Hard-up businessmen fall prey to loan sharks
Sri Lanka’s small scale businessmen are struggling to make their ends meet. Hard pressed for cash, they have turned to private money-lenders only to be caught between the devil and the deep blue sea during the past two years.
Lending by financial institutions and individuals is not a priority for the regulator, the Central Bank as it considers the risk of the firms that lend, provided it does not affect the overall stability of the financial system, economic analysts said.
However, this does not address the massive impact of greedy lending of money-lenders on desperate businessmen forced into such borrowings, they claimed.
Members of Colombo Traders Association (CTA) pointed out that the traders are facing difficulties owing to competition and drop in sales as well as the government’s action to fix the maximum retail price.
They noted that the price of an imported product cannot be fixed as the prices change seasonally and the dollar rate too fluctuates and therefore, the prices should be changed very often to give the best to the consumers.
“Earnings of consumers are not sufficient to purchase goods other than food items” one trader said adding that local business and trade are being affected under these circumstances.
Inflation is now up with the increase in prices of essential commodities, making it difficult for consumers to buy readymade garments textiles, electrical appliances and other imported items of their choice.
From readymade garments and textile shops in Pettah, poultry and piggery farms in Nittambuwa as well as small scale building contractors and retail traders countrywide affected by the current economic situation, businesses have fallen prey to private money-lenders providing millions of rupees in instant loans for their units to survive.
Very few can survive by paying the interest rates ranging from 3 to 20 per cent per month and most of the others are being caught up in the vicious debt cycle as their revenue from trade is not sufficient to service debts owing to drastic drop in sales during the past two years.
But the money-lenders are not worried because they have ways to recover their money using “mafia” tactics. There is no getting away for the borrowers.
Private money-lenders flourish because unlike banks they do not insist on ascertaining the financial credentials or track record of a borrower.
The banks would not lend to persons, who had no credit history, no identity documents, no collateral, no guarantors, etc.
Recovery against a loan given by money-lender begins on day one when up to one month or three-month interest is deducted before providing the amount needed to the borrower, several affected business men revealed.
The money-lender also needs a surety like land deeds, gold jewelry, or undated cheques and complete family details. All this is used in case there is a payment default.
The loan sharks also have a strong network in the borrowers’ home town so they can easily locate a defaulter, even if they try to run away.
A small group of businessmen who met in Colombo recently revealed their miseries and the problem of crippling indebtedness to private money-lenders as they strive to maintain their businesses under the present disappointed economic situation.
They urged the Central Bank or the Finance Ministry to implement a structured system through Non Banking Financial Institutions as most of them have also obtained loans to run their businesses.
At the Colombo meeting, a businessman in Armour Street who is engaged in importing electrical appliances said that he had borrowed money from a money-lender to clear a stock of imported electrical items at Customs as they cannot keep the shipment more than three days without paying demurrage.
Money-lenders in Mattakkuliya and Kotahena areas are operating with the backing of politicians and they used to lend money ranging from Rs.5 to 10 million at an interest rate of 10 per cent per month, he disclosed.
“These money-lenders keep vehicles as surety by signing open papers or property deeds getting the power of attorney and using the power of thugs to recover their loans,” he revealed.
He noted that some bank officers were also lending money to settle overdrafts of businessmen.
Another businessmen selling safety equipment said that he has fallen into a debt trap as most of his buyers have not settled the bills amounting to Rs. 19 million for their purchases of safety equipment from him during the past two years.
He noted that he has to service loans taken from finance companies and money-lenders which has exceeded Rs. 56 million at present.
There was a 30 per cent drop in his sales, he said adding that he has no money to import the next stock of safety equipment.
A poultry and piggery farm owner in Nittambuwa who had a thriving business two years ago has been pushed to the wall due to the increase in poultry feed and government’s action to fix a maximum retail price for chicken.
He is now indebted in a massive amount of Rs. 200 million to finance companies and money-lenders
He said that he has taken one loan to close another, caught in tedious repayment cycles of four to five loans at present.
A building contractor from Kalutara who has undertaken government project construction work mainly “Deyata Kirula” disclosed that he is now being constantly hounded by money-lenders for the money borrowed from them to run his business.
He noted that he has no business and no proper income now following the present government’s refusal to pay for the construction work done by him for “Deyata Kirula “projects of the previous regime.
A readymade garment shop owner in Pettah had to turn to private money-lenders as his sales dropped by 70 per cent during the past two years.
Acknowledging there is a problem “of multiple borrowings”, he said that he had to resort to this practice as his cash flow became minimal due to the present economic situation.