SMEs drown in moratorium repayment plans with compound interest
COVID-19 and economic crisis-affected small and medium enterprises (SMEs) are now faced with a double shock of the Central Bank’s interest rate hike of around 30 per cent imposed by banks in their debt recovery action and the interest on interest levied by them under re -payment plans, SME associations complained.
SME’s and some hotels were among those badly hit by the so-called repayment plans with compound interest at time when the tourism industry is regaining momentum, a top official pointed out.
The Central Bank has implemented several schemes of debt moratoria and concessions to assist the affected borrowers specially the SMEs.
The last phase of the moratoria granted to affected borrowers of the banking sector ended on 30.06.2022.
However the Central Bank has recently issued guidelines to provide concessions to all licenced banks to grant necessary concessions for SME creditors and individuals by considering their appeals on a case-by-case basis, consequent to an objective assessment, on the future repayment capacity/viability of the business.
But banks and financial institutions have already activated all types of recovery actions, including parate execution and forced repossession of leased assets, they pointed out.
More than 300,000 small and medium scale businesses dependent on the banking system have either been closed already or are facing closure, according to the state’s Economic Stabilisation Subcommittee.
It is not only compound interest, but businessmen also took loans during the moratorium period to pay off their employees’ salary and resurrect their businesses, Founder President of the Confederation of Micro, Small, and Medium Industries (COSMI) Nawaz Rajabdeen told the Business Times.
Without even recognising the dire consequences, 70 per cent of around 1.3 million SMEs with 2.2 million employees contributing to more than 50 per cent of the country’s GDP are now in more debt than any time before, he said.
Most SMEs did not receive the benefits of moratoriums and financial aid extended by bilateral agencies, he said adding that the banks benefitted the most, while those small and medium enterprises remained high and dry.
However the banks have informed the creditors the moratorium was only for the capital payment, not for the total monthly interest, the General Manager of a leading bank said.
They have been asked to pay the interest for the monthly installment without paying the capital, he added.
For the SME creditors who did not pay the interest, the interest for the entire moratorium period has been calculated and they had to pay a separate interest for that unsettled interest payment, he explained adding that this compound interest was referred by creditors as interest on interest.
President of the National Trade Protection Council (NTPC) Mahendra Perera told the Business Times that this was very unfair practice and if the banks had informed the SME borrowers on procedures of compound interest payment once the moratorium is over, they would have been never used the facility.
He emphasised that that SME’s were used to pay interest rates for their borrowings from banks and financial institutions ranging from 14-18-20 per cent per annum some time back and this has increased to 30 per cent at present which was unbearable for them.
Many such enterprises never thought they will have to pay interest on interest in this debt moratorium because it was not publicised by the Central Bank, he alleged.
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