June 1, 2013, 12:00 pm



By AhilanKadirgamar


Household debt has been increasing exponentially, and at the heart of the problem are state policies and banking. A glance through the recent annual reports of three large banks, Bank of Ceylon (BOC), Peoples Bank and Commercial Bank, will show a doubling or even a tripling of assets in the three years after the war. A large part of these assets have been in the form of loans provided to firms and households. Such expansion of credit by domestic banks was possible with the support of the Central Bank and borrowings from global financial institutions. The BOC for example boasts having floated two US$ 500 million bonds over the last year and a half, in the process also augmenting the foreign exchange necessary to import goods into the country.


Soon after the war, the Central Bank encouraged loans for resettlement through banks, increasing their reach into the North and East. But this was just the tip of the iceberg. A range of bank loans and debt instruments have contributed to financialisation. Agriculture loans initiated decades ago have continued, and new micro-finance and self-employment schemes have considerably increased in recent years. With increases in global gold prices, pawning, historically the realm of the money-lenders and the mafia, has been embraced by banks. However, the fall in global gold prices has hit the pawning business in recent months; the value of pawned gold is falling relative to the loans. A variety of finance companies and subsidiaries of banks are now involved in leasing. And lease purchasing is also in trouble with increasing numbers of customers defaulting on their monthly payments.


Thus the people, the Government and the banking sector, are all facing the predicament of debt. A few analysts have rightly awakened to the risks of a financial crisis facing the treasury and the banking system. Others are preoccupied with the consequences of bank loans to state enterprises including the CPC and CEB. However, such analyses do not address the process of financialisation affecting the remote parts of the country. Indeed, debt and dispossession are now beginning to devastate rural homes.


Political Economy of Rural Debt


What does this story of financialisation and debt look like from the perspective of a rural household? Here, the North has been subject to the fastest change with the region being rapidly integrated into the market in the years after the war. Indeed, the BOC Annual Report for 2012 claims: "The loans and advances grew by 27% over the previous year. 19% of the growth came from the North East provinces." In order to illustrate the extent of the debt problem, I will describe the political economy of rural debt in a village in Jaffna District. I draw on interviews with residents of this village; the residents and the village will remain anonymous.


This village, like many others in the country, primarily depends on agriculture and has, over the years, benefited from the agriculture loans that came with the Central Bank backed New Comprehensive Rural Credit Scheme in the 1970s. These are loans determined by the Central Bank based on the crop cultivated per acre of land (onion – Rs. 95,000, chilli – Rs. 65,000 etc). And on the ground, a large number of banks work with village farmers’ organisations to determine who should receive such loans, which are to be paid back with a subsidised Central Bank interest after the harvest. Early this year, the harvest failed owing to untimely rains. However, in addition to the loss of agricultural income, villagers are burdened with monthly payments on other loans. In recent years, the proliferation of debt instruments and expansion of rural debt have crippled rural folk from even repaying historically feasible agriculture loans. This is what the BOC Annual Report states:


"The Bank provides a variety of other loan schemes, such as short-term "pawning" loans on personal property, loans for travel expenses, and loans for self-employed individuals and government workers. As of December 31, 2012, pawning loans & other loan schemes accounted for 44% of the retail banking loan portfolio of Bank amounting to LKR 136,962 million. Pawning loans are short-term loans that are fully secured by pledged gold coins and jewellery. Pawning loans are primarily utilised by farmers and individuals in rural areas for agricultural purposes."


Indeed, a number of banks situated in the town neighbouring the village have been providing a variety of self-employment loans, micro-finance schemes, lease purchasing loans and pawning services. Encouraged by massive advertising campaigns and the availability of loose credit, villagers were quickly caught in a cycle of debt, whereby they took more loans for further consumption, or to add to the finances necessary for housing schemes or to pay the interest for other loans and lease purchases. Within a couple years, household debt has reached levels that cannot be repaid. Families are pawning all their gold, their leased vehicles are being seized and some are on the run from the banks and police. Devastated by the crop failure and the banks tightening credit, the greatest worry over their heads is their accumulated debt.


The government and its propagandists boast of a per capita GDP of US$ 2,400. This means little to the rural and urban poor whose annual income is far below this amount. The village community spoke of how most families including landless labourers had debt on the order of Rs. 4 lakhs per household. This may also partly explain the expansion of GDP based on consumption through debt. Indeed, although consumption and production are always possible through expansion of credit, an eventual crisis emerges when profits – the engine of capitalism – fail to materialise.


A major shift with neo-liberalism in recent years is that loans are directly negotiated between the individual and the financial institution. This is unlike the agriculture loans which involves farmers’ organisations. Thus in the village, many individuals have got loans up to Rs. 2 lakhs to start up shops and others have received loans worth a few lakhs to buy three wheelers. The banks ask only for two guarantors, most of whom are also recipients of debt. There has been no analysis about the demand for so many shops and three-wheelers in the same village. Furthermore, many such loans are used for purposes other than employment. That is for consumption, for festivities or to repay other debts. And this approach of targeting individuals with debt without engaging village organisations leaves individuals to suffer on their own when the collectors arrive with the police.


Financialisation and Capitalist Crisis


Such problems in the villages have paralleled a financial bubble created by financial institutions including state-owned and private banks, finance companies and pawning shops. The financial bubble has increased the debt of and debt owed to financial institutions in recent years. There are signs that this debt bubble will burst soon; borrowers are increasingly failing to pay back their debt as a result of consumption and speculation, especially in real estate, rather than investment in production. And in turn, financial firms will not be able to repay their debt to global financiers, creating the possibility of a national financial crisis. The flow and expansion of finance, which helped boost the foreign currency available to the country and created demand for consumption within the country in the form of credit to households and businesses, may now cause a crisis with financial contagion triggered by non-performing loans.


The causes and dynamics of capitalist crisis are varied and must be unearthed from the hidden abode of production, the mystified transactions within the banking system and the muddle of economic relations forming the day to day lives of the people. Analysing capitalist crisis involves understanding the interests and processes underlying capitalist firms, whether they are industrial companies or banks, and their impact on the lives of people including the forms of labour they provide. In recent decades, economic analysis has distanced itself from the impact on people’s economic lives and has been preoccupied with economic growth. In this context, questions such as what kind of crisis and for whom, can bring the focus back on the people. Indeed, the priority should be relief for people caught in this vicious cycle of debt.


Now many would argue that debt is inextricably tied to credit, which is essential for the functioning of the capitalist system. Indeed, credit is the oil that ensures the functioning of the capitalist engine and we cannot wish away credit and debt as long as our economic system is based on capitalist relations. However, there is a thin line between credit and finance, where credit provided for capitalist production is channelled into the realm of financial investments and speculation. Indeed, the financial system is prone to speculation as investors try to make quick profits resulting in financial instability and frequent crises. Furthemore, the capitalist system is also subject to crisis from a range of other processes such as the fall in profits, over production and under consumption. Hence financial regulation alone cannot circumvent capitalist crisis. Nevertheless, understanding the dynamics of any financial crisis requires both understanding the interests of financial institutions and state policies including liberalisation and deregulation. Here, financialisation and debt can quicken the arrival of crisis and also determine the scale of economic devastation.


Rural Economic Alternatives


Sri Lanka may well be on the verge of a major economic crisis. The priority should be to address the future of the rural and urban poor who are likely to suffer the most from such a crisis. The unprecedented scale of debt requires a national discussion about writing off the debt of this marginalised population, who are in fact victims of the greed of financial institutions with the complicity of policy makers. Furthermore, the disastrous policies of financialisation should be reversed immediately to avoid deeper and repetitive crises in the future.


If such a crisis persists and deepens, it will lead to a credit crunch seizing the rural economy and devastating rural life, particularly the lot of landless agricultural labour, fishermen without boats and women heading households. More prudent solutions are necessary given the social deterioration that comes with market expansion and unleashing of market forces. It would require consideration of infusing state finances directly into the rural economy through local level bureaucracy and schemes such as the Rural Employment Guarantee Act in India, which ensures employment by the state for a certain period each year. Furthermore, prices for agricultural and fish production should be controlled so that rural producers are not left to the whims of market forces.


Economic crises with dispossession of large sections of society have devastated many parts of the world. And they were amply revealed after the global economic crisis of 2008 and the attendant crisis of legitimacy for financialisation after decades of neo-liberal hegemony. In this context, analysis of the consequences of financialisation, especially the drowning of rural communities in debt in Sri Lanka, raises questions about responsibility. The Government and its policymakers accelerated on the path of financialisation three years ago even as the world was awakening to its devastating consequences. Who would you hold responsible for banking on debt?

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