BOU: Crane Bank had no chance of recovering loans

At the time of its sale, Crane Bank had reached a point where it could not recover the money it had loaned out to its clients, Bank of Uganda governor Emmanuel Tumusiime Mutebile has said.

Mutebile is expected to appear before the Parliamentary Committee on Commissions, Statutory Authorities and State Enterprises (COSASE) that is investigating the closure of seven commercial banks following a special audit report by the Auditor General John Muwanga that flouted the process the Central Bank followed to close the banks.

The banks that the Auditor General says were irregularly closed are, Buganda Kingdom’s Teefe Trust Bank (1993), International Credit Bank Ltd (1998), Greenland Bank (1999), The Co-operative Bank (1999), National Bank of Commerce (2012), Global Trust Bank (2014) and Crane Bank Ltd in 2016.

The audit was conducted upon a November 2017 request the committee made to the Auditor General to undertake a special audit on the closure of commercial banks after dfcu Bank’s takeover of Crane Bank turned controversial.

Mutebile and a team of senior officials from the Central Bank on Thursday appeared before the committee but were sent away and asked to return on November 9 with documented evidence.

In his report that was submitted to Parliament in August, the Auditor General said that he had failed to establish how consideration of Shs200bn from dfcu Bank as price for Crane Bank was reached at by Bank of Uganda.

In a written response that he intends to present to the committee, Mutebile says that it was by luck that dfcu Bank offered to buy Crane Bank at Shs 200bn given its accumulated bad loans worth Shs 458bn.

Mutebile says, dfcu Bank’s offer of Shs200bn was based on net recoveries on fully provisioned non-performing assets as adjusted following dfcu Bank’s due diligence which put the figure at Shs500bn.

When the fully-provisioned assets were scrutunised, Mutebile said, it was discovered that some of the loans could only be classified as loss category and whose recovery was found to be very uncertain given that some of them were objectively more than 355 days past their due date or have general weaknesses in terms of; origination, collateral and its registration or enforceability.

He said, efforts to recover the loans proved impossible given that the conditions the loans were in would complicate recovery stating that such assets carry a zero value on the balance sheet and their recovery is usually; cumbersome, strenuous, very costly, and partial and is most importantly achieved over a much longer time frame.

“A review and assessment of the bad portfolio was conducted in a bid to ascertain forced recoverability of major loans and possible timelines. For an acquiring bank (dfcu Bank) to have bid to pay Shs 200bn staked against a possible recovery from such a portfolio worth Ugx.458bn, which Crane Bank had failed to recover, was a great achievement,” Mutebile stated.

Mutebile further claims that Crane Bank’s closure was intended to secure Uganda’s banking sector, since failure to do so would have led to dire consequences for the whole banking sector.

Mutebile says that an onsite examination discovered a significant under-capitalization, upon which Crane Bank’s shareholders were given an opportunity to revive the bank through a capital call on July 1, 2016.

The shareholders allegedly failed to comply with the capital call, forcing BOU to exercise its powers under Section 87(3), 88(1Xa) and (b) and took over the management of Crane Bank.

“The takeover under section 87(3) was guided by the systemic nature of the undercapitalized institution to avoid financial sector instability. The results of a subsequent inventory and forensic investigation guided the resolution plan that resulted in the P&A,” Mutebire wrote.