Saving the indebted

Tuesday, 31 October 2017 00:00 - - {{hitsCtrl.values.hits}}

The high level of indebtedness in the north that had been flagged by stakeholders for many months is finally getting attention but it is imperative that solutions are fast-tracked to prevent a social catastrophe.

Central Bank Governor Dr. Indrajit Coomaraswamy visited the north earlier this month to get firsthand details of the high level of indebtedness in the region. After the end of the war, banks, finance companies and other lenders flocked to the north and east with attractive offers of loans. The pent up demand in the area together with the upbeat sentiment of the time resulted in many people taking loans either to buy household items or start a small business. However, the post-war optimism did not convert into long-term sustained growth and many of the borrowers found that they were unable to pay back their borrowings.

To make matters worse, low levels of financial literacy by the borrowers meant that many of them had little idea of the high interest rates they were borrowing at while others had little idea of how aggressive the companies would become to regain their loans. This has had deep impact, particularly among the women, 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 had 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 that they do not use in other parts of the country. 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. But the reality is that some part of the worst of the debt may need to be written off to save lives.