Parate execution: The last option and ‘not’ the first option

Any move to repeal parate action will have serious consequences for the banks in managing and recovering their non performing advances

The moment a “Parate Action” notice is published in the newspapers, the borrower loses the reputation and gets exposed as a defaulter; hence this is a very powerful weapon used by the banks towards recovery of their advances. 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. They have to safeguard the interest of their depositors which is paramount

pThere have been several articles and views expressed by various influential personalities with regard to the execution of Parate Action and the impediments faced by borrowers mainly those involved in MSME (Micro, Small and Medium Enterprises) inclusive of many ‘start-ups’ when such an action is enforced. It has been reported several MSMEs and connected stakeholders have appealed to the authorities to consider the suspension of ‘parate action’ by banks. 

It has been revealed after the expiry of the Debt Moratorium granted by the Central Bank of Sri Lanka and the lifting of the suspension enforced on parate action many of the banks have utilised the suspension to auction the properties mortgaged to them and it has been further revealed a total of 1,183 cases towards parate action were reported to have been gazetted during the current year. This may have prompted the relevant parties to voice their concern in preventing any further course of action by the banks.

The Sri Lanka Banks Association (SLBA) which is the apex body representing all licensed banks in the country, in a statement issued have highlighted many of the impediments faced by the banks in recovering their exposure especially in relation to wilful defaulters and have expressed their concern.

The concerns expressed by all stakeholders are justifiable in the context of the current economic crisis which has affected every citizen of the country inclusive of the banks and financial institutions which have a major responsibility as they have to safeguard the funds of their depositors and any mishandling will have serious consequences.

Being a personality with considerable expertise in the field of Collateral Management and considering the current predicament faced by all connected parties I am prompted to share some of my thoughts for the greater interest of all. Before I proceed I should state all concerns expressed by various personalities are valuable points which should be respected and need a deeper analysis, hence I venture in sharing my thoughts and giving an insight for the benefits of all. 

Collateral management

Needless to say the management of collateral is an important component in the management of credit. The banks should have effective control over their collateral to overcome any eventuality. The COVID pandemic resulted in the regulator granting moratorium covering the facilities which resulted in the suspension of parate action by banks in addition to the suspension imposed in seizing of vehicles by banks and financial institutions. When there is no economic activities due to the frequent lockdowns which prevailed during the crisis the borrowers cannot be expected to meet their commitment on the due date. This resulted in the intervention of the Regulators in granting a moratorium which resulted in the suspension of the recovery, parate action, seizing of vehicles, etc. 

After the expiry of the moratorium and with the fuel crisis, the business community appealed for an extension of the moratorium. However, the regulator has not extended instead they have advised the banks to individually asses each case and consider granting any relief if there is a necessity of such an extension. Banks are required to individually examine the cases and if they are not satisfied then they will have to realise the collateral in their possession to realise the exposure as the last option.

Definition of Parate Action

‘Parate Execution’ is a term defaulting customers of a bank fear most. “Parate” is a Dutch term which means immediate and “Parate Execution” basically means a debt recovery process outside the normal law hence needless to say this is a powerful weapon possessed by banks.

The main objective in extending this power to all licensed commercial banks was to provide a greater level of security and flexibility to the banking system and to deter wilful defaulters, towards expediting the recovery of the outstanding. Banks could go for ‘parate action’ only if all their action towards the recovery of the facility has not had the desired effect and all available options have been fully exhausted.

I remember attending a seminar in 1990 at the time of the introduction of the Debt Recovery Act. Several leading personalities of the banking fraternity and Government officials attended this seminar. The salient features of the Act were explained to all bankers present. It was emphasised this Act was brought in to safeguard the banking industry which is considered as one of the successful industry in Sri Lanka. 

Under this Act all banks inclusive of private banks have the right to auction and sell the property mortgaged to them without the need of instituting any legal action by seeking the intervention of the courts, provided the outstanding of the borrower is above Rs. 5 million (previously at the time of the enactment of the Act it was limited to Rs. 150,000).

Enhanced limit

The insertion of the new section 5A of the Recovery of Loans by Banks (Special Provisions) (Amendment) Act No. 4 of 1990 now allows banks to resort to parate execution only if the principal sum borrowed is over Rs. 5 million, hence banks have already lost a powerful weapon and any further enhancement or repeal will have serious consequence for the banking industry. The floor of Rs. 5 million, imposed excludes any interest accrued or penalties imposed thereon. Accordingly, up to Rs. 5 million all cases are mandated to follow the normal legal process.

When the Debt Recovery (Special Provisions) Act, No: 2 of 1990 was introduced in 1990, the amount stipulated was Rs. 150,000 (Rupees one hundred and fifty thousand only). Most of the banks utilised this option towards the recovery of their bad loans. Representations were made to the then Government in 2011 to enhance the stipulated amount which resulted in the increase of the original amount to Rs. 5 million from Rs. 150,000 which is a massive leap. This resulted in the weakening of the weapon possessed by banks towards the recovery of their Non-performing-advances (NPA). 

Banks are cautious in their lending even against immovable property for advances below Rs. 5 million since they will not be able to exercise the right to auction under the amended act, notwithstanding the tangible nature of the security. However, it should be stated they assist such ventures in the absence of any security by accommodating their requests strictly on effective follow-up and the viability of the projects. There were many successful ventures which are household names in Sri Lanka which has even captured the international market, created employment opportunities to many apart from the valuable foreign exchange derived. Thanks to the assistance extended by banks.

Operation of Parate Action

The moment a “Parate Action” notice is published in the newspapers, the borrower loses the reputation and gets exposed as a defaulter; hence this is a very powerful weapon used by the banks towards recovery of their advances. 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. They have to safeguard the interest of their depositors which is paramount. However, if there are instances of wilful 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 wilful defaulters. I state this based on my own experience.

The last option by banks

 Banks were cautioned to ensure their right to go for parate action is not misused in any way. This should be the last option as in case of other legal action. It was emphasised that only in case of any eventuality arising due to wilful 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 as they have an obligation to safeguard the depositors’ funds. It should be emphasised from the point of a banker, the enhanced limit of Rs. 5 million from the original stipulation of Rs. 150,000 has deprived the banks of a very powerful tool which hitherto have been used by the banks in recovering their exposure. It should be remembered just because the ‘parate action’ option is available banks do not and should not use it; the banks need to give relief to genuine grievances of the borrowers and grant them adequate time and grace period before exploring ‘parate action’ option. I have been consistently stressing this point at all my lectures on Collateral Management.

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 and such eventualities are rare. Wilful defaulters will not come under this category and auction of such properties of wilful defaulters gets expedited as there is no other alternative. There have been instances where certain genuine borrowers who could not get any relief from their banks were able to obtain court injunction to prevent such auction under parate action hence banks are cautious in exercising this option.

Feasibility of ‘parate action’ against movables

The insertion of the new section 5A of the Recovery of Loans by Banks (Special Provisions) (Amendment) Act No. 4 of 1990 also now allows banks to resort to parate action to cover movable assets as well in addition to the immovables. However, 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 endeavour 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 bankers as the movables which were mortgaged to them became zero overnight. Borrowers removed their stocks to avoid paying exorbitant rents at a time there were no people movement, lockdown, etc., which was a genuine concern.

Banks are reluctant and do not use this option on movables due to the above factors as it is not practical hence they take complete solace by utilising various other mechanism like, submission of monthly stock statements, regular inspection, insurance compliance, etc., to ensure the movable assets mortgaged are intact.

Parate action should be the last option and not the first option. 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. However, if it is a wilful borrower, the banks are left with no other option other than to enforce parate action. Genuine borrowers committed to cooperate with the banks towards meeting their commitments should have no fear.

Conclusion

Any move to repeal parate action will have serious consequences for the banks in managing and recovering their non performing advances. If such an effective option is not available at the disposal of the banks, it will result in the suspension of the interest income on NPA for an indefinite period until the completion of the legal process. In addition, the banks will have to expend substantial expenditure on their resources in managing the NPA, towards litigation process, etc., as managing an NPA is a highly costly exercise.

Banks will be cautious in their lending especially to the MSME sector if this powerful weapon possessed by them is taken away and it may result in the tightening of the existing credit policies of the banks which could face liquidity crisis. The cost of borrowing will be excessive due to high rate of interest and will deprive genuine borrows in availing credit facilities at affordable rate. In conclusion, the concerns expressed by all stakeholders should be taken into consideration to determine the necessity of suspending or repealing the existing regulation.

Banks are now careful and use the option of parate execution ‘only’ if all their attempts towards the recovery have failed.