After Air Mauritius
If a banking group that doubles its payroll cost by Rs 1 billion in two years cannot leverage its bloated personnel to perform all the due diligence required in its operations, then it has a major problem on its hands
By Aditya Narayan
After Air Mauritius (now placed under voluntary administration following a loss of Rs 868 million in 2018-19), another government-owned entity is in the spotlight for its balance sheet written in red ink. This time it is the State Bank of Mauritius (SBM) Group of Companies, which has posted a paltry profit after tax of Rs 15 million for the financial year 2019 due to a credit loss of Rs 3 billion. Like Air Mauritius, SBM has the reputation of being the jewel in the crown of public assets. How did SBM Group fare so badly in 2019 in terms of financial results?
“Over the last three years, SBM Group has accumulated credit losses of Rs 7.6 billion.This raises several critical questions as regards operational due diligence, credit approval and accountability. Is the bank following all the criteria of prudential credit risk management before approving large loans to foreigners. Are the KYC (Know Your Client) rules being applied rigorously? What amount of collateral is required for large loans to foreign applicants? Who recommends and approves the loans – Credit Management Committee or board of management?”
A comparative analysis of the financial results of SBM Group and Air Mauritius shows that the two entities have some common features:
- They are both government-owned enterprises where the the State is the majority shareholder;
- They are both listed on the Stock Exchange as public companies that are required to abide by the rules of good corporate governance;
- Government appoints the chairmen and directors who sit on various boards;
- Chairmen and directors are entitled to a highly generous package in terms of fees, salaries and other benefits;
- The personnel cost is very high compared to the size of the business.
Complex corporate structure
To better understand the situation, it is important to know how SBM Group is set up. The SBM Group is a conglomerate that is headed by a holding company, the SBM Holding Ltd. The latter controls two holding companies in different lines of business:
- Banking sector: The SBM (Bank) Holdings Ltd, which owns the SBM Bank (Mauritius) Ltd and wholly-owned subsidiaries in India, Madagascar, Seychelles and Kenya.
- Non-banking sector: the SBM (Non-Financial Cluster) Holdings Ltd, which owns a number of companies in fund management, capital markets and insurance.
Over the years, the banking sector in Mauritius has been hit by various financial shenanigans. Years ago, the Mauritius Commercial Bank was involved in a scandal whereby the National Pension Fund was defrauded of Rs 800 million in its deposit account to the benefit of a third party. It was an absolute failure of internal control in a major commercial bank. Lately, the SBM Group hit the headlines for (a) the notorious euro-loan of Rs 40 million granted to an ex-minister without sufficient collateral, (b) the purchase of land for Rs 95 million from a private party at overvalued prices, (c) financial losses arising from bad debts written off, and (c) provisions for doubtful debts made due to the insolvency or delinquency of big foreign clients who defaulted on their loans.
The SBM Group’s results in the banking sector for 2019 are quite disturbing. The abridged audited financial statements for the year ended 31 December 2019, which were published on 29 April 2020, disclose the consolidated results for SBM Holdings Ltd (‘the Company’) and its subsidiaries altogether (‘the Group’). The SBM Group, as such, ended up with a net profit after tax of Rs 15 million in 2019 compared with Rs 1.2 billion in 2018 and Rs 2.6 billion in 2017 as shown in the table below. The low profit for 2019 is due to the large credit loss expense of Rs 3 billion, of which Rs 1.7 billion ($50 million) is attributed to a non-performing loan granted to an Indian businessman in the United Arab Emirates, who is now insolvent and under investigation on fraud charges.
One of the core values of the SBM Group, as listed in its annual report, is being prudent in taking risks with shareholder and depositor funds. However, over the last three years, SBM Group has accumulated credit losses of Rs 7.6 billion.This raises several critical questions as regards operational due diligence, credit approval and accountability. Is the bank following all the criteria of prudential credit risk management before approving large loans to foreigners. Are the KYC (Know Your Client) rules being applied rigorously? What amount of collateral is required for large loans to foreign applicants? Who recommends and approves the loans – Credit Management Committee or board of management?
The more fundamental question is whether the credit losses are the results of a lack of transparency and accountability in the convoluted structure of SBM Group with a holding company and subsidiaries, which altogether form an obscure landscape where nobody seems to take responsibility for what is going on. Bank clients and investors are confused and shocked by the apparent mismanagement of SBM Group where high-level officials stepped down and a new CEO was appointed last year following the discovery of abnormal banking practices.
Association and control
Those who are familiar with the concept of Association and Control in corporate law and tax legislation know that a holding company has a de jure control over its wholly-owned subsidiaries and can issue shareholder directives for the proper management of affairs. Furthermore, considering the related-party relationship between parent and child companies, directors of the holding company can exercise de facto control over the subsidiairies by influencing their decision-making. This is specially true in Mauritius where corporate governance rules are not strictly followed in terms of independent boards of management.
Suspected government interference through board members appointed by the responsible minister seems to have blurred the boundaries between professional, independent management and oversight boards. Between the chairman of SBM Holdings Ltd (a non-government employee) and the chairman of SBM Bank (Mauritius) Ltd (the head of Cabinet), who wields how much power over decision-making in respect of large loans. Under a previous Bank of Mauritius (BOM) directive, the SBM Bank (Mauritius) Ltd as a separate entity was required to operate independently of the holding company.
However, when something went wrong at SBM Bank (child), people looked to SBM Holdings Ltd (parent) for an explanation as, in the mind of the layman, both are the same as they belong to the same family. Last year, the BOM issued a new directive whereby SBM Holdings Ltd as the parent company was allowed to exercise some oversight on SBM Bank (subsidiary) by having its representative on the board of SBM Bank. However, the new oversight powers granted to the holding company have not prevented the bad loans provided to dubious businessmen.
It is obvious that SBM Group needs a major shake-up in its upper management ranks and a complete overhaul of its management practices. There is a lot of room for improvement from the credit risk assessment of major clients applying for loans to securing adequate collateral, to monitoring loan repayment, and to ensuring effective internal controls over loan approval and disbursement procedures. The SBM Group is accountable to its shareholders, employees and taxpayers (through the State as stockholder). People who are guilty of dereliction of duty should be held accountable as amateurism is not tolerable in the banking business. A lower profit means a lower dividend and a lower Return on Equity for shareholders. Investors, including the NPF, are watching with bewilderment the free-fall in SBM’s stock price on the market, which impairs the value of their assets.
SBM Group’s payroll increased by Rs 1 billion from 2018 to 2019. If a banking group that doubles its payroll cost in two years, which implies either a higher number of employees or a substantial increase in emoluments across the board, cannot leverage its bloated personnel to perform all the due diligence required in its operations, then it has a major problem on its hands.
* Published in print edition on 5 May 2020
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