Cancelling Bankorp's licence would have led to "serious implications" for the South African banking system, said former Reserve Bank governor Dr Chris Stals.
In a telephonic interview, Stals explained to Fin24 the Reserve Bank's reasoning for extending the controversial R1.5 billion bailout to Bankorp in 1985. He served as Reserve Bank governor between 1989 and 1999 and was director-general of the Department of Finance between 1985 and 1989.
"We protected the South African financial system against a major collapse," he said.
At that stage, the closure of Bankorp risked resulting in "epic" problems for the whole of South Africa, Stals said.
Bankorp was the third largest bank in the country, with assets worth R32 billion and over 90 000 clients.
The bank had branches in Hong Kong, London and New York, said Stals. However, it had trouble with bad debt and non-conforming loans and could no longer comply with the minimum capital requirements of the Bank's Act.
He explained that the Reserve Bank had a commitment to assist a banking institution in that situation to maintain a "relatively stable" financial system. At the time South Africa was experiencing sanctions from the rest of the world and the withdrawal of capital.
Stals added that the actions by the Reserve Bank ensured that South Africa has a strong banking system today.
"It all worked out," he said.
The Absa takeover of Bankorp helped clear its debt and the money had been repaid to the Reserve Bank, he said.
But the Bankorp saga has sparked debate in South Africa.
According to a report by the Mail & Guardian, Public Protector Busisiwe Mkhwebane is investigating the bailout. A leaked preliminary report implies that interest payment on the loan is still outstanding.
Absa may be required to pay as much as R1.25 billion for outstanding interest payments, said the report.
Stals, however, said this does not make sense. He told Fin24 that Absa is not liable to pay any outstanding interest.
"I have said and I still confirm this — both Bankorp and Absa paid the interest that was due to the Reserve Bank regularly. The final or capital sum of the loan was paid by Absa by October 1995. So as far as I am concerned, Bankorp and Absa stuck to the basic requirement of the agreement."
Stals further explained the terms of the agreement:
- The Reserve Bank entered into an agreement with Bankorp to lend them R1.5 billion at a low interest rate, variable between 0% to 2%.
- Security had to be provided to the Reserve Bank for the loan — acceptable security would be South African government bonds.
- The R1.5 billion was to be used to buy SA government bonds; interest earned on the bonds according to market rates was 16% at the time.
- The difference between the 16% earned on the bonds and the low interest (1%) paid to the Reserve Bank for the loan, was essentially the "assistance" or lifeboat provided to Bankorp by the Reserve Bank, the lender of last resort. This income earned was to be used to write off Bankorp's bad debts.
- Stals added recent media reports indicate that there is a great deal of confusion regarding the two interest rates mentioned in the agreement.
The low interest rate at 1% is what Bankorp and subsequently Absa, following the takeover, had to pay back to the Reserve Bank for the loan.
"They [Bankorp and then Absa] paid that interest regularly throughout the period of the loan," he said. According to the agreement, the capital of the loan also had to be paid at the end of its term, which Absa did.
Stals said claims that Absa is to repay the interest earned on its government bonds, that is 16%, were unfounded.
"In terms of the agreements available as far as I am concerned, there is no provision ever made that anybody should repay the interest they earned on the government bonds."
This interest was to be used to write off bad debts.
"They [Absa] couldn't use that interest for their own purposes. They were put in a position that forced them to use all interest earned to write off the bad loan book," said Stals.
Given the economic turmoil in South Africa at the time, the government would have been "happy" to receive the R1.5 billion new investment in government bonds, said Stals.
This would help government finance the budget deficit.
"As far as the markets were concerned, they took off a lot of pressure on interest rates in the market."
The R1.5 billion investment in government bonds reduced government's demand to finance the deficit through other sources, he added.