Summary

  • The G20 meet this week have one their agenda to make a request to the private money lenders to suspend debt repayments till the situation improves on the pandemic and the unemployment front.
  • The pandemic and the increase in unemployment levels across the world has led to more and more people falling victims to loan sharks.
  • The situation has been deteriorating over the past few months, even after the World Bank and the IMF provided emergency funds. 

The deteriorating economic situation due to the outbreak of the Covid-19, widespread unemployment, the cash crunch has become caustic in most countries. People in the poorer regions of the world are falling into debt traps, which can have disastrous consequences for countries in the future.

The G20 countries, which are set to meet in Riyadh in Saudi Arabia in the third week of November, are planning to take up this issue as an important agenda and is set to urge private money lenders to suspend debt repayments at least for some time.

It is to be noted that while on a government-to-government level, debt repayment rescheduling has been in effect in many parts of the developing world but their benefits have not trickled down to the lowest levels, which is why G20 has decided to discuss this issue.

The World Bank and IMF loans, which were given to underdeveloped countries in the initial months of the pandemic, have now started to lose their efficacy as the pandemic has now extended longer than most had expected.

Worsening unemployment situation

The Covid-19 has hit all the sections of the society, hardest being the weakest section. While the rich people had adequate savings and contingency plans to deal with it, poor people, daily wagers had nowhere to go but borrow money from private money lenders at exorbitantly high rates of interest.

The problem was even more accentuated in the developing and underdeveloped countries where the government could not extend support schemes like furloughing or unemployment benefit schemes. In these countries, the falling employment levels and cash shortage continue to drag people back into poverty, which has torn down any economic development in these countries in the recent past.

With an increased demand for credit with private money lenders, coupled with a very loosely regulated state of this market, the present situation has worsened in most countries. The local governments are also finding it difficult to deal with this problem and are instead making efforts to rebuild their economies. The only option left thus is for them to request private moneylenders to defer debt repayments to bring immediate relief to their debtors.

Loan sharks

Loan Sharks are small money lenders who are not regulated by a country’s banking system. These lenders lend money at a local level, and the interest rates they charge have no relation to the country’s central bank interest rates. The money lenders do not make any stringent checks before lending out money which is the primary reason most people fall into their trap. The interest rates charged by these moneylenders can be exorbitantly high and could compound monthly.

Loan sharks have been notorious for using unfair and more often illegal means to recover money from their debtors. In many smaller and underdeveloped countries, this has led to a situation where the lives of people have been reduced to that of bonded labour.

Though governments of many countries have time and again tried to bring laws to check the behaviours of these money lenders, the practice continues abated mostly in south Asia and Africa.

Debt repayments

The uncontrolled regulation of the private money lending market is not the only problem that is causing menace. Institutional lenders and their procedures are most of the times so cumbersome and lengthy that people prefer going to the local lenders. Moreover, very small and very short-term money lending is not a business segment that most institutional and established lenders are interested in as it does not provide them with enough margins.

However, the pandemic played a crucial role in uncertainty which led to this problem growing phenomenally over the past few months. The meteoric rise in demand for small credit has led many of these money lenders to become greedy and increase their already exorbitant interest rates. In the absence of adequate government support, people are forced to seek help from these lenders and face huge debts which will be very difficult for them to repay.

Conclusion

Advanced countries have been able to extend various support measures which have helped their populations tide through the difficult times in the initial months of the pandemic hit. However, countries with weak financial situations and weaker regulations have not been able to make adequate arrangements and are at a greater threat of indebtedness. Under such circumstances, just a request from a multilateral organization like G20 will not be sufficient, but adequate monetary support would have to be provided by the World Bank and IMF.

 

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