State workers get ‘distress’ loans worth Rs.250,000 from Rs.30,000 earlier
Sri Lanka’s state banks have been directed to immediately facilitate the payment of interest-free distress loans for public sector employees with the amount rising several times to a maximum of Rs. 250,000 per year from an average Rs. 30,000 earlier.
The directive by the Treasury comes a few weeks before the January 8, 2015 presidential poll and deviates from the past practice of the employees absorbing the interest payments and also the loan being paid by the relevant government institutions and corporations using their annual budgetary allocations.
Under the new scheme effective in December 2014, the annual interest of 10 per cent levied for these loans will be borne by the Treasury.
Nearly 1.5 million public servants are entitled to this loan.
The new distress loan scheme formulated by the Treasury few weeks ago would trigger a credit bubble as the state banks are facing financial problems triggered by bad loans, and default on gold backed loans.
According to bankers, the Bank of Ceylon and the People’s Bank are already providing these loans to public servants this month.
The board of directors of the National Savings Bank (NSB), according to a circular no. 842/2014 issued by the NSB General Manager, has given approval at a board meeting on December 11, 2014 to implement a distress loan scheme for police officers with effect from December 15.
Police officers in particular will enjoy this immediate loan which is to be recovered in instalments. Informed Treasury sources said that 10,178 police officers, who were in the waiting list since the first half of the year having applied for this loan, would now be able to draw it immediately.
They said that the approval of the Inspector General of Police (IGP) is needed in each application by a police officer but there is no need of guarantors to sign the loan documents as surety. This is a very risky way in issuing loans from the NSB which spends millions of rupees of people’s savings, a senior banker told the Business Times.
He said that state banks are under political pressure on the eve of presidential elections and the state banking sector will face serious financial problems unless it takes measures to manage the risk of bad loans.
State banks have to absorb the credit loss before it hits the capital and it has to properly manage the lending margin which has been coming down with low interest rate, he added.
He noted that the government issuing directives through the Treasury and the Central Bank to state banks to lend money to gain political objectives at a time of a presidential election will result in bad loans and may have to be bailed out at the people`s expense.