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Is microfinance model failing? Govt. absorbs more than Rs 1.25 b in unpaid loans
The Government has absorbed more than Rs 1.25 billion worth of unpaid microfinance debt incurred by 45,139 women in the North, East and North Central Provinces. At the same time, lending companies have written-off Rs 141.41 million worth of interest payments on these loans, the Finance Ministry’s 2018 annual report states.
Last year, the Government introduced a scheme to write off non-consumption loans up to Rs 100,000 given to women by all registered finance companies in the drought-affected districts of Trincomalee, Ampara, Batticaloa, Jaffna, Mullaitivu, Kilinochchi, Vavuniya, Mannar, Kurunegala, Puttalam, Anuradhapura and Polonnaruwa.
Thirty-seven microfinance institutions and finance companies submitted their claims under this proposal and both capital and interest components of each of the loans were written off. The Treasury has committed to reimburse the written-off capital to the companies within three years in equal, semi-annual instalments. The loss incurred by writing off the interest on the loans will be borne by the lenders.
The figures show even established non-governmental organisations that have traditionally offered microcredit as a development tool have availed themselves of what one economist called “the bailout”. He said this indicated that the microfinance model had failed and that companies, too, were starting to abandon the business.
But the Finance Ministry annual report states that microfinance sector is the most important model for access to financing in rural areas. The industry has shown “incredible growth” over the past few years and “has been an effective instrument for reduction of poverty in Sri Lankan rural community due to its contribution to the growth of rural sector”.
The highest number of 10,999 loans was recorded in the Kurunegala District, the annual report says. This is 24 percent of the total loans written off. The number of women benefiting under the debt relief programme are considerably high in the Anuradhapura, Puttalam and Ampara districts compared with other areas.
The outstanding loan portfolio of major microfinance institutions stood at Rs 282 billion, the report says. Of this, 47 percent or Rs 135 billion is held by Regional Development Bank alone. A further 26 percent or Rs 73 billion is held by the Department of Cooperative Development and 24 percent or Rs 68 billion by the Department of Divineguma.
In comparison, savings reached just Rs 381 billion by the end of last year. Of this, Rs 270 billion was placed in long-term and short-term investments.
Last year, the banks disbursed Rs 76 billion in loans to the microfinance sector. Of this, Rs 47 billion was given by the Sanasa Bank while the Hatton National Bank and the Bank of Ceylon disbursed Rs 13 billion and Rs 6 billion respectively. Compared to the State banks, the Commercial Bank and Seylan were the private banks with significant microfinance portfolios.
Microfinance entities provide high interest, small loans to women through a door-to-door strategy. They are given without collateral and other conditions. The report reveals that the loans are then used for “high-risk small agriculture activities, unfeasible economic activities and sometimes for consumption purposes”.