Central Bank to aid war-hit families in debt trap

BY Meera Srinivasan

The Hindu: Sri Lanka’s Central Bank will evolve a programme to help the country’s war-affected communities tackle the mounting pressure of household debt, according to 
its chief.

Following a recent visit to the Northern Province to study the extent of the problem and explore solutions, Governor Indrajit Coomaraswamy said the country’s apex bank was considering a three-pronged strategy to tackle the issue with its regulatory reach.

“We need to identify those very debt-distressed people and try to alleviate their current debt burden through a mixture of responses — a moratorium, increasing the maturity of the loans, and exploring how interest rates can be reduced,” he told The Hindu in an interview.

“There are different options; it could be an interest rate cap, it could be something else — we have to look at all the options,” he said.

Currently, borrowers pay an effective interest rate upto “as high as 70 percent”.

After Sri Lanka’s civil war ended in May 2009, among the many concerns pertaining to accountability and reconciliation in the Tamil majority north and east was a growing trend of families borrowing loans at high rates of interest. In the absence of livelihood options for a community struggling to rebuild itself, people resorted to multiple loans for survival after futile attempts at self-employment in an economy that was yet to recover following decades of strife.

Speaking on the underlying causes, the Central Bank chief said the country’s post-war reconstruction policy had failed to link credit programmes to income generation, leaving a large section of the community trapped in heavy debt. “It [the reconstruction policy] was very well-meaning and well-intended in my view. But if you give people credit, and do not create the enabling environment for them to service that credit through flows of income, clearly you end up in the situation we have today.”

Exploring solutions

In May this year, the Central Bank said it would study the debt levels in the former war zone.

Following up on its findings, a high-level team led by Dr. Coomaraswamy met civil society members, government officials and representatives from banking and financial institutions last week to explore possible solutions to the problem.

Former President Chandrika Bandaranaike Kumaratunga, who currently chairs the Office for National Unity and Reconciliation, is keen that we address the issue and attended the discussions in the north, he said. A lack of financial literacy, coupled with a pent-up demand for consumption, and the financial institutions’ aggressive recollection strategy have made matters worse, he said.

“The constant refrain we heard is ‘please do something to stop these people from coming to our homes, our villages’. Women are especially vulnerable and exposed in terms of how they operate. There have been many clear cases of abuse,” Dr. Coomaraswamy said.

In addition to roping in law enforcement agencies and setting up a help desk, the Central Bank would publicise a “customers’ charter” to build awareness in the community. Intermediary institutions such as banks, rural cooperative societies, thrift societies and women’s associations would work on customising credit programmes to local requirements.