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Friday January 21st, 2022

Is Sri Lanka’s pandemic debt moratorium interest free? – fact checked

ECONOMYNEXT – Sri Lanka’s ministers and some authorities have repeatedly said the government has given debt moratorium debts so that there will be minimum impact on the businesses.

Many rushed to use the debt moratorium on the assumption that they will have to pay the same amount later with freeze in interest payment.

But Sri Lanka’s businesses, especially small and medium enterprises, are now slowly realizing the impact of debt moratorium.

“I was paying 500,000 per month for the loan and took the moratorium that was for 18 months. The total amount I should now pay has added up to 9 million rupees. But now due to compound interest another 5 million has added to his total payable by the end of the time,” Ravith Silva, a leading businessman in the automobile service industry told EconomyNext.

“It is not only compound interest, but businessmen also took loans during the moratorium period to pay off their employees’ salary and re-boot their businesses when the country reopened from time to time. Without even recognizing, we are now in more debt than any time before.”

Many people like Silva had used the debt moratorium as a relief, but now struggle with more burden as compound interest is weighing on their repayment capability, analysts say.

Sri Lanka’s central bank has given a raft of extension on debt moratorium to protect mainly small and medium enterprises (SME) from Covid-19 pandemic due to businesses were halted to ground zero, but interest on interest rates of pre-Covid loans is now threatening many SMEs as they are in the brink of closing down operations.

Many SMEs now say they are likely to close in next year due to not being able to settle the loans with the moratoriums coming to an end early next year with many entrepreneurs are struggling without business and impending loan repayments.

“Most of the SMEs grabbed the moratorium option without considering the consequences,” said Dimantha Mathew, head of research at Colombo-based First Capital Holding said.

“Many assumed it was free. But there is nothing free.”

Other analysts said though the central bank in its directive clearly mentioned about the additional interest on the accrued interest payments, any SMEs never understood that they will have to pay an additional interest even on the interest payment.

The central bank has extended the debt moratorium period until end December this year, but distressed borrowers have to pay interest on the period and the loan extension comes at a cost of 1 percent above 364-day T-bill yield.

Newly appointed central bank governor Ajith Nivard Cabraal on October 1 decided to provide a liquidity support of 15 billion rupees to finance interest accrued in loans that have been given the moratorium.

As the island nation is now preparing for its post-Covid-19 economic recovery, unwinding of moratoria gradually is inevitable.

“Many SMEs never thought they will have to pay interest on interest in this debt moratorium. It is all because the way it was marketed,” said a senior bank official who asked not to be named as he is not authorized to speak to media.

“Had the SME borrowers know how much they will have to pay once the moratorium is over, they would never use the facility.”

However, many banks EconomyNext spoke to said when the moratorium was granted they had told the borrowers that moratorium was only for the capital payment, not for the total monthly interest.

“So they (borrowers) were asked to pay the interest for the monthly installment without paying the capital,” an official at the People’s Bank credit department told EconomyNext.

For the borrowers who did not pay the interest, the interest for the entire moratorium period will be calculated and a separate interest for that unsettled interest payment will be charged. This is what these borrowers call interest on interest.”

“This is completely legal and it was given permission by the Central bank of Sri Lanka as well. In their moratorium statements, it has been stated that commercial banks are given the permission to do it,” he said.  (Colombo/Nov. 28/2021)


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