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Crane Bank Fraud: ‘Sudhir Ruparelia Presented Ghost Property to Secure Funds from BoU’

Embattled Ugandan businessman Sudhir Ruparelia tried to use properties which were not registered in Crane Bank’s name to secure money from the Central Bank to capitalize his insolvent financial institution, a senior government official has revealed.

BoU Director of Commercial Banking Ben Ssekabira told Parliament’s Committee on Commissions and Statutory Authorities and State Enterprises (COSASE) that Crane Bank ran out of cash and pleaded with the central bank for capitalization of $115m.

“The requested amount of $115m was too much for BoU to lend out to a commercial bank according to the law,” said Ssekabira.

“We could only give them a maximum facility of Shs 79.2bn repayable within a year.”

Ssekabira said Crane Bank bosses (Sudhir) came up with securities which were not registered in Crane Bank’s name.

“Unfortunately, when they presented the security of bank (Crane) branches, we established that the land had been transferred into the names of another company,” said Ssekabira.

It remains unclear if lawmakers will probe Crane Bank management’s motive.

Nevertheless, said Ssekabira, BoU later discovered that Crane Bank had liquidity challenges hence requesting management to capitalize the bank with Shs 32bn.

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“We gave them a deadline of September. Shareholders could only manage to raise Shs 26bn,” he added, raising concerns about whether Sudhir really wanted to save his bank or had realized the ship was sinking.

In a recent article, capital markets expert Joseph Kitamirike observed that “If Sudhir had continued to own and run the Bank under his empire, given the high level of Non- Performing Loans which starved Crane Bank of cash flow, he would have been compelled to inject at least US$ 100 million in capital to continue trading. Such an injection would possibly have constrained his ability to grow and sustain the rest of his business empire.”

He added: “In a way, by letting the Bank collapse and not diverting capital from his other businesses, the first winner in the resolution of the Crane Bank transaction is Sudhir.”

Nevertheless, said Ssekabira, Crane Bank bosses failed to the raise the required fund.

“The deadline passed so we had to close it,” he emphasized.

The BoU official dismissed claims by lawmakers that BoU never intended to help Crane Bank, pointing at their lack of collateral security and “other problems” which officials say include insider lending and outright fraud.

He also revealed that “the bank (Crane) was investing in its subsidiary” in reference to Crane Bank Rwanda.

The MPs are investigating the circumstances under which several banks including Teefe, NCB, Global Trust, Greenland and Crane Bank were closed.

The lawmakers’ probe is based on a special audit conducted by the Auditor General (AG).

The report says Crane Bank’s shareholders including Sudhir Ruparelia failed to raise “collaterals of substantial value” to obtain cash from Bank of Uganda as the insolvent financial institution hurtled off the cliff.

How it happened

On August 16, 2016, Bank of Uganda (BoU) signed an MoU with Crane Bank requiring its owners to address its capital inadequacy and directed it to recapitalize it with Shs 172bn by end of October 2016.

Bank of Uganda staff appearing before COSASE to answer issues of Bank Closure

The AG reported in his confidential report to Parliament that Crane Bank managed to raise a paltry USD 8M (Shs 27bn) in three installments between August 23 and October 13, 2016.

At the time, an audit of the bank had showed that Crane Bank had assets worth Shs 1.1tn compared to total liabilities standing at Shs 1.3tn.

This implied the bank was insolvent hence the urgent need to recapitalize it to avoid the possible collapse of the banking industry.

For example, customer deposits as of October 20, 2016, were Shs 977bn and deposits and balances to other banking institutions were Shs 67bn. Crane Bank’s ‘other borrowings’ were valued at Shs 230bn while ‘other liabilities’ stood at Shs 27bn.

The deferred tax liability stood at Shs 19bn. If Crane Bank fell short of raising liquidity, all these liabilities would have taken down other financial institutions.

Crane Bank quietly applied for a facility of USD 115m from BoU as a “lender of last resort” to help sort out its “immediate and longer term liquidity issues”.

This implied Crane Bank could hardly raise capital in the long or short run.

On October 17, 2016 BoU assessed the application and approved a maximum facility of Shs 79bn repayable over one year period from the date of the offer in quarterly installments at an interest rate of CBR plus 5 percent margin and that the facility would solely be secured by “third party collaterals of substantial value” and BoU would “not accept branch premises as security for the loan facility.

In short, BoU was willing to salvage Crane Bank if it could commit to paying back taxpayers’ money.

This revelation by the Auditor General counters Crane Bank’s shareholders’ claim that BoU did not provide any form of support to allow the financial institution recover from a liquidity crisis.

On October 19, 2016, BoU was surprised when Crane Bank appealed to the lender of the last resort to reconsider the following: – Provide the facility in US Dollars at 2% per annum since most of the outstanding depositor concerns were in dollars; waive any margin on interest since a high interest rate would compound Crane Bank’s liquidity challenge and also enhance the amount since Financial Institutions Act (FIA) permits BoU to lend more than what was availed.

Realizing that Crane Bank was incapable of raising the much needed capital or valuable assets to obtain funds for capitalisation, BoU on October 20, 2016 took over the bank.

The Chairperson of the Committee on COSASE, Hon. Abdu Katuntu (L) and Vice Chairperson, Hon. Anita Among, during a sitting at Parliament

Shs 478bn Injection

BoU appointed a statutory manager to manage, control and direct the affairs of Crane Bank before commencing the injection of liquidity support to Crane Bank up to January 9, 2017 totaling Shs 478bn.

Audit firm, PwC was hired to carry out a forensic review of Crane Bank focusing on a 48-month period before statutory management which was completed on January 13, 2017; and MMAKS, an internationally reputed law firm, to provide transaction advice to take over Crane Bank.

On December 9, 2016, BoU through MMAKS Advocates invited 13 bidders to bid for the purchase of assets and assumption of liabilities of Crane Bank.

The AG says in his report that between December 12 -15, 2016 BoU issued the inventory report to 6 bidders after signing a confidential agreement for them to undertake due diligence on the assets and liabilities of Crane Bank.

Subsequently on December 20, 2016, out of 13 bidders, only two (M/S Aethel Partners LLP and DFCU) submitted bids which were reviewed and evaluated. Officials say many bidders were afraid of buying a “hollow” bank.

For example “insider loans” that had been identified amounted to a staggering Shs 63bn not to mention “irrecoverable or unrecovered loans advanced or managed imprudently and subsequently written off.”

Governor Tumusiime Mutebile recently told bankers that the inventory found that “Crane Bank was massively insolvent, with core capital of negative Shs240 billion, as a result of mismanagement and fraud.”

He said the “notion that this bank could have been rehabilitated by its owners – the same people who were responsible for its failure – if only the BoU had provided more liquidity support and allowed the owners to remain in control, is not tenable,” emphasising, “In reality, the BoU had no other options, if it wished to minimise the losses incurred by the bank and protect the interests of its depositors, other than to take over Crane Bank and resolve it.”

On December 27, 2016, BoU engaged KPMG to audit Crane Bank’s annual report and financial statements for the year ended December 31, 2016.

On January 20, 2017, BoU placed Crane Bank under receivership. A few days later, a Purchase of Assets and Assumption of Liabilities agreement with DFCU was on January 25, 2017 was signed whereby all assets were transferred and liabilities assumed by DFCU.

Some assets such as rights of Crane Bank to claim against its shareholders for wrongs done or losses occasioned by irrecoverable loans advanced or managed imprudently and written off prior to take over date were deferred.

On January 25, 2017, BoU signed a Shs 200bn liability agreement with DFCU to settle the assumed liability within 30 months commencing October 1, 2017.

AG observations

The AG said BoU lacked guidelines/regulations or policies to guide identification of the purchase and sale of defunct banks.

BoU explained that the “circumstances of each bank resolution differ and cannot always be predicted in advance, for example, the nature of the global financial crisis which erupted in 2007-2008 took all bank regulators by surprise and required solutions which could not have been anticipated before the crisis. Drawing up a set of internal policies to guide a P&A and the selection and evaluation of bids is unlikely to be helpful and could be counterproductive if it impedes the flexibility of the BoU to act expeditiously to resolve a failed bank in the manner which least disruptive and damaging to public confidence and stability of the banking system.”

On valuation of assets and liabilities, BoU said it relied on the inventory report carried out by auditors and due diligence undertaken by DFCU.

 

Bad book

 

According to the bid, DFCU offered deferred cash consideration of up to Shs 200bn based on “net recoveries of the bad book.”

The recoveries of the bad book, according to the AG, would be used to settle the Crane Bank liability to BoU to a maximum of Shs 200bn.

DFCU agreed to assume the BoU facility to Crane Bank up to a maximum of Shs 200bn.

According to a BoU memo from the Executive Director in charge of Supervision to Governor ref. EDS 122.10G dated July 31, 2017, the bad book was Shs 570bn out of the gross loans of Shs 1.159bn.

“This bad book was transferred to DFCU to provide a resource for repayment of loans of Shs 200bn and bridge the shareholder’s deficit of Shs 439bn at the date of takeover,” reads the AG’s report.

Recovering Funds

Asked to explain the plans of recovering billions of taxpayers’ money pumped into Crane Bank, BoU said the “injected funds were to be recovered through a Purchase & Assets and claims against Crane Bank shareholders.”

For example BoU will recover from Sudhir and other Crane Bank shareholders Shs 63 bn of insider loans.

As of writing this report, the AG said Shs 4bn was collected from these loans, leaving a balance of Shs 59bn.

“The loan files and the collateral are still in BoU custody,” said AG John Muwanga.

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