The debt moratorium scheme, administered by the Central Bank via commercial banks, was supposed to help struggling enterprises, mainly small and medium businesses, ride the constricting disruptions induced by the pandemic and maintain employment in the economy. It made perfect sense. Small and medium businesses are the backbone of the economy. Collectively, they employ 45% of the working population and contribute more than half of the total GDP. Some of them, no doubt, can go on to be large corporations and multinationals like many others over the years. Therefore, insulating the SME sector from the unfolding economic downturn and currency imbroglio was critical. The government and several public officials repeatedly bandied the debt moratorium scheme as an elixir for businesses hit by the Covid-19 pandemic. They said the moratorium itself would have minimal impact when it expired, and business owners raced to their banks and applied for this life support. It was a godsend, and business owners believed there would be no additional costs; after all, there was a freeze on interest in the moratorium period. However, with 2021 coming to a close, many of them are realizing the true implications.
“I was paying an instalment of Rs500,000 per month for the loan and took the moratorium that was for 18 months,” Ravith Silva, a leading businessman in automobile services, told EconomyNext. When the moratorium ended, the company found itself worse off. “The total amount I should now pay has added up to Rs9 million! Due to compounded interest, an additional Rs5 million has accrued by the end of the moratorium,” he said with bitterness. It is not only compound interest. Many business owners also took out new loans during the moratorium period to pay salaries and re-boot their businesses when the country reopened from time to time. “Without even recognizing it, we just got into deeper debt than any time before,” Silva said. Compounded interest has pushed them deeper into debt, and the additional burden is weighing down their ability to service capital and interest payments.
The Central Bank had announced a raft of extensions on debt moratoriums to protect mainly SMEs from grinding to a halt and causing mass unemploy – ment. However, the interest on interest charge on pre-Covid loans is now threatening to send many businesses over the brink. With loan moratoriums ending next year, unable to bear the inflated interest burden, many face the grim prospect of shuttering.
“Most SMEs grabbed the moratorium option without considering the consequences,” said Dimantha Mathew, Head of Research at First Capital Holding. “Many assumed it was free. But there is nothing free.”
Although the Central Bank directive on the moratorium scheme mentioned the additional interest on the accrued interest payments, many SMEs never understood that they would have to pay interest on interest even on the interest payment frozen for the duration of the moratorium.
The Central Bank has extended the debt moratorium period until the end of December 2021, and distressed borrowers have to pay interest on the period while the extension comes at an interest cost of 1% above the 364- day T-bill yield. When Ajith Nivard Cabraal took office as Central Bank Governor in October 2020, he decided to provide liquid – ity support of Rs15 billion to finance interest accrued on loans in the moratorium. However, as the economy begins a slow recovery from the pandemic, the gradual unwinding of the debt moratoria is inevitable.
“Many SMEs never thought they would have to pay interest on interest in this debt moratorium. It is all because of the way authorities marketed the scheme,” a senior bank official told EconomyNext asking not to be named. “Had the SME borrowers known how much they will have to pay once the moratorium is over, they would never have used the facility.”
EconomyNext reporters reached out to several banks who claimed they had advised borrowers that the moratorium was only for the capital payment and did not cover the monthly interest charged on loans.
“So they (borrowers) were asked to pay the interest for the monthly instalment without paying the capital,” an official at the People’s Bank credit department told EconomyNext. “For the borrowers who did not pay the interest, we will calculate the unpaid interest for the entire moratorium period, charge a separate interest payment on that. It is completely legal and permitted by the Central bank of Sri Lanka as well. The moratorium statements sent monthly to customers clearly state that commercial banks have permission to do that”.