Jaffna, Sri Lanka: A new loan to repay an earlier loan, the cycle never seems to end for many families in post-war north and east Sri Lanka. Ask Nirojani Suresh Kumar, 34, who has been struggling, not just to repay, but even to keep track of the loans she has taken. Resettled in Mullaitivu in the northern region after the war ended, Nirojani’s loan woes started with her first loan of SLR 100,000 to start a broomstick business. However, army-run workshops were able to make and distribute brooms on a mass scale, which Nirojani could not match. Her debt mounted over months as income fell, and family expenses were high due to an ailing husband without a steady income and three daughters.
Unable to keep up with the repayments, she took another loan to pay off the first, and another to pay off the second and a third, till six years later, she barely manages to keep track of all her loans. Nirojani is not alone in her plight. The debt issue among families who, post-war, resettled in the north and eastern provinces has become endemic. In the eastern provinces alone, there were over 60 debt-related suicides. Exorbitant interest rates and arbitrary fines for late payment charged by micro-finance companies and their exploitation of the ignorance of financial knowledge among women-headed families in particular are seen as primary reasons for the debt trap these families find themselves in.
Nirojani, for instance, only knows how much she has to pay each month for each of the five loans she has taken from different finance companies for meeting family expenses. When interest repayment is overdue on one loan, she takes a fresh loan to settle the old debt. “I am waiting for a new loan from one company so I can settle old loans of two other companies,” she said. How Nirojani will pay back the loans she does not know.
But these are non-issues for the credit companies whose reps go door to door selling loans and collecting interest payments. They are happy to give one loan after another. Post-war north is a rich virgin market for these companies. They rushed to the area, offering loans to communities resettled there by the state.
Although the country introduced a Microfinance Act in 2016, the Sri Lankan government has been unable to regulate the sector, where a large number of organisations operate in lending small loans meant to be utilised as financing for small and medium businesses. However, finance minister Mangala Samaraweera last week acknowledged that the government is aware of some institutions lending money at effective interest rates as high as 220 percent.
The government has also decided to grant a debt write-off for women-headed households in 12 drought affected districts, including some in north and north-central provinces. The scheme is only applicable for non-consumption loans under SLR 100,000 obtained from any registered finance company, a statement issued by the finance ministry said. Further, to stop exploitation, the government also imposed an interest cap of 30 percent per annum on all loans given by microfinance companies.
Although a one-time write-off has been announced, the government is reluctant to take any summary action against the finance companies despite a call from Sri Lanka Microfinance Practitioners' Association (SLMFA) for a solid regulatory framework to regulate the sector. “The Central Bank is aware of what is happening and if there are any regulatory measures that can be taken they will take it,” said State Minister of Finance Eran Wickramaratne, adding that, “We don’t condone victimising of vulnerable communities, but there has to be a fine balance here.”
Many families looked to these companies to obtain the extra funding needed to complete construction of their houses, despite getting up to SLR 550,000 under the Indian housing assistance programme. Like S Naguleswari from Vavuniya district in Northern Province who completed building her house last year and is still paying weekly installments of the six loans she took to fund the construction. “I did a few modifications to the house but given the high cost of materials during the time, we had to put a lot of our own funds to build the house,” she explained. Nirojani, too, had to take loans for house constructions as unlike others, she had to hire labour, she said.
Trying to keep up with the Joneses in constructing their homes is one reason for this debt trap, said Raga Alphonsus, a programme advisor with ZOA, an international relief and recovery organisation working with post-war communities in these provinces. “Those who had foreign remittances from relatives were able to manage without getting into debt, but many others got caught in the debt trap, he said. “But this was not the only issue,” Alphonsus argues. “Many in the community were being exposed for the first time to a market economy and took loans to finance their consumption without understanding the consequences.” Unlike state-run banks and other financial institutions, microfinance companies demand no documentation or collateral for their high-interest loans, often giving group loans to wives with just their husbands as witnesses.
Unconventional recovery methods
Each person who borrows money has a ‘loan card’ or a ‘record book’ detailing all the loans taken and loan installment amounts. Often, every day of the week has a loan instalment due and a credit collector visits. When unable to make repayments, the borrowers go into hiding, or ask friends or neighbours for mini loans. If one member of the group defaults, other members are liable for the amount. The collectors often use unconventional recovery methods like visiting households at odd hours, and name and shame tactics.
After reports of sexual violence and abuse by collectors who come in the night, the North and East provinces imposed an 'evening curfew’ for credit collectors. Now they come as early as 5.30am in the morning, says Dharshan Thanuja, Programme Coordinator for ZOA, giving debt counselling and livelihood support for families.
“When we don’t have enough money to pay for the creditors, my husband fights with me,” said Nirojani. Debt has been a common trigger for domestic issues in the communities, adds Alphonsus. “The debt issue has caused other socio-economic problems, like food security issues in families, when they have to pay loan installments from the money they kept aside for food,” he says.
Suicide by borrowers unable to repay is another serious issue, said Thanuja, who cited nine such cases in her area alone. “In one case, the woman had left a note detailing the debt and asking her family to sell her land to settle it,” said Thanuja. “I read the note. It also said to give some money for her three children she left behind.” The eastern province reported two deaths in early July. The issue has been highlighted at various fora over the years.
According to Alayadivembu divisional secretary Vedanayagam Jegadeesan, the issue was raised at meetings held with Central Bank representatives who visited Trincomalee a few months back. He did not say what remedial action was proposed. But government officials are quick to point out that not all microfinance companies are evil. They are joined by activists like Alphonsus who say there are a number of companies which are fair in their business practices. “You can’t blame the finance companies solely,” said Alphonsus. Jegadeesan said that some organisations give out loans at low interest after due process. “These have helped with livelihood activities, like women development societies,” said Jagadeesan.
But many people want less hassle and immediate cash, pushing them into the arms of those who charge high interest rates. “Something has to be done about such companies,” said Jegadeesan. Some of them are not even registered under the Central Bank of Sri Lanka, “because of which the Central Bank says it cannot do much.”
National policies and economic affairs state minister Dr Harsha De Silva, too, accepted the need to establish a proper regulatory framework for microfinance to prevent vulnerable communities falling prey, but was unable to explain why no sustainable corrective measures have been taken to regulate the sector.
According to Sri Lanka Central Bank Assistant Governor JPR Karunaratne, only one lending institution has been registered with the Central Bank as a microfinance company out of nine applications received under the 2016 Act. However, Karunaratne said that as the mandate of the Central Bank focuses on the depositors, not borrowers, the regulator is not able to do much about the situation.
Updated Date: Jul 30, 2018 22:24 PM