The key to the bitter court battle between the KwaZulu-Natal (KZN) government-owned bank Ithala Soc and the Reserve Bank is a curious statistic: about 10% of Ithala’s total loan book is constituted of loans to its own staff.
This is way out of kilter with international banking norms where, depending on the size of the bank, loans to staff are usually no more than 1% of the total loan book.
Not only that, but the repayment administrator, Johan Kruger, who was appointed by the Reserve Bank’s Prudential Authority (PA) to take a closer look at the state of the bank last year, claimed in his solvency report that the loans “include instances where declined credit decisions were allegedly overruled by the office of the CEO and where loans were processed without following proper procedures”.
Ithala, formally known as Ithala Soc, disputes this and is furiously fighting to remain operational in a high-stakes court case currently under way in the Pietermaritzburg high court which could end in the liquidation of the bank.
The case pits yet another state-owned “development” bank against the solvency requirements of the PA, and reflects on other institutions in the roughly the same category, like the Postbank and the recently imploded VBS banking institution. It invites the question: is it in fact realistically possible to successfully operate a “development bank”?
In the legal battle, the PA’s argument is simply that Ithala Soc is operating without a banking licence and is insolvent.
This broad claim is founded on some hair-raising statistics, of which the proportion of staff loans is only one. These include the fact that the bank has made a profit only once in the past 15 years, that its interest coverage ratio is below one, that its return on equity is materially negative, and that its debt-to-equity ratio is “unsustainable”.
But beyond these broad metrics, the staff loan book is eye-catching as it suggests that there is more going on here than simply a bank in trouble, which raises the foreboding spectre of the VBS crisis.
Ithala bank is fully held by the long-standing KZN provincial development organisation, the Ithala Development Finance Corporation (IDFC). Together, the bank and holding company have about 1,000 staff members. Only about 300 hold loans – but lots of employees have more than one loan.
Given that Ithala Soc’s total outstanding loan book is about R2.1bn, this means the average loan per staff member is roughly R700,000.
For its part, Ithala Soc claims furiously that “these allegations are unfounded with malicious intent”. The staff loans were all made according to established credit risk management policy, and in no instance were procedures not followed in the credit granting process, it says.
In fact, says Ithala, since the bank can effectively withdraw loan repayments from the salaries of its staff members, this portion of its loan book is extremely healthy and fully paid up.
Effectively bankrupt?
Still, from the perspective of the PA, these and other parts of Ithala’s loan book are poor quality and there would be huge impairment in a forced sale situation. Ithala’s own CFO previously estimated that in the case of a winding down of deposit-taking activities, the loan book would have to be discounted by 37.4%.
The resulting balance sheet shortfall in the case of winding up would be about R570m, providing further evidence in the mind of the PA that the bank is effectively bankrupt.
Ithala is furious about this too, claiming the report on which the PA relies was part of a stress-testing exercise, and the internal document was intended for entirely different purposes.
“As at March 31 2024, Ithala’s assets exceeded its liabilities by R354m. This is evident in the 2024 audited financial statements issued by the auditor-general of South Africa,” the bank says. “If Ithala was technically insolvent, the auditors would not have issued the audited financial statements on a going-concern basis.”
What Ithala Soc does not dispute however is that the bank is in a loss-making position, which the PA puts at R520m between March 31 2008 and March 31 2024. But here is the kicker: the bank has survived because of regular capital injections from its parent, the IDFC, even though it has only had a single profitable year in the past 15 years.
The IDFC has existed for decades and is a large property owner in KZN, and according to its annual report, is solidly in the black. It funds the bank because of its development mandate “to provide financial services to the previously disadvantaged”.
It claims the bank’s capital adequacy ratio only dropped below the required 15% level after the repayment administrator was appointed.
This is not good enough for the PA, which is particularly irked that the bank does not have a formal licence to operate, and that it continued taking deposits after the authority issued a cease-and-desist order.
The possible demise of the bank will come as a shock to thousands of the bank’s clients, who are made up of everything from funeral fund savers to beneficiaries of loans to buy minibus taxis. The court date when it will all be decided has not yet been determined.
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