Bad SCF decisions 'before scheme'

Finance Minister Bill English. Photo / Mark Mitchell

The majority of South Canterbury Finance's problem lending took place before it entered the Government's deposit guarantee scheme, Finance Minister Bill English claims.

Responding to a call by opposition parties for a full inquiry into the collapsed finance company, English defended the Government's decision to include South Canterbury in the scheme.

"At the time South Canterbury Finance appeared sound," he said.

Standard & Poor's had affirmed a stable credit rating of BBB- in June 2008 - just five months before it was accepted into the guarantee scheme. The rating agency described South Canterbury's asset quality as "sound, underpinned by a modest risk appetite, proactive risk management, and sound underwriting standards".

But English said it may not have been as strong as indicated by the agency.

"In the 4 years to December 2008 South Canterbury Finance's assets had almost doubled from $1.1 billion to $2.16 billion. As 2009 evolved, it became clear that much of this additional lending was not high quality."

However, he said, the great majority of the problem lending occurred before entering the guarantee.

English's comments contrast with that of South Canterbury chief executive Sandy Maier who last week claimed the company used its acceptance into the guarantee scheme to ramp up its risky lending.

"I guess the best you could say was it was somebody's idea of aggressive growth. This happens in the lending industry, cyclical excesses and rushes of blood to the head. South Canterbury Finance was poorly controlled and managed for some time," Maier told TV3's Campbell Live.

The Government became concerned enough about South Canterbury's lending that Treasury appointed KordaMentha as advisers to report on the company's financial position.

It also provisioned $831 million into its accounts - most of which was related to South Canterbury.

"Assessing the potential risk was complicated by related-party lending, generally poor credit and accounting processes, and more recently the departure of most of the senior management," English said.

But despite the problems the company remained in compliance with its deed of guarantee and even if there had been a reason to withdraw it from the guarantee scheme existing investors would still have been covered, he said.

The Government has already paid out $1.775 billion to cover depositors and pay out debtors. It expects to recover about $1 billion from the sale of South Canterbury's assets.

English said once fees paid for the wholesale and retail deposit guarantee schemes were taken into account the net cost was likely to be between $300 million and $400 million.

But Labour finance spokesman David Cunliffe said questions needed to be asked of the Government to ensure such a collapse did not happen again.

"What went wrong and was the cost to taxpayers really minimised?" he said.

Green Party co-leader Russel Norman said Parliament's finance and expenditure select committee should hold an open inquiry into South Canterbury and the Government's actions.

Maori Party MP Te Ururoa Flavell said Maori were comparing the $1.6 billion with the $1 billion cap put on Treaty of Waitangi settlements 15 years ago.

"That was $1 billion to settle all claims for a Maori population at the last census of 643,977 people. It compares miserably with $1.6 billion paid by the Crown to settle with a few unhappy investors," he said.