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Govt. launches programme to rescue women from microfinance debt traps
View(s):The government has started writing off loans taken by some 45,000 women who are caught in ‘debt traps’ after borrowing money from microfinance credit companies operating in conflict and drought-affected areas in three provinces.
With the government allocation of Rs 1.4 billion as debt relief, thousands of women-headed households in the former war-torn areas and those who were affected badly in the worst ever drought situation the country experienced in the Northern, Eastern and North-Central provinces were selected as beneficiaries as they had become the victims of loan shark companies.
In the North this week, Finance Minister Mangala Samaraweera began the government debt relief programme by handing over certificates to 300 women beneficiaries. Accordingly, loans, which were less than Rs 100,000 and outstanding for more than three months, were selected to be written off.
Stressing that unregulated loan sharks, lenders and the worst-drought condition played a major role in creating this debt trap, Minister Samaraweera said many households, particularly women headed ones, were forced to seek loans simply to survive. “I am sad to note that even some reputed companies in the financial services industry have been indulging in such practices,”he said.
In a joint study, Finance Ministry and Central Bank officials found that the worst offenders targeted vulnerable households and charged them exorbitant interest rates, sometimes as high as 200 percent.
The study also revealed that unethical practices — such as charging excessive interest rates and using coercion techniques — had brought about severe economic hardships and psychological distress to women borrowers.
Since debt write-off is a short-term solution to a much larger problem, Minister Samaraweera said that the ministry would introduce legislation to govern the microfinance industry. The draft Microfinance Act would ensure that lenders acted with responsibly and clients had access to better credit facilities, he said, adding that the microfinance industry would be brought under the purview of the Central Bank.
“As a first step, the government has passed regulation to cap interest rates at 35 percent a year, which is still more than the market rates, and would be sufficient to cover the inherent risk premium and administrative costs,” the Minister said, while noting that microfinance could have been an effective mechanism to bring people out of poverty if only the industry had been properly regulated.
The debt trap caused by shark lending institutes and unregistered microfinance companies has resulted in many social issues such as a high number of suicides and incidents of sexual bribes.
According to women-led civil society organisations in the East, more than sixty suicides have been reported in the recent past. Most of them were directly or indirectly related to the debt issue, economic hardships or psychological stress.