Sri Lanka limits micro debt relief to old defaults, rates controlled at 35-pct
ECONOMYNEXT – Sri Lanka will only give debt relief to women who have taken micro-loans before June 2018 and have been in default for over three months, interest rates will be controlled at 35 percent, Finance Minister Mangala Samaraweera said.
The finance ministry had earlier announced a rate of 30 percent.
There have been fears that the offer of state debt relief will encourage defaults among borrowers with a good credit record until the state intervention and lock thousands of poor families out of the formal banking system after they are put in the Credit Information Bureau as defaulters.
There is an estimated 75 to 80 billion rupees of loans below 100,000 rupees from finance companies to small borrowers in the 12 districts, not counting unregulated micro-lenders. In all districts there could be around 140 billion rupees of small loans, according to industry estimates.
Samaraweera told reporters said that in anticipation of the debt relief, some borrowers have already stopped their loan repayments.
"That’s why we will provide relief for loans under 100,000 rupees taken before June 30," he said.
Analysts say astate debt moratorium initiated sometime around 1999 under pressure from the Janatha Vimukthi Peramuna, had led to defaults of by farmers with good credit record, who then ended up in the CRIB and was unable to take a loan for the next cultivation season.
Samaraweera said the debt relief will be given to women who have taken loans from micro lenders and finance companies have been unable to repay due to bad weather, will receive debt relief under a billion rupee program.
Members of the Lanka Microfinance Practitioners’ Association have agreed to take part in the programme.
Mangala Samaraweera said that women in 12 drought affected districts who have not been able to make repayments over a period of at least 3 months will be eligible to have their principal loan repaid by the government.
Microfinance companies and finance companies have agreed to write off the accrued interest, he said.
He added that the first letters providing debt relief will be issued on September 01.
Most of the borrowers affected have been turned away from banks due to a lack of collateral for loans, Samaraweera said.
He said that some financial institutions have been charging ‘predatory rates’ in the regions affected, and have been using armed gangs to recover the loans.
Unlike large loans given by banks, where customers go to the branch to repay and are charged penal rates if they do not pay, micro loan installments are collected, usually by motorcycle riders, which is a cost, analysts say.
Meanwhile, Finance Ministry Advisor Mano Tittawela said that according to Central Bank data, around 75,000 women will be eligible for the programme.
He said that the government has observed that some women have taken multiple loans of under 100,000 rupees, and in such cases, only the largest loan will receive relief.
Microfinance and finance companies have agreed to cap annual interest rates at 35 percent for all new loans, he said.
Samaraweera said that around 60-90 percent of residents in drought affected districts such as Polonnaruwa have taken micro credit loans, and due to their inability to pay back the loans, a number of women have committed suicide.
"Some young women had to pay off their debt with sexual favours," Samaraweera said.
"The government felt it had an inherent moral duty to intervene."
However analysts say demanding or receiving sexual favours is a criminal matter, which requires prosecution and cannot be solved by price controls on loans.
Unless the perpetrators are prosecuted, the same tactics will be employed when loans defaulted, even if the rates are below 35 percent. Analysts say finance companies should set in place a process where credit collectors engaging in such tactics are sacked and blacklisted from finance companies, so that they are no longer threat to women borrowers.
Price controls on the other hand could make small loans uneconomical for formal businesses, and drive borrowers to the hands of village money lenders who charge about 10 percent a day.
Some micro-lenders who have been giving short term loans at high rates have been undercutting village money lenders.
Meanwhile Samaraweera said that the government understood there were women who were being exploited in other districts, but only 12 districts where the situation is critical will be covered under phase 1 of the programme.
A new microfinance regulatory authority will be established, he said.
"This is a national tragedy. It needs to be addressed at different levels," Samaraweera said.
Industry analysts say instead of imposing blanket price controls there may be need to examine practices where loans are heavily marketed to borrowers who may not need them and may not have sufficient information to asses risks. (COLOMBO, 2 August, 2018)