Co-op left on ‘autopilot’ before 2013, parties also to blame

The problems at the Co-op bank, especially the inability or failure to collect debts, did not suddenly appear during and after the economic crisis, the inquiry into its collapse said on Wednesday, blaming successive governments for lacking the will to tackle the problems, which eventually rendered the lender unsustainable and needing a bailout in 2013.

Bad corporate governance, political meddling, weak supervision and lack of will to tackle the problems were all highlighted by the damning report, which the investigators had dubbed a “death inquest”.

“No government was able to make the courageous decision of taking radical measures to permanently tackle the chronic problems at the Co-op,” the report said, referring to the period before 2013. “We will use an everyday phrase to describe the situation. The Co-op was left on autopilot.”

The inquiry identified the biggest problem in the period before 2013 to be the bad management of the Co-op’s loan portfolio – “Their weakness to collect the borrowers’ debts in time.”

The problem, according to the report, was already evident in the years after independence in 1960, but nothing was done.

It was highlighted in a report in 1981 whose recommendations were largely ignored, allowing the problem to fester.

“Undoubtedly, the Co-op came to the brink of collapse in 2013, needing to be bailed out by the state, due to the borrowers’ failure to repay their loans that led to increased capital needs,” the report said.

The panel rejected the “excuse” that the non-performing exposures (NPEs) were a result of the global economic crisis towards the end of the last decade and into the current one.

It conceded that it did have an impact on the borrowers’ ability to repay their debts but “it was not the cause of the problem”.

“That pre-existed for many decades. In fact, many of the NPEs were classified as such long before the crisis,” it said.

The report said in many cases borrowers took advantage of the situation to justify their inability and unwillingness to be consistent with their dues.

The 1981 report found that many of the problems were due to the excessive powers held by the governor and commissioner of co-op companies.

At the time, five officials were prosecuted and convicted.

Based on the report, powers were taken away from the commissioner and granted to the individual co-ops, which allowed significant independence and wide-ranging decision-making.

That in turn allowed for the selection of unsuitable people to administer the co-ops. Loans were granted on the wrong criteria – collateral instead of ability of repayment; they were given to people who clearly not repay them such as elderly individuals and companies with poor financial resources – and without permission. Loans were also granted in the form of current accounts with unlimited funds and no repayment timeframes.

The lack of ability to effectively manage risk, bad governance and independence, prompted irregularities and embezzlement with especially damaging effects.

According to the report, the state of affairs was conducive for political parties to meddle in co-ops.

“The manner of selecting the members of the co-op commissions and by extension, the secretary (head), reflected, to a large extent, the power of the parties in the local society. Little or no attention was paid to the ability of those elected and their qualifications to handle financial issues,” the report said.

This not only resulted in bad banking practices but also favoured wrongdoing.

“However, what was worse was the cover-up. Everything happened in a closed party circle.”

During the period in question, parliament was kept abreast of the goings on in the co-op sector through the annual reports prepared by the supervisors.

“We have not found any discussion in the parliament’s minutes about the sorry state of affairs in the co-op sector. It omitted to do its constitutional duty of controlling the executive.”

In its overall findings regarding political meddling, the committee said the criteria parties used in their decisions were not the best interests of the co-operative movement but their own domination and “serving their own party interest”.

It stressed it was not claiming parties were to blame for the state of affairs in the co-op sector but it greatly contributed.

“Irrational lending to party affiliates, covering up wrongdoings by officials who had party support and the subsequent impunity are just some of the characteristic examples of such behaviours,” the party said.

Parallels with a House of Lords decision

In its report on political meddling in the co-ops, the Co-op inquiry said:

“We would describe it as political corruption as defined by a House of Lords decision (in the Magill v. Porter case 2001). This is a case about political corruption. The corruption was not money corruption. No one took a bribe. No one sought or received money for political favours. But there are other forms of corruption, often less easily detectable and therefore more insidious. Gerrymandering, the manipulation of constituency boundaries for party political advantage, is a clear form of political corruption. So, too, would be any misuse of municipal powers, intended for use in the general public interest but used instead for party political advantage. Who can doubt that the selective use of municipal powers in order to obtain party political advantage represents political corruption? Political corruption, if unchecked, engenders cynicism about elections, about politicians and their motives and damages the reputation of democratic government.”