in the production of 1.5 million deposits, with a value of $68.7 billion and 569,000 individual policies with a sum assured of $174.4 billion.

Lessons learnt, according to the Ministry Paper include:

* much more stringent 'fit and proper' criteria should be applied to owners and managers of financial institutions; 

* there should be a clear demarcation in respect of ownership, management and control of various types of financial institutions in order to avoid contagion; 

* regulatory framework must be clear, precise and transparent, with provisions being made to reward good management and to penalise poor management.

At the end, a set of strong, well-capitalised institutions, adequate to the size of the national economy, will evolve which must include a significant reduction of the number of deposit taking institutions.

In future, where fiscal capacity permits, further reductions in the cash reserve ratio, applied to commercial banks, will be effected until they equate with that of merchant banks. This will prompt mergers between existing commercial banks, achieving yet further rationalisation in the number of institutions, the Ministry Paper said, adding that the Deposit Insurance Scheme will be in full operation to deal with institutions that face insolvency problems.

It concluded that overcoming the problems of the financial sector will depend on the availability of persons skilled in 'work-outs' and divestments to work under the direction of FINSAC in implementing the latter's Strategic Plan; the availability of competent management personnel, monitored and controlled by effective boards of directors and the continuing vigilance of the supervisory authorities. According to Dr. Davies, intervention in the financial sector was necessary because of adverse macroeconomic conditions; managerial incompetence; incompetence and laxity of professional support groups; corruption/fraud; regulatory inadequacies and incompetence.

The Finance Minister once again saved his ire for the sector's management. '

The fact is that on an average, the management in Jamaican financial institutions is very well paid, even by international standards. As such, the test of good management is the ability to guide a firm through difficult times. It cannot simply be that when huge profits are being made this is a demonstration of managerial brilliance, but if losses are made, the cause is Government policy.'

He continued: 'Now that we have had the benefit of closely examining the work done by such accountants and auditors for institutions which are facing problems, there are several instances where the adherence to basic professional standards must be questioned.'

In a submission to Parliament, during last year's presentation Dr Davies said: '

FINSAC is expected to have a life of about seven years. Support is provided to solvent companies on the basis of rehabilitation plans to be implemented in five years. FINSAC expects to be fully repaid by the end of the fifth year; assuming successful work-outs of the existing problems.

Interventions are likely to take place within the first year of FINSAC's existence. Components which can be restored to viability will be rehabilitated and returned to private ownership within a year, while other components will be liquidated or sold for merger with other institutions as soon as possible.'

He continued, 'After the initial period of interventions and assistance activities, the role of FINSAC will be narrowed to primarily supervision and monitoring of work-out plans of institutions that have been financially assisted by FINSAC; and themanagement of the 'investment' portfolio of the assistance activities.

Recently he announced that the operations of FINSAC were to be merged with those of another entity set up to deal with failed financial companies - Financial Institutions Services (FIS).

The adjustment company is being financed by the government, through borrowing in the domestic market, the full extent of which will not be known for some time. At budget presentation time last year, some J$1.5 billion had been raised. The Bank of Jamaica has also loaned funds to FINSAC, while its housekeeping expenses have been borne out of advances provided by the Agricultural Credit Bank (ACB).

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