Reserve Bank says inquiry into the VBS Mutual Bank collapse is likely
South African Reserve Bank deputy governor Kuben Naidoo believes that a commission of inquiry and a forensic investigation into the collapse of VBS Mutual Bank, currently under curatorship, is likely.
Naidoo, who is also the registrar of banks, also believes there would be a call for public funds to be put into the bank by the end of the curatorship process.
Questioned by members of Parliament’s standing committee on finance, Naidoo gave the firm assurance that action would be taken against those found to be responsible for any malfeasance or fraud uncovered, no matter how long it took, as it was critical that consequences were seen to result from remedial action.
The curatorship has brought to light matters of which the Reserve Bank was previously unaware, said Naidoo, who appeared before the committee to report on the curatorship, which was precipitated by a liquidity crisis.
"It is not true that we have no plan to protect the depositors." Naidoo said that the adoption of a "look through principle" for members of stokvels, funeral societies, clubs or associations, along with the application of a guarantee of R50,000 for retail deposits for each individual member of these organisations, would ensure that 99.8% of depositors would be protected. The bank has about R390m in retail deposits.
Naidoo conceded that hardship would result from the lack of liquidity, but emphasised that the curator was working hard to resolve these issues within the next few days. Withdrawals will be allowed for new deposits, such as salaries. He said the authorities had no choice but to put the bank under curatorship because of its lack of liquidity and that this only happened at the end of a long process of the Reserve Bank trying to help the bank remedy its problems.
Meanwhile, Treasury deputy director-general Ismail Momoniat said Treasury was worried that the unavailability of funds invested by municipalities in VBS would affect service delivery. Their deposits are not guaranteed.
Municipalities in Gauteng (two municipalities with R130m invested), Limpopo (nine with R1.12bn invested) and North West (four with R330m invested) have R1.5bn invested with the bank in total. These funds are either the conditional grants or allocations by national government for the equitable share.
According to Momoniat, the municipalities that had deposited funds with VBS were small and relatively poor and would suffer from the lack of availability of their funds as they do not generate much revenue. This lack of funds could land back with the fiscus with demands that it provide funds to the municipalities.
Naidoo told MPs that the situation at VBS was "very fragile" and "precarious". Liquidity had to be managed very carefully as there was less cash in the bank than initially thought. He said there were "inadequate and questionable governance and risk management practices" at the bank; the compliance function and culture were also deficient, and the growth strategy in the balance sheet was "aggressive" in the midst of funding challenges.
The bank’s asset and liability management practices were weak, leading to a high liquidity risk. Its depositor profile was highly concentrated on municipalities for which the deposits were short term, while the bank’s lending was long term.
Naidoo said the Reserve Bank had warned the bank repeatedly about the risk of this concentration, but the warning had been ignored. "The VBS board and management failed to manage the bank’s rapid growth and its funding and liquidity position."
The bank suffered regular and significant losses caused by high operating expenses due to its aggressive infrastructure expansion plans. These losses had a negative impact on capital. It had also ventured into new products and services without a commensurate investment in the enhancement of internal controls.