One of the things that students studying for their banking diploma or degree must learn are sound lending principles, a universally accepted set of criteria to ensure that losses through bad debts are minimised.
One of the critical criteria is that borrowing proposals must be vetted to ensure the borrower has a good business plan to secure repayment of the capital and interest within the term agreed with the bank.
Students learn that the collateral offered should not diminish the intensity and intrusiveness of the scrutiny, and no lending should usually be sanctioned solely on the strength of the collateral provided.
The role that Bank of Valletta has played over the five decades that it has been under virtual government control shows that it has sometimes ignored sound lending principles.
BOV accommodated state-owned entities that were economically unviable but that could provide government guarantees to obtain the needed loans. Over the years, it was mainly parastatal organisations that benefitted from such lending practices.
This shows that not much attention was paid to the extra scrutiny regulators expect banks to undertake when dealing with related party transactions, i.e. banking transactions with organisations that, like the bank, have significant government shareholding or with whom the government had contractual obligations.
Troubled entities like the shipyards, Enemalta, Air Malta, Electrogas, and more recently Steward Health Care Malta, have often relied on BOV for financing to operate.
The court's judgment on the contract for the privatisation of the hospitals declared clearly that the underlying agreements signed by the government with Vitals and Steward were tainted with fraud. The judge also identified the parties who aided and abetted the perpetuation of this fraud, including BOV, which financed Steward’s half-baked plans against the strength of a government guarantee. This has prompted the opposition and independent candidate Arnold Cassola to call on the bank to clarify its position on this matter.
BOV would argue that the practice of lending for proposals backed by a sovereign guarantee is long established. This, though, does not make it an acceptable practice.
While in the case of its misguided lending to Steward, the bank will likely recover all its money from the government, it is taxpayers who will be funding this €36 million black hole.
These were reputational risks that BOV has unnecessarily exposed itself to.
Regulators must also review their processes to scrutinise banks’ lending to ensure that only viable projects are financed. They should ensure taxpayers are not unknowingly made to underwrite dud loans to government entities or private organisations that do business with the government. Banks with no government shareholding are known to often shy away from borrowers who do not have viable business plans and only rely on government support to secure project financing.
The government’s longa manus in BOV’s affairs may be hidden but certain events show it may still active. And this is why critics and some shareholders insist that the government should no longer be the one appointing the bank’s chairperson, though this is not intended to cast any suspicion on the person currently occupying the post. Many hard-working and competent BOV employees need to put their minds at rest that no senior officials cave in to political pressure.
The role of Bank of Valletta in the economy is too important and delicate.
Taxpayers need to put their minds at rest that there is no political pressure to help launch dubious government-sponsored projects.