A branch of VBS Mutual Bank in Thohoyandou, Limpopo. Picture: ANTONIO MUCHAVE
A branch of VBS Mutual Bank in Thohoyandou, Limpopo. Picture: ANTONIO MUCHAVE

Municipalities that deposited R1.6bn with failed VBS Mutual Bank stand to lose most of their money, worsening their already dire financial position and increasing the risk for violent protests.

Fourteen municipalities stood to lose about R1.4bn of their deposits, and even if they recovered something, they would only do so in about five to seven years, said Co-operative Governance and Traditional Affairs Minister Zweli Mkhize.

This has left a huge hole in their budgets, which will negatively affect service delivery to distressed poor communities.

Mkhize was concerned that service delivery protests could erupt due to budget shortfalls. But, in an interview with Bloomberg, he insisted that the government would not provide bail-outs to the municipalities involved.

The minister urged the provincial departments of co-operative governance and traditional affairs, as well as the municipalities, to work on recovery plans to avert service delivery protests.

He gave all the municipalities until mid-July to report on the financial issues surrounding the deposits and their effect on service delivery.

Mkhize called for consequences for those who might have broken the law by making municipal deposits into a mutual bank. Such deposits are not allowed under the Municipal Finance Management Act and violate Treasury instructions.

Service delivery protests in North West in 2018 have already led to the removal of former premier Supra Mahumapelo and seen the takeover of the provincial government by national government.

The municipalities that made deposits with VBS — which is now under curatorship — are in Limpopo (eight, with total deposits of about R1bn); the North West (four, with R315m); and Gauteng (two, with R127m).

A number of these municipalities, such as Madibeng and Mahikeng in the North West, are dysfunctional and financially constrained. At least one — Merafong in Gauteng — owes Eskom about R191m. Mkhize’s department estimates that 31% of SA’s municipalities are dysfunctional, while a further 31% are almost dysfunctional. Only 7% of them function well and 31% are reasonably functional. Total municipal debt to Eskom stands at about R14bn.

Mkhize outlined the bleak financial prospects facing these municipalities in a written reply on Monday to a parliamentary question by Congress of the People MP Deidre Carter. The minister said municipalities that had deposited R1.6bn with VBS could at best hope to receive about 10% of their deposits once the process had been concluded in about five to seven years.

The bank was placed under curatorship in March in the midst of a liquidity crunch in which it was unable to repay money owed to municipalities. VBS had accepted short-term deposits and made long-term loans.

Since then it has emerged that there is not enough equity in the bank to cover the municipal deposits. There have also been media reports of lavish spending and loans to related third parties.

The curator, Anoosh Rooplal, has uncovered a host of irregularities and has had to withdraw the financial statements "because they are not a true reflection of the financial status of VBS Mutual Bank", Mkhize said in his reply.

The Reserve Bank has launched a forensic investigation into the bank’s affairs.

Mkhize said that the municipalities as well as the three affected provinces had instituted investigations that would inform the disciplinary actions as well as criminal charges to be instituted against the officials or political office-bearers responsible for the placement of funds with the bank.

"A preliminary investigation was conducted and the report will be handed over to the Hawks and made public once it is concluded," the minister said.

This investigation showed that about R20m was paid in commission for soliciting deposits in VBS and that false deposits were made by related parties to the bank.

ensorl@businesslive.co.za