Sunday, June 4, 2023

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SMEs in trouble over 36-pct bank interest for 7 percent interest loans

By: Staff Writer

Colombo (LNW): Sri Lanka’s small and medium businesses are in more trouble with the increase of bank interest to 36 percent from over 7 percent loans taken during a time when interest rates were kept down by authorities, than recent tax hikes, SME associations complained.

The Central Bank which has printed money for over seven decades to create forex shortages and balance of payments crises went overboard more than usual in 2020-2022 to suppress rates and try to boost growth or bridge an ‘output gap.’

SME’s were now in a ‘debt trap due to banks charging interest on interest for their loans as the moratorium is not applicable at present, a leading member of the SME association said.

Most of the SMEs have taken loans when the interest rates were at 7 percent without realizing that some of those are also variable interest rates, he added.

And now they can’t manage the debt they are in. That is actually a bigger problem for them than the tax.

The central bank printed money to enforce artificially low interest rates, and directed that loans be given at 7 percent to boost economic output.

Sri Lanka has been grappling with output gap targeting since\the International Monetary Fund gave technical assistance to the central bank to calculate ‘potential output’, giving the perfect opportunity for the country’s trigger-happy economic bureaucrats to print money.

Separately, taxes were also cut to boost potential output on the claim that there was a ‘persistent output gap’ after two currency crises in the wake of flexible inflation targeting cum output gap targeting up to 2019, triggered growth shocks.

Small and Medium Enterprises (SMEs) are now faced with a double blow of the Central Bank’s interest rate hike of around 30-36 per cent imposed by banks in their debt recovery action and the interest on interest levied by them under re -payment plans, SME associations alleged.

SME’s and some hotels were among those badly affected by the bank’s repayment plans with compound interest at a time when the tourism industry is regaining momentum, a top official of Sri Lanka tourism 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 licensed 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.

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