CBSL says interest waiver on loans and leases could undermine stability of fiscal system

‘Moratorium related to payment of installments on capital borrowed ‘

by Suresh Perera

Notwithstanding protests over charging interest on repayment of loans and leases based on the one-year Covid-19 related moratorium, a senior Central Bank of Sri Lanka (CBSL) official said there’s no question of reversing the decision as neither banks nor other financial institutions can afford to absorb the negative impact of a waiver on interest on the capital, particularly at a time of an economic crunch.

“With the country facing a financial crisis largely due to the fallout of the pandemic, the government cannot be expected to offer further relief by reducing the interest component on the due repayments”, he stressed.

In terms of a Central Bank directive, all banks have been authorized to levy seven percent interest per annum on the total outstanding of loans and leases up to March 31, 2021, while finance companies can charge 11.5 percent.

Under the moratorium, credit facilities and leasing arrangements secured by key economic sectors hit by the outbreak of coronavirus were initially given a six-month grace period on repayments with effect from April 1, 2020. It was later extended by another six months as the worsening pandemic situation continued to cripple economic activity.

“The grace period related to payment of installments on the capital borrowed to fund loan and leasing facilities. Where the interest payments were concerned, a rate was agreed upon after a discussion with the stakeholders”, the official noted.

How can financial institutions, particularly finance companies, run their day-to-day operations and honor their commitments towards investors if there’s no return on borrowings?, he queried.

This can be done only if there is a situation where they don’t have to pay interest on investor holdings, he pointed out. “If they were to offer a return to one segment, while being denied their due revenue from the other, mounting losses are bound to push them towards insolvency”.

Financial institutions have to also absorb the cost of funds, as for example, a customer who has to repay a loan installment of Rs.10 million per month, holds back a repayment of Rs. 120 million during the one-year moratorium, the official explained.

With 50% of their funds disbursed as loans, the cash flow of these institutions have taken a big hit”, he said.

Under the circumstances, it is reasonable that at least the due interest on the borrowings are settled on time to ensure the survival of the financial sector in these difficult times, he said.

The tourism industry is still tottering. In this scenario, their loan installments are unlikely to roll in even after the grace period ends on March 31, 2021, he remarked.

He said that in the event of a natural disaster, the government can be expected to disburse funds to provide relief. However, a bail out on the interest payable by borrowers is too much to demand at a time of an economic downturn.

“We have received a plethora of complaints on this matter, and certainly understand that there are difficulties, but a perfect solution to please everybody is difficult to find”.

“Levying 11.5 percent interest on the total capital outstanding is unacceptable”, protested D. Nalaka Lankapurage, secretary of the All Ceylon Vehicle Leasing and Installment Payers Collective (ACVLIPC).

“We don’t mind paying reasonable interest on the monthly premium, but when it comes to the total capital outstanding, the commitment is too much to bear as business is slack across the board”, he complained.

With interest calculated on the basis of the total capital outstanding, even small-time borrowers are asked to pay Rs. 50,000 to Rs. 60,000 per month, which is next to impossible with business at a low ebb, he noted.

“Financial institutions even decline to give us a breakdown of the payments. When they demand, we are expected to duly pocket out with no questions asked”, Lankapurage asserted.

Many of these institutions have made billions of rupees in profits over the years. Can’t they offer us a degree of relief even at a time the pandemic has ripped apart life and livelihoods in the country?, he asked.

“We admit that financial establishments cannot give loans gratis. All what we are asking for is a reasonable rate of interest on the monthly premium; not on the total capital outstanding”, he continued.

Lankapurage said that those who have leased vehicles have to also shoulder the added burden of paying insurance and meeting running costs.

Members of the ACVLIPC staged a protest opposite the Presidential Secretariat recently against what they termed a “rip-off by banks and other financial institutions”.

A memorandum addressed to the President, which set out their grievances, was handed over to a Presidential Secretariat official during the agitation.