Cabinet nod to write off microfinance debt opens can of worms

The recent Cabinet decision to write off non-consumption loans up to Rs. 100,000 given to women by all registered finance companies in selected districts has sent the microfinance firms reeling.

As per the Micro Finance Association, total loans under Rs. 100, 000 given to women borrowers in the districts mentioned in the Cabinet paper come to Rs. 42 billion but the government has allocated only Rs. 500 million for the reimbursement.

The 12 districts that were affected by the recent drought are Trincomalee, Ampara, Batticaloa, Jaffna, Mullaitivu, Kilinochchi, Vavuniya, Mannar, Kurunegala, Puttalam, Anuradhapura and Polonnaruwa where cultivations were affected consecutively for five seasons.

Finance Minister Mangala Samaraweera has said that women who obtained such loans amounting to Rs. 100,000 and below could apply for a complete write off of the interest and the capital payment.

"How can the government resolve a Rs. 42 billion issue with only Rs. 500 million?" asked one finance company CEO. He accused the government of not making a proper estimate for this exposure before making the decision. "It's a 'Santa Claus' decision," he said implying this was politically motivated.

The Treasury will reimburse the loss incurred by the microfinance companies for having written off the capital component, according to the Cabinet paper. "The government has said that it will reimburse the capital of the finance companies but not the interest. How can it settle Rs. 42 billion outstanding loans by paying only Rs. 500 million? What is the legal right that the government has to demand the lenders to write off interest?" the CEO of the finance company that is into microfinancing, said.

These finance companies have public deposits for which they have to pay interest. They will be in difficulty to pay the interest expenses on deposits when these finance companies have no interest income, a senior manager of a finance company that is into microfinancing said.

He added that the interest write off is only for women and not for men. "Can the government have gender discrimination like that when offering a concession?"

He said that there are other districts in the South which were also affected from the drought.

He added that the method of processing the loan write-off and reimbursements for finance companies is not feasible. It is said that the loan write- off applications will be processed through divisional secretaries who will recommend the write-off on behalf of debtors.

"There is no transparency in this process and the process of reimbursement is impractical," another senior manager of a finance company said.

The Rs. 500 million allocation of government is enough only for 5,000 debtors whereas there are 500,000 debtors qualified for this, he added. "The Treasury has selected only a small percentage of the 500,000 debtors which is not a sound decision."

As per estimates, nearly 14,000 financial institutions in the country directly or indirectly provide microcredit products. However, a majority of these financial institutions are either financial NGOs, not-for-profits or follow a local cooperative structure. For-profit formal sector microfinance institutions are few, and the market is dominated by the five to seven players, amongst them listed firms such as LOLC that serve the majority of the low-income customer segments.