Household debt

Monday, 8 January 2018 00:00 - - {{hitsCtrl.values.hits}}

The Central Bank is planning a country-wide assessment of household indebtedness to be carried out this year amid concern over rising debt levels. This is a long needed tool to strengthen the institutional framework for macroprudential surveillance and substantially review Sri Lanka’s welfare system as well as poverty alleviation measures to see if public funds are actually helping people improve living standards.

The North and North Central provinces in particular and pockets of other areas have seen a spike in levels of indebtedness, partly due to prolonged bad weather. To make matters worse, low levels of financial literacy by the borrowers meant that many of them had little idea of how difficult it would be for them to repay the loans. For farmers there was no choice but to borrow in order to survive and many of them had even become food insecure as a result.

Debt has had a deep impact, particularly among women in the North, who are socially as well as economically impacted by debt. Horrific cases of women being asked for sexual bribes and facing additional pressure from being humiliated in the community by the collection agents have become all too common. Widespread lending meant that in some cases interest payments have snowballed up to as much as 70% and existing regulations are commonly seen as inadequate to tackle the complex tangle of financial liability.

Circumstances have become so bad that in some instances the borrowers are not even aware of which company they have borrowed from or the original terms under which they got money. Lenders have also found creative and unusual ways of pushing loans. In the North one measure is to group women together into segments of three or four and give them loans under a common guarantee scheme. If one person defaults then the responsibility is shared by the rest of the people in the group. This mode of lending provides a cushion for the lender but transfers a disproportionate amount of responsibility to people who cannot afford to shoulder it.

Lending to the vulnerable is always a challenge and one of the biggest challenges involving microfinance. From the regulator’s perspective, wading through all the different permutations of these loans and finding out who can pay and at what rate is a daunting process.

The Central Bank also has the duty to do this without undermining the overall financial system and still leaving enough confidence in the lending mechanism to fund ventures that are viable to gradually boost the regional economy.

In this quagmire of financial complexity, solutions will need to be conveyed clearly and underpinned by consistent engagement. Stricter regulations on finance companies to evaluate what they are lending for and educating the public to make better decisions will be a long-term facet of this intervention. Uplifting the economy by encouraging investment is already an aspect that the Government is looking at and will need to be fast-tracked.

Unless widespread debt is tackled Sri Lanka may find its near poor, that is the number of people living just above the poverty line, increasing. Indeed it may even push more people below the poverty line and increase inequality. As consumption trends change and climate change becomes the norm, finding sustainable solutions to indebtedness will also have to gain ground for real development to happen.