MSMEs get lifeline as Cabinet approves freeze of parate action till 15 December

The struggling Micro, Small and Medium Enterprises (MSMEs) and individuals are to get a lifeline with the Cabinet of Ministers yesterday at its meeting agreeing to temporarily suspend highly contentious parate action till 15 December, 2024.

The Cabinet meeting chaired by President Ranil Wickremesinghe approved a proposal to this effect submitted by Justice Minister Dr. Wijeyadasa Rajapakshe PC along with Industries and Health Minister Dr. Ramesh Pathirana. The duo first listened to aggrieved MSMEs at an anti-parate lobby forum at the BMICH in December last year.

The Daily FT last week quoted analysts as saying that the temporary suspension will be till the end of this year. (See https://www.ft.lk/top-story/Parate-action-to-be-partially-suspended/26-758771)MSMEs for months have been agitating for proper debt relief after the Central Bank in 2023 lifted a four-year suspension of parate action due to multiple crises starting from the Easter Sunday attacks, COVID-19 followed by political and economic crisis.

At a Daily FT co-hosted webinar (https://www.ft.lk/top-story/Debate-over-parate-action-heats-up/26-758646), MSME activists demanded breathing space via immediate suspension of parate action temporarily and offer relief via debt restructuring, reduction in interest, write offs, longer repayment period.

The Cabinet decision to temporarily halt parate action also comes despite warning by the Central Bank Governor Dr. Nandalal Weerasinghe that such a move will not help MSMEs and would be at the cost of banking system stability.

However the Cabinet move follows widespread demand for urgent “breathing space” for MSMEs and several political leaders backing the same.

Daily FT learns that the Government opted for temporary relief whilst the Asian Development Bank and other multilateral donor agencies are working to establish a credit guarantee fund.

To qualify for the temporary parate suspension, the MSMEs must show a proper restructuring plan for debt and operations. Such a restructuring plan must show cash generation 20% over all expenses and debt servicing; an internal rate of return 15 to 25% and a feasibility of the restructuring plan must be documented and verified by an independent finance professional. A market study is also essential to viability.

At the FT-webinar, CBSL Governor said MSMEs had been supported extensively since 2019. He revealed that the value of loans which got relief/restructured was Rs. 5.8 trillion. He said in 2023 the number of actions were only 557 involving loans worth Rs. 38 billion which was 0.4% of total credit and 2.7% of impaired loans.

With banks asked to set up business revival units, he said over 2,500 enterprises with Rs. 85 billion in debt had been supported via this initiative.

Anti-parate activists who have now formed into a grouping called MSME Chamber of Sri Lanka claim that the number of parate actions was much higher and thousands of MSMEs have collapsed leading to job losses.

“Parate is used only as a last resort to deal with wilful defaulters and unviable borrowers. Parate is the legal means for banks to recover overdue loans and prevent mismanagement of bank financing and diversion of business funds to other purposes loan repayment,” charged Dr. Weerasinghe.

He also went to the extent that the existing old parate law must be strengthened further to reduce time to take over assets pledged and divest same or enterprises to a new owner to ensure business continuity and minimise job losses. “Borrowers can go bankrupt but not the enterprises,” the CBSL Governor opined.