Sri Lankan Micro Finance institutions have lent over Rs. 160 billion on high interest rates while the borrowers now have to pay more than Rs. 250 billion to settle them, Secretary-General and Chief Economist of the National Economic Council (NEC) Lalith P. Samarakoon said.
He said that there are over 10,000 unregistered finance companies in Sri Lanka and out of which, only four companies could be registered. These registered finance companies have lent around Rs. 60 billion, while unregistered companies have lent Rs. 68 billion while the rest were dispersed by NGO related institutions.
Samarakoon disclosed that most of these Micro Finance lending institutions borrow from commercial banks at around 16% of interest and then lend at 32% or even more. “We are also looking at offering a new low interest credit line for Micro Finance lenders, so that they could offer credit to borrowers at a lower interest.”
He said that the irony of these scenario is that most of the borrowers of micro credit take loans for non commercial matters; hence the contribution made from these loans to the economy is very low.
There are some instances where these unauthorized finance companies offer credit almost by force, as most of the borrowers have little financial literacy.
“It’s the tough collateral from the Commercial Banks that force micro credit borrowers to move away from the banking sector. The solution to this is to reactivate a banking system such as the Regional Banks and educate people to borrow from it.
Samarakoon also pointed out that some companies are now offering micro credit online which would further aggravate this system as ‘tracking of loans’ would be difficult. There is also a trend where customers take one loan and have to take about five to six loans to settle the previous claim.
He said that this subject was taken up at the last meeting of the NEC and it was decided to bring in new legislature to regularize this industry in consultation with Central Bank and Ministry of Finance soon. Deputy Governor Central Bank, H. A. Karunaratne said that these micro finance companies are exploiting a regulation that prevents Central Bank from regulating lending institutions.
“However, we have now decided to bring in new legislation along with the Finance Ministry to regularize this industry.”
He said that new regulations would put a check to these illegal Micro Finance institutions, while the Central Bank also hopes to educate the public on the micro finance. He also said that the EAP deal was done after considering the best options that were on the table during the time.
The foreign investor consortium, Singapore-registered Blue Summit Capital Management Ltd., offered US$ 75 million and at the time it was the best offer.
“ The Singaporean company later did not want to purchase Swarnamahal Investor Services and the deal was sealed for US$ 69 million out of which US$ 54 million was paid. The remaining US 15 will be settled this week.”
He said that depositors were paid 20% of their dues and a further 10% of their capital would be paid next week.
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