Govt. to amend Microfinance Act to tackle rural indebtedness

• Reforms to regulate loan-givers, package to deal with debt distress likely to be included in Budget

By Uditha Jayasinghe  

Increased indebtedness in rural communities, particularly in the North and North Central provinces, has prompted the Government to consider amending the Microfinance Act to reduce and regulate credit-giving institutions. 

Central Bank Governor Dr. Indrajit Coomaraswamy this week acknowledged that the regulator had “se rious concerns” of the high level of indebtedness in the country. Indebtedness, particularly in the north, was triggered by rampant lending after the end of the war for consumption and the establishment of small businesses. 

However, since the economy failed to pick up significantly as expected most of the borrowers found themselves unable to repay their debt. 

Many, the Governor conceded, were trapped under high rates of interest and caught in a debt trap as they are unable to pay down their capital. 

Drought and other natural disasters also hit farmers in both the North and North Central provinces resulting in them being unable to repay loans after harvest losses, sometimes for several seasons in a row. 

“We are attempting to address some of the most severe levels of debt distress and are in the process of formulating a package, which we hope will be presented as part of the Budget proposals,” he said. 

At present the Microfinance Act one regulates entities that take deposits but there is no oversight for companies or individuals that only lend money. Under the new amendments the Government aims to widen the powers of the Microfinance Act to include all loan-givers, irrespective of whether they accept deposits or not.       

Finance companies in these regions have also been accused of aggressively flogging high interest loans to people, who at times have limited financial knowledge of the commitments they are making, and creating social issues as well.