Parate action, banks and MSMEs: Need for pragmatic and sustainable way forward

State Minister of Finance Ranjith Siyambalapitiya’s remark last week that steps would be taken to suspend the powers of the parate execution law for a specified period caused a sense of alarm and panic within the banking sector. Subsequently, last Monday, the Cabinet approved the freezing of the parate action in respect of MSMEs till 15 December subject to certain conditions. 

Parate execution is a practical foreclosure procedural law, which allows licensed commercial banks the sale of mortgaged properties without going through the formal court proceedings. Initially, parate rights were only available to State banks but through the Recovery of Loans by Banks (Special Provisions) Act No. 4 of 1990, the rights were extended to the private banks as well.

Last November, the Supreme Court in a landmark judgement held that the properties mortgaged to a bank not only by an actual borrower but also by a third-party for the loan granted to the actual borrower can be sold at an auction to recover the unpaid loan and interests. This decision strengthened the parate execution powers of banks because prior to the aforesaid judgement, banks could only sell the pledged properties of actual borrowers as part of recovery actions. Since the ground-breaking Supreme Court judgement, intense lobbying was carried out for the suspension of the parate execution law by a selected group of business owners and such efforts received wide coverage from the media. Late last year, an Anti-parate Activists Business Forum was held at the BMICH with the participation of ministers like Wijeyadasa Rajapakshe and Dr. Ramesh Pathirana, during which a resolution was adopted for the abolition of the Parate Law.

Many MSMEs complain that their businesses have gone through an extended period of agony due to the Easter Sunday attack, COVID pandemic as well as the political/economic crisis post-2022. Particularly, there is a substantial non-performing debt with regard to construction and hotel sectors owing to the prolonged adversities. In fact, leisure, transport, and arts and entertainment are the most affected sectors with non-performing loans in the range of 20% to 30%. Those who favour the suspension of the foreclosure law justify it on the grounds of the businesses needing an extensive breathing space to recover from the worst economic crisis in the history of the country. Some have suggested the establishment of an Asset Management Company to take off the non-performing loans from the balance sheets of banks in order to increase their capacity to extend financing facilities to creditworthy businesses and thereby accelerate the efforts towards economic recovery. A more competent business revival unit in banks is another suggestion. 

Nevertheless, a few weeks ago, during a webinar co-hosted by this newspaper with several professional associations and chambers, the Central Bank Chief Nandalal Weerasinghe asserted that the existing Parate Law needs to be further strengthened to reduce the time taken to take over the pledged assets. He further pointed out that in 2023, the number of parate actions was only associated with 557 loans worth Rs. 38 billion, accounting for just 0.4% of the total credit and 2.7% of impaired loans.

Meanwhile, the Sri Lanka Banks Association expressed their disapproval of the temporary suspension of the foreclosure law while stating such a move would weaken the ability of banks to perform their role in supporting the economic sectors that would revive the country. They also cite that around 80% of the assets of banks are funded by depositors who lack the ability to lobby and influence politicians unlike some borrowers. In such a backdrop, there is a considered view that it would be unwise to compromise the safety of depositors by taking away a vital authority which acts as a deterrent against wilful defaulters. On the other hand, Sri Lanka has a mandatory Deposit Insurance Scheme which guarantees deposits of up to Rs. 1,100,000, which is more than 90% of deposit accounts. There have been proposals to further strengthen this scheme in addition to new funding from the World Bank and the Asian Development Bank.

Given the divergent viewpoints for and against along with concerns from bankers and lobbying for relief for MSMEs, a proper and all parties-encompassing review of various issues pertaining to parate law needs to be carried out so as to ensure a pragmatic and sustainable way forward