Oct 25, 2008 (LBO) – In Sri Lanka’s deep south, small tea farmers are feeling the pinch from a collapsing commodity bubble, as a worldwide meldown of financial and asset prices gathers momentum on a long expected deflationary collapse.
The brokers are running a sophisticated finance business, managing the risk of independent factories and effectively giving a credit guarantee to the banks.
“Banks prefer to lend to brokers, because brokers know how to value stocks and have control over the money,” one broker who declined to be named said.
There is also an informal, if not highly effective credit guarantee system. If a factory defaults on a broker, no other broker will touch the factory.
But the system has now been hit by a crunch. Millions of rupees are now tied up in unsold stocks.
Brokers are unable to extend new credit as limits with banks are full, or because they are simply unwilling to over-extend themselves having experienced such downturns before.
The industry has asked for a six billion rupees credit guarantee from the government and a six month moratorium on loan repayments as they have on earlier downturns.
The factories buy newly plucked tea green leaf from tea smallholders, o