How bad debt, management brought down Crane Bank

Sunday October 23 2016

Crane Bank customer care staff at a past finance and insurance expo in Kampala. PHOTO | MORGAN MBABAZI

Crane Bank customer care staff at a past finance and insurance expo in Kampala. PHOTO | MORGAN MBABAZI 

By BERNARD BUSUULWA

Massive withdrawals disguised as payments to suppliers by corporate customers over the past two months prompted the placement of Crane Bank under management by the Bank of Uganda.

Industry sources told The EastAfrican how traders and government agencies were tipped off by employees on a widening hole in the bank’s balance sheet following the coming into force last year of stricter regulations on provisions for non-performing debts.

This prompted the customers, including a large institutional investor, to give instructions for settlement of invoices and statutory obligations against their balances. The transactions looked routine but caught the management’s attention too late when it was found no new money was being deposited into the accounts.

Sources said that the bank, which was already suffering a $50 million capital hit from the bad debt treatment, may have bled as much as Ush300 billion ($87 million) over the period.

The loss of confidence by key customers is what attracted social media speculation on the bank’s future over the past fortnight forcing BoU’s hand in a bid to avoid a further run that would have posed systemic risks for the sector.

“This action has been taken upon a determination that Crane Bank Limited is significantly undercapitalised as defined by law, poses a systemic risk to the stability of the financial system and that the continuation of Crane Bank’s activities in its current form is detrimental to the interests of its depositors,” Bank of Uganda governor Emmanuel Tumusiime-Mutebile said on Thursday.

The governor said he had suspended the bank’s board of directors and senior management team, appointing Edward Katimbo Mugwanya as the statutory manager.

Under the Financial Institutions Act 2004, Mr Mugwanya has six months to advise the Central Bank whether Crane Bank’s major ownership should be given to a new investor. In the worst case scenario the bank would be liquidated. Under Uganda deposit insurance laws, customers are paid Ush5 million ($1450) in case of a bank going under.

Crane Bank Rwanda

The National Bank of Rwanda, however, said Crane Bank’s subsidiary in Kigali was “sound and strong.”

“The National Bank of Rwanda wishes to inform the public that Crane Bank Rwanda, a subsidiary of Crane Bank Ltd, is an independent bank licensed and regulated under Rwanda banking law No 007/2008. Crane Bank continues business as usual,” a statement from the National Bank of Rwanda reads.

The central bank however said it will closely follow the activities of the bank to prevent any adverse spillover a day safeguard customers’ deposits. “The National Bank of Rwanda encourages Crane Bank Rwanda clients and staff to continue normal banking business and avoid getting distracted by any negative rumours,” the statement concludes.

Industry sources said there was huge withdrawal of money by foreign depositors from Crane Bank despite BoU assurances suspected to have caused the shilling to hit a record low of 3,480 units to the dollar last week.

“Some foreign clients of Crane Bank, particularly from India, have been withdrawing their funds from the bank. Some of these clients had deposited as much as $3 million and converted their money into dollars before repatriating it back home. This triggered enormous pressure against the shilling and pushed it to new lows,” one source intimated.

The lingering question is how a bank that reported a profit of Ush65 billion ($18.5 million) in 2014 incurred a loss of Ush3 billion ($855,905) in 2015.

Insiders said the answer lies in the BoU changing its mode of inspection that helped bring more non-performing loans to light. In addition falsification to suggest loans had been paid, raised the capital that would need to be injected to $100 million.

While other banks were asked to recapitalise and obliged, Crane Bank was counting on a bailout which was ruled out after the bank removed some assets from the balance sheet despite wanting them to secure borrowing from the Bank of Uganda.

Strategic investor

At this point the regulator advised Crane Bank to look for a strategic investor. Although several suitors turned up with Atlas Mara Group being the latest, Crane Bank main owners businessman Sudhir Ruperalia and White Sapphire, were holding out for a huge pay day.

In the Atlas Mara negotiations for instance sources said there was a valuation gap of $50 million between what the owners were asking for and the offer from the Bob Diamond-led group.

Another obstacle in the acquisition of Crane Bank is that its land and buildings are registered under Crane Management Services, a sister company engaged in real estate business. Under this arrangement, Crane Bank pays rental dues to its sister company and is obliged to clear rental charges covering five years in case it chooses to vacate these premises.

The regulatory management of Crane Bank, Uganda’s third largest commercial bank by assets, with a balance sheet valued at more than Ush1.2 trillion ($342 million) by end of December 2015 has raised a dark cloud over the country’s banking sector as many consumers raise fresh questions over the safety of personal deposits held by local players.

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