Growing household debt brings fresh headaches to borrowers and financiers
Recent survey shows growing risk in Sri Lanka’s main cultivating regions
Growing household debt is nothing new for both developed and emerging economies, and Central Banks globally have been grappling with the issue from timeto-time and have used interest rates and other macro-prudential measures to arrest the situation when it poses threats to their system’s financial stability.
The situation is no different in Sri Lanka as there was a sharp increase in household debt during the last 3 - years, a development which the Central Bank had to intervene to curtail the rapid increase in personal loans last year.
Each household in Sri Lanka is at least Rs.375,000 in debt by the end of 2016, a figure which has obviously gone up by now - from Rs.250,000 in 2014. Once the Central Bank Governor had to say it was time the bank, “put some sands in to the wheels to slow down a little bit because there is really a very sharp increase in personal loans”. That was the situation nationally but the fresh concerns appears to be propping up in the country’s NCP - a home to a large section of farming community engaged in paddy cultivation - as at least 3/4 of households have become indebted and worse, majority of them have obtained at least two loans on average.
The survey which has been carried out based on 1,500 respondents in the NCP has found that the average household borrowings remain higher than the national average, and Polonnaruwa district carries the highest debt figure.
The average household borrowing in the NCP on average stands at Rs.393, 281, but Polonnaruwa district - home to President Maithripala Sirisena - shows a borrowing of Rs. Rs.466,452 by each household, a significantly higher figure.
In Anuradhapura, the amount is Rs.332, 455 per household.
What is worrisome is that little less than half of these households (44 percent) consider servicing those debts is a heavy burden on them.
The average debt servicing ratio - monthly loan amount to monthly income - is over 30 percent in both districts - Anuradhapura and Polonnaruwa - and around 18 percent of the households are facing severe debt burden as their debt servicing ratio is over 50 percent.
The situation has added fresh burdens to another group i.e. the financial institutions who gave these loans.
According to survey results, 17 percent of those loans in the province are in arrears and 8 percent have been put in to the non-performing category more than double the national average of 3.5 percent.
However 90 percent of the loans given are secured, either with personal or group guarantors and out of the 66 percent of loans that are in arrears for more than 3 - months has plans to be re-paid.
But what is striking is the fact that 23 percent of these loans that are in arrears are planned to be repaid by taking more loans - an indication that people are falling in to a further debt trap.
The data indicates 8 percent of the new loans have been taken to settle previous loans.
The majority farming community in the NCP is borrowing for housing, agriculture and livestock purposes mainly from main stream banks and rural banks and co-operatives, Samurdhi/ Divineguma/ Janashakthi Bank, finance and leasing companies and other micro lenders.
Informal lenders include non-government organisations, money lenders, friends and relatives.
Over 31 percent of the loans have been taken by non-income receivers dominated by females.