Finance Ministry to increase credit limit to provide relief to low income borrowers

By Sandun A Jayasekera

In a bid to provide a respite to the people, particularly those in the North-East and North-Central Provinces from the micro finance debt trap, the Finance Ministry has decided to increase the credit limit to low income families to Rs. 60,000 from Rs. 40,000 for loans released from Cooperative Rural Banks. The interest rate will be brought down to 9% from 14% for the new loan facility.

Accordingly, Micro Finance Credit Facility Programmes for the People of Northern and North Central Provinces who are in debt will be resumed with immediate effect following the cabinet nod last week. A loan scheme has been implemented through Co-operative Rural Banks and Thrift and Credit Co-operative Societies to provide relief to individuals with a low income who have obtained loans from various micro finance institutions.   

The Treasury will release Rs. 542 million and it operates as a revolving fund. Following the proposal made by Prime Minister Mahinda Rajapaksa, the loan programme will continue increasing the maximum credit limit to Rs.60,000 per individual.   

Commencing in the late 1990s, NGOs in Sri Lanka sought to address women’s credit and livelihood needs with microfinance – a model of lending without collateral by holding groups of women responsible for each other’s loans.   

With the expansion of the financial sector after the civil war, recognizing the large profits to be made, numerous companies entered the microfinance business. Among them were around fifty established finance companies, including subsidiaries of major banks, registered with the Central Bank, as well as hundreds of new unregulated companies. Using public institutions, religious places and women’s homes as centres for debt collection, loans were provided in return for weekly and even daily installment repayments, with effective annual interest rates ranging from 40% to 220%. The proliferation of these loans created a debt trap, where new loans were taken or money was borrowed from informal sources to pay back previous loans.   
As the indebtedness crisis mounted, women’s groups in the North and East of Sri Lanka took the lead in exposing the abusive practices of debt collectors, the fear and humiliation pushing women into hiding, and the plight of families torn apart.