Tuesday, 25 October 2011

What happens with loan repayments when a natural disaster occurs?

© CARE/Ami Vitale

I am currently in Cambodia where months of heavy rainfall have resulted in the worst flooding in a decade. This has left at least 247 people dead and damaged more than 390,000 hectares of agricultural land, including more than 10% of the country’s rice harvest. The floods have affected 1.2 million people across the country, but particularly those living along the Mekong River. Around 34,000 households have been evacuated to higher ground, and many roads, schools and homes have suffered damage.

Since early 2011 lendwithcare has been partnering with a local microfinance organisation, Cambodia Community Savings Federation (CCSF), which provides loans and other financial services to microentrepreneurs in the north-western provinces of Battambang and Banteay Meanchey, near the border with Thailand. While not as badly affected as other parts of Cambodia, many villages in the province remain isolated and under water. In some parts, cattle have been put in pens on small man made islands of earth, surrounded by flood waters. Many farmers have lost their entire rice crop as their farms have turned into lakes. In these situations, what happens to loan repayments?

Since many entrepreneurs have more than one source of income, they may in fact be able to continue making loan repayments from income generated from activities not affected by the flooding. For example, Saret Bou took out a loan of about £360 from the Ek Phnom Credit Union a few months ago. His loan was re-financed through lendwithcare (you can see more details at http://www.lendwithcare.org/entrepreneurs/index/703). He used the loan to prepare his land and buy fertiliser in order to ensure a good rice yield.

However, one hectare of his land has remained under water for the last month and he has lost any rice he planted there. Despite this, he hopes that the two hectares that escaped the flooding will provide him with a reasonable yield when he finally harvests the rice in January. However, Saret is confident that he will continue to be able to meet his monthly loan repayments over the next few months because he and his wife also produce ‘Sambok Nem’. This is a thin type of pastry that can be stuffed with meat, fish or other food and then cooked. They produce and sell Sambok Nem on a daily basis and it provides them with a regular income.

Other entrepreneurs though are not as fortunate as Saret Bou, and will be unable to make full and on time repayments. Indeed it would be unfair on borrowers for lenders to insist. In these cases, CCSF and the local credit unions are planning to re-schedule repayments without penalty charges for late repayments and without, importantly, imposing an unreasonable level of debt on borrowers. Usually, this means that entrepreneurs will make much smaller than expected repayments, or suspend repayments altogether for some months while extending the length of the loan. Nobody is quite sure what needs to be done and what the scale of default might be though until the floodwaters subside and they have had the opportunity to visit entrepreneurs and assess the extent of the damage.

Thon Meas, Operations Manager for CCSF, remarked “This level of flooding is unprecedented during the many years that I have worked for CCSF. It is a worrying time for the organisation, but we are determined to continue supporting the credit unions and ensure that our borrowers receive the support they need to re-establish their livelihoods”. In fact, when they have lost their entire rice crop and have few other sources of income, farmers actually need credit more than ever; in order to buy seeds, fertiliser and even in the short-term food to survive. In situations where borrowers are unable to repay their existing loans it is not uncommon therefore for them to be given new loans so that they can buy the necessary inputs and begin producing again as quickly as possible.

By Ajaz Ahmed Khan, microfinance organiser at lendwithcare.org


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