Micro loan write-off triggers finance industry crisis
Sri Lanka‘s Non Banking Financial Institutions (NBFI) are likely to either stop or slow down their micro finance operations countrywide owing to the effect of writing-off small loans given to women in drought-stricken areas, Registered Finance Companies (RFCs) warned.
This situation has arisen as a result of the government’s directive to write-off non-consumption loans up to Rs. 100,000 given to women by them in around 12 drought-affected districts and introducing an interest rate cap of 30 per cent per annum on all future micro finance loans, they claimed.
Several heads of RFCs told the Business Times on condition of anonymity that this directive of the government will increase operational cost of companies due to cut down of interest rate; they said adding that human resources will need to be cut down, negatively affecting all the families dependent on them.
Though the Government states that it will pay the written-off debts within a 3-year time period, there was no Treasury guarantee it will happen. On top of that finance companies are paying a tax for an income they do not possess, they added.
Unregulated lending organisations/individuals/ NGOs have caused trouble in the industry by violating the Grameen concept, a CEO of a RFC said pointing out their only objective was to earn profits at whatever cost.
The real concept is to work hand in hand with customers for sustainable growth, he said.
When issuing a micro loan, RFCs educate the customer on all terms and conditions and follow the group lending system and get cross guarantors, he disclosed.
Central Bank-regulated financial institutions are in trouble because of the loan write-off done by the government, he said pointing out that unregulated organisations are carrying on with their malicious practices and they are not penalised.
RFCs collect money from customers in the form of Savings/FDs and this money is invested in the form of loans, he explained.
When government writes-off loans, it’s these customers’ savings which are being written off, he emphasised.
On the other hand, he noted that the RFCs take in customer savings at a much higher rate than banks; hence it’s almost impossible to manage their cost of funds at the current rate imposed by the government.
At least 40 per cent interest rate is required but not 30 per cent, he said pointing out that RFCs pay massive amounts of taxes to the government. When their income is low, payable tax amount will decrease and that will affect government’s tax revenue, he revealed.
The main reason which brought this policy change was the North/East drought, he said alleging that the government has not looked at this problem in a holistic manner as the authorities have considered it from one perspective only.
Highlighting the bungle of state authorities, he noted that from the 12 districts identified by them Chilaw and Puttalam are mostly confined to fishing communities and their micro loans have also been written off due to drought.
A high official of the Finance Houses Association of Sri Lanka pointed out that the government needs to stop all the unregulated institutions /NGOs/individuals who have become a menace to the industry with their short term personal gains and also the public needs to be informed that they should only transact with regulated banks/finance institutions.
He said that regulated institutions don’t use thuggery to get payments from customers, but unregulated entities do this often.
They do not have to maintain a brand image or the prestige of a well-regulated company, he said, pointing out that their only concern was day-to-day money collection.
Such pressure from those unregulated entities had caused certain customers to commit suicide as well, he disclosed.
Another CEO of a leading RFC told the Business Times; the decision of the Finance Ministry will definitely exert an impact on the cash flows of the companies as the Treasury will take three years to repay the capital written off by them.
He asked as to whether this directive could be issued by the Finance Ministry directly to the RFCs without the consent of the Monetary Board of the Central Bank.
Whose directions should the NBFIs follow, he queried.
When a loan is written off, it will be registered in the Crib (agency that records defaults), he said adding that it will prevent affected people from future borrowings from RFCs.
Women with over three months of arrears are considered for this loan write off facility, but the others who have continued to repay the loan despite hardships will not be eligible for it, he said adding that the government’s directive only helps the defaulters.
This directive is not clear to the majority of the people and as a result most of the borrowers of RFCs have refused to repay their loans arguing that this directive is applicable to all of them.
As a result recovery of loans by RFCs is currently severely affected, he said adding that their final recourse will be legal action against defaulters badly affecting all the people who borrowed money in drought-affected areas, not only the debt ridden women.
RFCs (NBFI) are responsible for depositors and shareholders and by writing off micro loans will weaken the company operations and reduce its profitability and balance sheet, he said.