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Frequent Questions on the Credit Bank of Prishtina
CLOSING OF THE CREDIT BANK F PRISHTINA – MARCH 13, 2006
The Governing Board of the Banking and Payments Authority of Kosovo, pursuant to the provisions of sections 38 and 39 of UNMIK Regulation No 1999/21 “on Bank Licensing, Supervision and Regulation” has decided the following:
- to revoke the banking licence of Credit Bank of Pristina (CBP),
- to take possession of the bank through a Receiver;
- to appoint a Receiver;
- to dismiss the Board Members and the Management (General Manager and Deputy General Manager).
1) Why did BPK decided to interrupt CBP activities?
The on site review of CBP, conducted by BPK teams, showed that the present value of the bank’s assets no longer adequately covered its liabilities. CBP had lost its capital and was insolvent. Despite BPK demands, the Governing Board of CBP had not been able to increase the capital to the minimum requirement of Euro 4 Million. Moreover, the Governing Board had not been able to comply with the BPK enforcement orders demanding needed actions to restore the financial situation of the institution.
Consequently, to protect the clients (the depositors) from any additional losses, the BPK decided to close CBP and to revoke its licence.
For possible follow-up questions:
a) Due to inappropriate credit decisions, as well as poor credit risk management, and apparent frauds, the credit portfolio of CBP was suffering from present and expected losses. Many loans in arrears remained unpaid.
Moreover, CBP did not have sufficient earnings to provide the necessary reserves (“provisions”) to cover the present and expected losses on its credit portfolio.
b) Indeed, facing credit risks is usual for a bank. All banks may, from time to time, suffer from losses, since some borrowers fail to repay their loans. Present or expected losses are to be covered by reserves (“provisions for non-performing loans”) taken from the bank earnings. All other banks have currently constituted such provisions.
In the case of CBP, the level of provisions that would have been necessary to cover non- performing loans exceeded its current earnings and capital.
Consequently, to protect the depositors from any additional losses, the BPK decided to interrupt CB activities and to revoke its licence.
2) Have there been abuses by the former Governing Board of CB?
In fact, a considerable share of responsibility for the problems found in CBP lie with the former Governing Board of CBP, which engaged in highly risky lending operations, in contradiction of BPK regulations.
Neither CBP Board Members nor CBP shareholders provided the institution with the necessary funding to cover the losses and reconstitute the capital to restore the situation.
In fact, during the course of its on-going review within CBP, BPK inspection teams discovered numerous violations of the banking regulation, which included the following:
- False statements and reports, which had been sent to the BPK to hide the poor financial situation of the institution.
- Many loans exceeded the prudential limit fixed by the regulation (no loan to one single borrower or to related borrowers shall exceed 20% of the own funds of a bank- this is referred to as “the risk division ratio”).
- Loans had been granted to Board Members or to shareholders without being reported as such to the BPK.
- Moreover, many of these loans, which exceeded the risk division ratio, were not paid back.
Consequently, the deposits of the Board Members and shareholders were administratively frozen. These deposits will possibly be paid back only if they are not related to abuses which have been committed.
More, facts which could be in relation with possible violations of the Laws and Regulations have been transmitted to the Public Prosecutor.
3) What will happen to clients/depositors?
All depositors, in amounts not to exceed 3 500 Euro, were entirely and immediately refunded. Consequently, about 97% of depositors (clients) were refunded during the two first waves of repayments. Other waves of repayment will be performed in line with the liquid assets collected by the Receiver. Individual clients as well as a large part of other depositors are being refunded in the course of the receivership. The Receiver is currently refunding 70% of each deposit up to a maximum of 20,000 Euro.
To be refunded, depositors (clients) should open a bank account in any bank, and then, to have that new bank communicate the references of this account to the Receiver
- clients of Credit Bank of Pristina are requested to open a new account in any bank,
- then depositors are requested to have this new bank communicate the references of this account to the Receiver at the following address :
Mr. Mike Rouswell
Receiver of Credit Bank of Pristina.
Depositors refunding.
Tirana Street 29
Pristina
- clients who already hold an account in a bank other than Credit Bank of Pristina should have that bank communicate to the Receiver the references of this existing account,
- as soon as the Receiver has received these references, he will transfer the balance of the deposit up to an amount of Euro currently authorized (after a verification of the existing balance),
- for security reasons, refunding of depositors will be operated exclusively through bank transfers, and never by cash,
As a result, it is absolutely useless to queue in front of any former Credit bank of Prishtina branches and offices, since no transfer will be made in cash.
Due to necessity to verify the accounts in Credit Bank of Prishtina, the repayment process could last for two or three days
4) Would anyone lose something?
Thanks to the existing liquidity reserves, most of the deposit accounts have been immediately and entirely refunded. The Receiver already performed payments, in line with the provisions of Section 43 of Regulation 1999/21 and Administrative Direction 2006/11.
As result an equal payment up to euro 3 500 was paid to depositors which covered approximately 97% of the deposits.
Further payments will be made upon successful collection of CBP loans, and the selling of assets. All depositors will be paid on an equal manner
If the liquidation of the bank does not bring enough money to cover the remaining deposits, the largest depositors could expect some losses.
In fact the success of the receivership, and consequently depositors’ protection, is in the hands of borrowers. Should borrowers pay back their loans, and behave as honest citizens, depositors will not loose anything. On the contrary, if borrowers –and namely the largest ones- are using all means not to pay back their debt, it will increase the damage caused to depositors. More, large responsibilities are in the hands of those of the borrowers who were granted loans in their capacity of Board Members of Credit Bank, since the largest risks faced by the failed institution are caused by inappropriate credit decisions made by Board Members.
CBP shareholders will lose the value of their shares since shareholders are the last to be refunded in case of liquidation. Their deposits will be administratively frozen pending review for possible abuse.
In case of additional questions:
a) According to the regulation, all banks shall keep at any moment a liquidity reserve, part of which is kept safe in the BPK accounts and part is kept in cash in the vaults of the institution.
b) The holders of personal safe deposit boxes in the vaults of CBP main office in Pristina did not loose anything. They were quickly allowed to have access to their personal safe by the Receiver.
5) What will happen to borrowers (those who have loans at CB)?
All the loans granted by Credit Bank of Pristina should be paid back according to their maturity and the scheduled payment plan.
Consequently, borrowers should continue to pay their loans. The Receiver will give the borrowers the necessary instructions.
The Receiver will take immediate action against all the borrowers whose loans are in arrears. Any borrowers who were connected with the CBP failure will be considered for possible legal action.
6) Would it have been possible to find another solution than closing CBP?
Ultimately, shareholders and the Board Members are responsible to provide additional capital to cover the results of their poor management. The BPK would have preferred this solution, but unfortunately, it did not happen, despite BPK requests.
Attempts from BPK to attract a foreign investor were unsuccessful.
Likewise, no realistic solution had been found by CBP to receive additional capital from a new partner or even to transfer the ownership of the bank to a solid and reliable investor. The last attempts made by CBP were unsuccessful and unrealistic due to the very poor financial situation of the institution. No one would have bought an insolvent bank. No one would have bought a bank in which so many questionable transactions were made. No one would have been ready to inject at least 12 million Euro to cover the losses.
7) Who is a Receiver?
A Receiver is an expert who will take control of the failed institution and manage it in the place of the dismissed Governing Board and management. He is appointed by the BPK. He will act on behalf of the BPK and under its supervision. On the case of CBP, the BPK has appointed a foreign expert, who has a strong banking liquidation background and experience of resolving failed banks.
8) What will be the tasks of the Receiver?
The ultimate task of the Receiver is to collect the remaining assets and to pay depositors and other creditors. This can only be done in full, if those who are borrowers repay their loans.
The Receiver will have first to protect the assets of CBP. He has already closed the branches and their operations. Simultaneously, he closed all deposit accounts and checked their balances.
With the existing liquid assets, he organised the first three waves of deposit repayments. Then he will recover the loans based on their maturity. He will sell the assets, which can be sold, the goal being to maximize recovery and minimize expenses in order to make additional repayments to the remaining depositors and creditors. The receiver will take all the necessary legal actions against borrowers who are not paying back their loans. He will also take all the necessary legal actions against those who have abused their positions in order to obtain loans.
At the end of the process CB will be liquidated. The Receiver will be helped by experts and staff members temporarily seconded by the BPK. He will also, be helped by some staff members of CBP.
9) How will the depositors of the Credit Bank of Prishtina be refunded?
According to the regulation, in any liquidation of a bank’s assets, allowed secured claims shall be paid to the extent of the realization of the security or the security shall be delivered to the secured creditor. In this context, the depositors of the Credit Bank of Prishtina will be refunded in several tranches:
a) First tranche of payment-Immediately after the closing of the Credit Bank of Prishtina, the Receiver started the repayment process to the depositors. A first payment up to 1000 Euro has been made to all depositors, after opening a new bank account in any of the commercial banks operating in Kosovo (upon verification of the existing balance). Repayment has been done via the BPK Interbank Clearing System. The Receiver has reserved the money for the remaining depositors (those that have not yet opened their bank accounts) to be refunded for the first wave.
b) The second tranche of payment was performed soon after the first tranche. The Receiver of the Credit Bank of Prishtina increased the amount for the second tranche of repayment that was made to all depositors (after a verification of the existing balance). This mount was up to 3500 Euro including the 1000 that was already repaid with the first wave. Repayment has been done via the BPK Clearing system. The Receiver has reserved the money for the remaining depositors to be refunded for the first and second wave (in cases where the depositors have not yet opened their new bank accounts).
In total, for these two tranches, the Receiver secured 4 426 759 Euro, out of which 3 989 446 Euro has been paid to the CPB depositors as of June 27, 2006. Some depositors who are entitled to payments under the first two waves have not yet filed a claim. Consequently, an amount of euro 437 313,91 is being reserved for them by the BPK in a special account.
After these two waves of payments, 89,45% of all the CBP depositors have been entirely refunded. Nevertheless as of June 29, 2006, there still remain a number of depositors who have not been paid back in full since the amount of their deposits was higher than 3 500 Euro.
c) On the third tranche of payments, the Receiver is making additional payments that will cover partially the remaining depositors. Based on the present expectations of loan recoveries, the Receiver foresees a good possibility to refund the remaining depositors up to 70% of their deposits during the course of the Receivership. Quicker payments, at a higher payment rate (above 70%), and even full payment could be achieved if borrowers pay back all their loans in full. As the Receiver collects sufficient funds, the repayment process will be performed in several waves in order to cover 70% of the deposits, with a repayment ceiling that amounts to 20 000 Euro. The first of these payments, which will amount to 1 700 000 Euro, has already begun. Once all the remaining account holders have received up to 20 000 Euro, the Receiver will cover progressively, on a pro rata basis, all depositors up to 70% of their deposits.
d) After three tranches of payments are completed; (i) The depositor having 5.000 Euro in his account with Credit Bank of Prishtina willhave received 3.794 Euro or 75.9% of his total amount, (ii) The depositor having 10.000 euro in his account with Credit bank of Prishtina will have received 4.774 Euro or 47.7% of his total amount, and (iii) The depositor having 20.000 Euro in his account with Credit Bank of Prishtina will have received 6.734 Euro or 33.7% of his total amount.
When all depositors are paid up to 70%, additional payments could be performed by the Receiver, on a pro rata basis, according to the amount of loans collected. BPK and the Receiver emphasize that the amount of the remaining payments will depend strictly on the capacity of those who borrowed money from the former Credit Bank to pay back their loans. Indeed, when BPK revoked Credit Bank’s license, and dismissed its Board and Managers, it was because a large part of the borrowers were not paying back the loans they had been granted. In fact, some of these borrowers are former Board Members or shareholders or their related interests. More, it is BPK’s observation that a number of credit decisions were not taken on the basis of proper financial analysis and good procedures. Consequently, BPK has referred to the Prosecutor information on possible violations of laws and regulations.
10) What will happen to CBP staff?
Part of CBP staff were employed by the Receiver. Others were progressively dismissed, and some of these were reemployed by other banks. Most CBP employees received up to three months severance pay.
11) What could be the consequences of the closing of CBP activities on the banking sector of Kosovo?
Credit Bank of Pristina was the smallest banking institution in Kosovo.
Its market share was around 4 per cent of the banking industry (4,1% of total deposits, 5,7% of loans). The clients’ accounts were easily transferred to other institutions.
Consequently, the direct impact of the closure of CPB is not considered significant for the banking industry as a whole. Neither are the indirect effects of the closure of CPB since all other banks are solvent and highly liquid.
12) How long does the receivership last?
The Receiver usually tries to conclude its activities within one year from the date of the appointment. Primary objective of the receiver is maximum satisfaction of the bank’s liabilities. Therefore, the receivership may be extended for a further period of six months, if such extension will result in a material decrease of the bank’s liabilities. In the most cases the liquidation of the bank takes more than 18 months, in some even years. In this particular case the receivership could last four to five years, due to loans recollection difficulties.
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