Pawning restrictions on banks to hinder working capital for farmers

Economist says idea that pawning loans are for consumption is wrong 


By Chandeepa Wettasinghe
Restricting banks from engaging in pawning activities will push the country’s farmers into more informal and dangerous methods of financing, a leading economist warned.

“Pawning in Sri Lanka is providing working capital for farmers. The idea that pawning loans are for consumption, is wrong. If it is stopped, farmers will be driven from pillar to post. It will drive farmers into the hands of informal money lenders,” former Central Bank Deputy Governor W. A. Wijewardena said.

The 2016 Budget restricted pawning to just 5 percent of a bank’s loan portfolio, stating that international gold price fluctuations weaken banks engaged in large instances of pawning. The proposal is a complete about-face to the populist Interim Budget in January, when the government had provided a 50 percent relief on overdue loan payments for farmers.

“As an agriculture-based nation, we will never forget the valuable contribution made by farmers to foster the economy. We have reliable information that they borrow from many sources, particularly from banks by pawning their valuables, to undertake their agricultural activities,” the Interim Budget had said.

However, the 2016 Budget also proposed that banks should allocate 10 percent of their loan book towards agriculture.

This is possibly due to agriculture representing 10 percent of the country’s gross domestic product—due to an absence of industrialized agriculture and value-added supply chains. However, 30 percent of the country’s labour force is in the agriculture sector.

Further, private sector, or foreign banks which may not have as extensive a branch network in rural areas would be hard pressed to provide an increased amount of agriculture loans.

However, Wijewardene said that farmers are not willing to apply for normal loans.

“For other loans, you have to get guarantees, etc., and it takes time. By the time the loan is approved, the farming season is over. Only people who have been in the field of rural agriculture financing know the value of pawning and know the value of things done by banks like People’s Bank,” he said.

Following the Budget 2016 proposal to restrict banks from pawning activities, international credit rating agency Moody’s, gave a stable outlook for the Sri Lankan banking sector, adding that a major issue of non-performing loans, arising through pawning, has been addressed.

Even though pawning is more risky due to being linked to international gold prices, and loans may default due to inclement weather damaging crops, state banks had engaged in the majority of pawning activities, and therefore, had an unsaid Treasury guarantee.

Further, Moody’s too agreed that the government had a track record of providing systematic support to banks when needed, reducing the risk of the banking sector.

However, Wijewardene opined that most banks had experienced problems due to inadequate experiences and procedures in dealing with pawning.
“Even though there are risks in pawning, these banks hadn’t done proper risk assessments. People’s Bank and National Savings Bank do proper risks assessments,” he said.