The fate of money belonging to municipalities and funds meant for the beneficiaries of deceased miners is now tied to the fortunes of embattled VBS Mutual Bank, which was placed under curatorship by the South African Reserve Bank over the weekend.
A complex set of relationships between VBS and its largest shareholder, Vele Investments, has added additional uncertainty to an already fraught situation.
At the end of 2017, about 21 municipalities and the Bopehlo Beneficiary Fund (BBF) and its administrator Bophelo Benefit Services (BBS) had deposits with VBS.
The problem facing at least one of these municipalities, the West Rand district municipality, came to light on Thursday.
In a statement, Adriana Randall, the Democratic Alliance’s Gauteng spokesperson on finance, said the municipality had about R81-million invested with the bank.
The municipality’s executive manager for corporate services, Rethabiseng Mokebe confirmed that it had placed the money with VBS.
But the municipality remains confident that the curator will sufficiently and competently deal with the matter Mokebe said.
The bank suffered a liquidity crunch when it could not pay back a large concentration of municipal and other deposits, ultimately leading to it being placed under curatorship on Sunday. It is unclear how much municipal money is trapped at the bank. One estimate puts it at R1-billion, possibly more. The Reserve Bank has refused to comment on the amount, which it said would have to be determined by the curator.
The curatorship is a double blow for the Bophelo entities. They hold and administer funds for beneficiaries of mineworkers, and both were subsidiaries of Mvunonala Holdings. In mid-2017, the BBF and BBS were placed under curatorship by the Financial Services Board (FSB), after the misappropriation of at least R255-million of the BBF’s money was uncovered.
Last year, Vele Investments, which is also the largest shareholder in VBS (the second-largest is the Public Investment Corporation) bought Mvunonala Holdings.
Part of the R410-million transaction was to be used as a partial recovery of the shortfall in the funds, according to Juanito Damons, the curator of the BBF and BBS. About R370-million was placed at VBS in the name of BBS and was due be withdrawn by the end of February 2018, he said. According to Olano Makhubela, the FSB’s deputy executive officer for the pension department, other Mvunonala entities owned by Vele may also be affected by the curatorship.
As part of the acquisition of the Mvunonala group, Vele Investments acquired other financial institutions, including Mvunonala Asset Managers, Nzalo Insurance Services, Bophelo Life Insurance Limited and Bophelo Tracing Services.
“From the information available, Mvunonala Asset Managers, one life insurer and, as mentioned above, the Bophelo Beneficiary Fund, are impacted as it holds deposits with VBS Mutual Bank,” Makhubela said.
Damons said that, at the time of negotiating the transaction, he had no reason to doubt the solvency and liquidity of VBS. As part of the final negotiations of payment, it was stipulated by “the counter to the transaction”, Vele, that the funds had to be paid to VBS.
When Damons called on the funds at the end of February, VBS failed to make the payment. Now money cannot be withdrawn without the consent and co-operation of the curator of the bank, Damons said. “If there is a significant delay in the repayment of the funds to me, this may affect the ability of BBS and BBF to pay future benefits.”
He said he had sufficient funds under his control to make the full payment of benefits due under the funds in the short term. But the potential prejudice to beneficiaries would depend on whether the full amount of the funds held at VBS could be repaid, and the time this would take.
The Reserve Bank has appointed Anoosh Rooplal, a director of auditing firm Sizwe Ntsaluba Gobodo, as curator. The Reserve Bank has guaranteed deposits up to R50 000, but this is unlikely to cover the full amounts deposited by pension funds andmunicipalities.
Makhubele said the curator and the Reserve Bank were very aware of these concerns.Rooplal said his first priority is to stabilise the bank and to protect depositors. “Curatorship is meant to be an aid to possibly restore VBS Mutual Bank. The process is, however, complex and we need time to investigate the affairs of the bank,” he said.
His team had the legal means to implement a resolution and this would take into account the interests of all depositors, creditors, staff and relevant stakeholders.
The chairperson of VBS, Tshifhiwa Matodzi, was also the chairperson of Vele but he resigned from the Velepost on Tuesday.
The spokesperson for Vele Investments, Ndivhuwo Khangale, said the company would support the curator but it did not want to comment on a number of other issues while the process was unfolding.
Matodzi did not respond to requests for comment.
In an angry letter to Kuben Naidoo, the Reserve Bank’s registrar of banks, Matodzi accused the Reserve Bank and the treasury of precipitating the VBS crash, because the treasury had notified six municipalities in August last year that they were contravening the law by depositing money with VBS. The municipalities began withdrawing their money, which caused a run on the bank, he claimed.
The Municipal Finance Management Act permits a municipality to open a bank account only with a bank registered in terms of the Banks Act. Mutual banks such as VBS are typically smaller, not regulated as strenuously and are not covered by the Act.
But the Reserve Bank has refuted Matodzi’s accusations, arguing that VBS’s business model, which increasingly relied on unlawful municipal deposits, was flawed and, for some time, has seen the bank run into liquidity problems.
Municipalities began depositing money with VBS in 2015, according to the Reserve Bank. Until then, the bank relied heavily on deposits, predominantly from retail clients, which were seasonal and therefore volatile. According to the Reserve Bank, the VBS business model had been to take short-term retail deposits and lend them out long term, mainly for home loans.
But, from 2015, the bank began to look for alternative sources of funding, including municipal deposits. The term of these varied, ranging from call deposits, money market placements and notice deposits to six-month fixed deposits, the Reserve Bank said. But it was “highly risky” for VBS to take sizeable municipal deposits that were short term and lend them out long term.
The bank’s current liquidity problems emanated from the maturity of a large concentration of municipal deposits and it was “exacerbated by the termination of other sizeable deposits, as well as VBS’s inability to source sufficient funding timeously”.
The Reserve Bank said it began discussions with VBS in 2015 about its reliance on large municipal deposits. VBS’s liquidity difficulties resulted in it being unable to settle its obligations to the National Payments System on several occasions, the bank said.
The growth in deposits cannot be underestimated. According to the treasury, the VBS balance sheet soared from R200-million a few years ago to R2-billion.
Until fairly recently, VBS was a little-known entity. But, in 2016, it came to public prominence after it lent Jacob Zuma almost R8-million to pay for controversial upgrades to his Nkandla estate.
In his letter, Matodzi said VBS was being punished by a system that did not want a black-owned bank to succeed.
The treasury denied this. “It is never the intention of treasury for any bank to be liquidated, particularly a small black-owned bank. National treasury’s actions are trying to balance the need for a more diversified small banking sector against the need for well-run and well-governed municipalities.”
On Thursday, Cas Coovadia, the managing director the Banking Association South Africa, stressed the need for transformation in the sector. “However, this must be done in a way that creates sustainable businesses that can offer communities safe and secure financial services.
“All South African banks must adhere to the letter and spirit of the law and be able to fulfil their legal duty of care to those who entrust their earnings to them,” he said.