Parate execution: Expiry of suspension and the way forward

Genuine borrowers with justifiable concerns, I repeat, should not have any fear

The Government previously announced the suspension of “parate action” which was in existence will not be extended beyond 31 March 2025. This has now been confirmed by the press release issued by the Ministry of Finance wherein certain financial accommodations have been revealed towards assisting the affected SME sector. Accordingly, the “parate execution” is now effective. 

The decision of the Government in lifting the suspension of parate action is commendable and I consider it as a bold decision. The Central Bank of Sri Lanka has already issued effective guidelines to the commercial banks towards assisting the affected parties in anticipation of the expiry of the suspension. In one of my previous articles on parate action, I have expressed concern of the impediments which will be faced by the financial institutions of any further extension of the suspension. 

In this article I venture into giving further insight of the lifting of the suspension for the benefit of all stakeholders.

What I stated in my previous article:

Reality on the expiry of the suspension

What will happen after 15 December 2024 after the expiry of the suspension, we cannot predict. Some have argued the “parate action” suspension should be in force for a duration of three years while some others have voiced the complete repeal of the “parate action”. Such action or any extension for a long duration of the suspension will have serious repercussion for banks and will greatly affect their liquidity and hamper their ability to lend especially to the MSME sector. Banks will be cautious in lending against collateral if there is no mechanism at their disposal to realise the collateral within a reasonable period towards recovering their exposure which will compel them to go for a mortgage action. Such action is costly apart from the time duration it will take in arriving at the final outcome which of course will arise only after exhausting all legal options both by the banks and affected borrowers.

The authorities may review the suspension after its expiry and allow it to lapse or there is a remote possibility of it being extended. The expectation is the suspension will lapse on 15 December 2024. The reality is, on the expiry of the suspension the banks will be burdened with substantial interest component held in their ‘suspense accounts’ in addition to the principal outstanding. Banks will have to consider giving the borrowers various concessions by way of interest reduction, extension of the repayment/grace period, etc. However the most crucial factor which will be faced by the banks will be their inability to secure the overall liability as the value of collateral held may not be adequate in some cases, to cover and secure the entirety of the portfolio outstanding inclusive of the accumulated interest held in suspense which will be substantial. This will even compel them to consider “haircuts “as enforcing “parate execution” will be a futile exercise. This in my view will be the reality of the situation.

Press release dated 8 April 2025 issued by the Ministry of Finance, Planning and Economic Development, under the caption “Government strengthens efforts to revitalise Small and Medium Enterprises (SMEs)

Quote:

“The extension granted for “Parate execution” expired on March 31, 2025. With the expiration of the “Parate execution”, the Government of Sri Lanka remains steadfast in its commitment to facilitate the revitalisation of SMEs. 

To provide support to this sector, a relief period has been extended until December 31, 2025. For SMEs with borrowings below Rs. 25 million, provided they approached their respective banks on or before March 31, 2025, to discuss and secure relief measures. 

Similarly, SMEs with borrowings between Rs 25 million and Rs. 50 million were granted an extension until September 30, 2025, while those exceeding Rs. 50 million received a deadline extension until June 30, 2025, to access assistance. These benefits are available exclusively to SMEs that initiated discussions with banks before the March 31, 2025, cutoff date.

Since the initiation of the relief program on December 15, 2024, key government agencies, including the Presidential Secretariat, Ministry of Finance, Planning and Economic Development, the Ministry of Industry and Entrepreneurship Development, the Central Bank of Sri Lanka, the Sri Lanka Banks’ Association, and the Department of Development Finance-have continuously monitored the implementation of the relief mechanism on a monthly basis.

It was observed during these monitoring efforts that some SMEs had not approached banks for discussions. In response, the Sri Lanka Banks’ Association launched a multilingual awareness campaign in national newspapers across Sinhala, Tamil, and English followed by social media promotions, encouraging SMEs to avail themselves of the benefits.

It was noted that SMEs engaged with banks successfully secured relief benefits, which included interest reductions and extensions to repayment periods. Even though willful defaulters may not reach the banks, bankers are hopeful that despite the expiry of parate extension many SMEs will come forward within the next few days to secure the benefits offered by the relief mechanism and Banks’ Association informed that their members are willing and ready to assist such SMEs…”

Unquote

Budgetary allocation to assist the MSME sector

It has been reported the Government has allocated Rs. 20,000 million (Rs. 20 billion) as investment and working capital financing. This is inclusive of Rs. 15,000 million for performing and non-defaulting SMEs and Rs. 5,000 million for defaulting SMEs with revival potential.

All affected parties now have the option to negotiate with their banks towards arriving at a satisfactory outcome towards the settlement of their outstanding which are reflecting in NPA. This is not only applicable to the SME sector, even the borrowers of various other sectors unable to meet their commitments could negotiate with their financial institutions to arrive at a satisfactory repayment program which will be the best option available for them.

CBSL intervention

During the COVID pandemic, banks were requested by the CBSL to establish Business Revival Units (BRU) to assist viable business enterprises facing financial difficulties unable to meet their financial commitment to the banks.

The undernoted are some of the remedies reported to have been adopted by the banks to assist the affected businesses:

1) Concessionary rate of interest, (interest reduction),

2) Extension of maturity,

3) Restructuring and rescheduling,

4) Interim financing,

5) Advisory services.

Needless to state the aforesaid are costly to the banks. However it has no other option since instituting legal action or enforcing parate action is always considered as the last option and not the first option. 

It has been revealed nearly 6,000 facilities which were in NPA (Non-Performing Advance) have been provided relief through the Business Revival Units of Commercial Banks. The suspension of parate action compelled the banks to consider alternate options most importantly to assist their affected borrowers and bring them back on track. 

Willful defaulters

Some of the borrowers under the category of “willful” defaulters may have not co-operated with their banks and would have taken advantage of the suspension of parate action even though some may have the capacity to meet their commitments. The aforesaid category of borrowers now face the risk of parate execution which could result in the auctioning of properties mortgaged to the banks. If there are instances of willful default and in such situations any amount of rescheduling, restructuring will be a futile exercise and a drain of valuable resources since all communication channels will not be available, due to the non-responsive attitude of willful defaulters. 

If the parate action is used against genuine borrowers who had encountered difficulties they could always seek the intervention of the courts for an injunction if they feel their justifiable reasons have not been considered by the relevant lending institution. Genuine borrowers committed to cooperate with the banks towards meeting their commitments should have no fear.

Now, that the suspension of parate action has been lifted, it should not be interrupted as the banks will now go for parate action in auctioning the properties of affected parties. This will not be the case since there are some misconception among some of the affected borrowers that the expiry of the suspension will result in the auctioning of their properties mortgaged to the banks. This will not be the case and far from reality. Genuine borrowers with justifiable concerns, I repeat, should not have any fear.

MSME sector is the backbone of the economy

Millions are dependents on the MSME sector. It is the responsibility of all stakeholders to assist this Sector by granting them relief. The priority should be to ensure their business is back on track. Parate action should be the last option and not the first option. If all actions towards the recovery have been fully exhausted and had not resulted in the desired effect, then the Banks have no option other than to go for parate action. 

The high cost of living has affected everyone and diminished the purchasing power of many. This will compel the people, mainly low-income households to venture into alternate avenues towards enhancing their income and this is the time hidden talents will come out. Providing credit facilities under Micro Finance to the poor and underprivileged could be considered as a powerful tool in alleviating poverty and improving the life style of the aforesaid category apart from the economic benefits the country could derive.

Banks have been cautioned to ensure their right to go for parate action is not misused in any way. This should be the last option. It has been emphasised time and again that only in case of any eventuality arising due to willful default or the borrowers’ inability to meet the commitments which have not had the desired effect and once the banks have exhausted all available options and left with no other option they should execute parate action. They have an obligation to safeguard the depositors’ funds.

Banks explore various options at their disposal towards recovery of bad loans such as restructuring, rescheduling, interest concession, assisting a sick project to overcome their difficulties and in certain instances they even give a complete interest waiver. If all the aforesaid options fail ONLY they will go for parate action. However, there may be exceptions which totally depends on the individual banks and most importantly the officers entrusted with such responsibility if they take a rigid stand. Banks and officials entrusted with such responsibility should be cautious in exercising the option of parate execution.

In one of the TV talk shows which I had the opportunity to watch, one of the Panelists engaged in MSME remarked banks ask for various information and at times it is only the Blood report which is pending. This is an unfair allegation and far from the reality. On the contrary Banks infuse blood to ailing ventures by giving them many concessions even going to the extent of giving technical advice towards resurrecting such ailing ventures free of cost. Banks have assisted many successful ventures based on the viability of the projects.

Willful defaulters will not come under this category and auctioning of such properties of willful defaulters will get expedited as there is no other alternative available for the banks. 

Parate action and its implication on movables

In my view it is not feasible to execute parate action against movables due to a variety of reasons as stated below:

• The execution of parate action requires certain procedures to be adopted by the lending institutions prior to such action which could delay such action,
• The borrower once they are notified will be well aware their movables are at risk under parate action, hence they will make every endeavor to reduce their stock level or move the stocks in its entirety to an unknown location which may result in the stock level falling into zero. The COVID pandemic followed by the economic crisis are very good lessons for banks as the movables mortgaged to them became zero overnight. Borrowers were compelled to remove their movables to avoid paying exorbitant rents at a time when there were no people movement due to the lockdown which was a genuine concern.

The reality is the borrowers who have pledged their moveable as collateral do not face the risk of their moveable assets falling under parate action. Banks do not use this option on movables due to the above factors as it is not practical hence they take solace by utilising various other mechanism; submission of monthly stock statements, regular inspection, insurance compliance, etc., to ensure the movable assets mortgaged are intact. 

Secured transaction registry and the MSME sector

Most of the financial institutions are reluctant to create a charge against moveable offered as collaterals due to the aforesaid weakness which exposes them to greater risks. In addition a prospective borrower could pledge the same moveable collateral (excluding motor vehicles) to multiple financial institutions. Once the Secured Transaction Registry is fully operational such risks could be eliminated and creating charges on moveable to multiple institutions may not arise. This will assist the banks and most importantly the MSME sector to have easy access for facilities by offering their moveable as collateral since many under the aforesaid category are unable to offer immovable property as collateral. The responsibility to ensure the availability of moveable collateral will be vested with the financial institutions which has a greater responsibility.

Keep the powerful weapon under lock and key

All officials in the financial institutions especially in Remedial Management have an important responsibility to ensure their existing NPA is managed effectively by having fruitful negotiations with the affected parties by adopting various options. Executing parate action should always be the last option and not the first option. Any misuse or abuse of this powerful weapon may result in the banks being deprived in using this weapon; such a course of action will have serious consequences for all stakeholders. Keep this weapon under lock and key and use it only if a necessity arises.

Banks and officials entrusted with remedial management should be cautious and use the option of parate execution ONLY if all their attempts towards recovery of their NPA have not had the desired effect.

(The writer is the author of “Pinnacle of five decades of banking – A journey beyond” and “Lending against collateral – What you should know”.)