ECONOMYNEXT – Sri Lanka is bringing laws to regulate micro-finance which are behaving like loan sharks giving loans to people who cannot afford them, but some regulated lenders are also engaging in such practices, the finance minister said.
The government is providing 1.4 billion rupees to write off the capital and interest of 45,000 women borrowers, up to 100,000 rupees, especially in the former war zones of the north.
"Whilst the drought was a major trigger factor, the unscrupulous practices of the lenders, particularly the unregulated loan sharks, played a major role in creating this debt trap," Finance Minister Mangala Samaraweera was quoted as saying in Jaffna, where he met borrowers whose loans were written off.
"I am sad to note that even reputed companies in the financial services industry have been engaged in such practices."
At least one stock exchange listed non-bank lender is known to be pushing loans hard to people who do not really need them, according to industry analysts.
Poor people in the North and East are particularly vulnerable as they are unused to credit and own no consumer durables, unlike the rest of the country, analysts who have studied the problem had found.
In Sri Lanka, traditional banks have long been blamed for being too cautious in giving loans and aggressive lending is a new phenomenon in the island.
"The worst offenders target these vulnerable households charging them exorbitant interest rates, some as high as 200 percent, spiraling borrowers to an unending cycle of debt," Samaraweera said.
"Unethical practices such as charging excessive interest rates from consumers, and using unnecessary coercion techniques have brought about many people, especially women, severe economic hardships and psychological distress.
"Lenders have, in many cases, given loans that they know the borrower simply cannot afford. In many cases, a single household would take multiple loans to pay off previous debts, rather than establish or improve existing businesses."
It is not clear whether the lenders actually charged 200 percent or if it is an extrapolation of a short term loan. However, a defaulted loan would be charged at high rates.
Micro finance loans, however, are costly to administer and recover.
Sri Lanka placed a cap of 35 percent on micro finance loans, which Samaraweera said was much higher than market rates would be enough to cover the inherent risks and administrative costs.
"The government is well aware that this debt write-off is a short-term solution to a much larger problem," he said.
"Furthermore, it is not feasible to have multiple debt write offs of this nature. To bring about a long-term solution, we are committed to introduce the necessary legislation and regulation to govern the microfinance industry."
"The new Microfinance Act that is being drafted would ensure more responsible lenders will be able to operate and consumers will have access to better credit.
"The new Act will also incorporate financial consumer protection measures.
"Ongoing efforts to improve financial literacy, led by the Central Bank, will be expanded with renewed vigor." (Colombo/Feb15/2019-SB)