MSMEs call on AKD for urgent debt recovery reforms amid economic shocks

• Micro, Small, and Medium Enterprises  Chamber of Sri Lanka highlights their members struggles under aggressive recovery practices, historical economic setbacks
• Recommends two-year halt on parate execution to allow business recovery
• Existing freeze on parate execution expires on 15 December
• Advocates restructuring loans based on current cash flows, offering flexibility in repayment 
• Proposes fair asset valuations and rapid surplus returns post-asset acquisition to protect MSMEs
• Suggests forming expert committee to oversee MSME financial reforms
• Calls for judicial oversight in debt recovery to ensure fair treatment
• Insists to position MSMEs as essential for economic resilience, aligning reform with broader goals

The Micro, Small, and Medium Enterprises (MSME) Chamber of Sri Lanka has issued an urgent plea to President Anura Kumara Dissanayake for substantial reforms to the country’s debt recovery processes, particularly under the Recovery of Loans by Banks (Special Provisions) Act No. 04 of 1990. 

The Chamber’s letter highlights how economic shocks and an aggressive debt recovery landscape are pushing many MSMEs to the brink of collapse, impacting both business stability and Sri Lanka’s overall economic health. 

“Given the economic turmoil and the unique challenges that our businesses face, it is crucial to advocate for reforms that protect these enterprises and foster a resilient economic environment,” the Chamber noted in the letter.

The Chamber proposes framing parate law reform as a pro-growth initiative to support the country’s economic recovery. 

By positioning MSMEs as engines of economic resilience, the Government could attract investment, foster stability and strengthen local economies.

The MSME Chamber’s recommendations aim to secure a more balanced and equitable financial system in Sri Lanka, protecting MSMEs from aggressive debt recovery practices while providing the framework needed for long-term stability and growth. 

Following is the full letter sent;

Recent challenges facing the business community

The MSME sector in Sri Lanka has faced an array of significant challenges over recent years, each compounding the difficulties experienced by businesses, particularly small and medium enterprises.

1. Racial and ethnic violence (2018):

The violent outbreaks against Muslim communities in March 2018 created a climate of fear and distrust, disrupting normal business operations. Many businesses owned by members of the affected communities were either vandalised or forced to close temporarily, leading to financial losses and a reduction in consumer confidence across sectors. This incident not only highlighted ethnic tensions but also exposed the vulnerability of businesses operating in a politically charged environment, emphasising the need for comprehensive peace-building and community engagement strategies to restore trust and stabilise the economy.

2. Political unrest (2018):

The political instability experienced during the 52-day power struggle in late 2018 had far-reaching economic consequences. Businesses faced uncertainty as decision-making stalled, and investor confidence dwindled. The lack of a stable governance framework hindered long-term planning and investment, compelling many SMEs to operate under duress and ultimately leading to cash flow problems and potential closures. This situation underlined the necessity for a political climate conducive to economic stability, wherein businesses can thrive without the fear of abrupt governmental changes.

3. Easter Sunday bombing (2019):

The horrific attacks on 21 April, 2019, had devastating impacts on the tourism sector—a key revenue generator for many MSMEs. Hotels, restaurants, and other businesses reliant on tourism suffered immediate and extensive financial losses. Furthermore, the ensuing security concerns led to a marked decline in both local and international visitors, disrupting economic activities across the country. The Government’s response to bolster security and rebuild tourism is critical, as is support for the affected businesses to recover and adapt to a changing landscape.

4. COVID-19 pandemic (2020-2021):

The pandemic led to an unprecedented economic downturn, with lockdowns and travel restrictions devastating numerous sectors. MSMEs, already operating on thin margins, faced insolvency as revenue streams evaporated. Many businesses were forced to pivot rapidly to digital solutions or alternative business models, which not all could successfully achieve. The lack of access to financial support mechanisms further exacerbated these challenges, emphasising the need for resilient business models and contingency planning within the sector.

5. Economic crisis (2022):

The financial crisis, marked by the Central Bank’s declaration of bankruptcy in April 2022, exposed systemic issues in the economic management of the country. The immediate response of temporary relief measures proved insufficient for many MSMEs, as aggressive debt recovery practices were enacted by financial institutions without regard for the broader economic context. The crisis highlighted the urgent need for structural reforms in the financial sector to ensure that MSMEs receive the support necessary to survive and thrive in a volatile environment.

Call to action: Reform of debt recovery processes

The current debt recovery framework, particularly the Recovery of Loans by Banks (Special Provisions) Act No. 04 of 1990, is proving inadequate in light of the unique challenges faced by MSMEs. The potential for aggressive recovery actions threatens the very survival of many businesses, making urgent reform essential.

1. Suspension of parate execution:

We propose a temporary suspension of parate execution for a period of two years. This moratorium would allow struggling businesses the necessary time to stabilise and implement recovery strategies, ensuring that they do not lose their assets during this critical period. It would serve as a lifeline for many enterprises that are at risk of collapse due to unsustainable recovery measures.

2. Facilitate loan restructuring:

Banks should be encouraged to restructure loans based on current cash flows rather than outdated credit assessments. This approach recognises the impact of recent crises on business viability and allows for a more realistic repayment plan that considers the financial realities of SMEs.

3. Address malpractices:

We urge the Government to tackle issues related to asset valuation practices and enforce consumer protections as outlined in the Monetary Law Act. Ensuring fair asset valuation and transparent procedures is crucial for maintaining the trust of borrowers and fostering a more equitable financial landscape.

4. Clarify default definitions:

It is vital to have clear definitions that distinguish between wilful and non-wilful defaults, especially in cases where businesses face force majeure events. Acknowledging the reality of unforeseen circumstances is essential in crafting fair recovery processes.

5. Equitable asset acquisition:

We propose a mandate for banks to pay Government stamp duty based on the current market value when acquiring properties. This requirement would ensure that borrowers are not further penalised during the recovery process and would facilitate a more equitable resolution.

6. Offsetting capital outstanding:

Allowing borrowers to offset capital outstanding alongside a significant portion of accrued interest in cases where properties are acquired will provide necessary financial relief and enable businesses to maintain operational stability.

7. Return of surplus balances:

We recommend ensuring that any surplus generated after property acquisition is returned to the owner within three days. This measure would prevent unnecessary delays in financial recovery and assist owners in managing their businesses more effectively.

8. Establish an advisory committee:

Forming a committee of business experts and stakeholders to evaluate practical financial systems will facilitate the development of sustainable solutions tailored to the needs of SMEs. This committee could also play a vital role in monitoring the implementation of reforms.

Broader economic considerations:

With the current budget cycle in progress, it is imperative that we address the reforms needed in the debt recovery process, aligning them with the government’s focus on economic restructuring. By initiating early discussions, we can better position these reforms within the broader fiscal planning for debt restructuring and SME recovery.

1. Long-term structural reform:

Sustainable reforms are essential to prevent asset seizures from wreaking havoc on SMEs, particularly given the challenging economic landscape. Advocating for enduring changes can lay the groundwork for long-term stability, fostering a more resilient business ecosystem that can weather future crises.

2. Enhanced borrower rights:

By introducing clear and standardised processes for SMEs to negotiate with banks, we can promote transparency and minimise the risk of rapid asset seizures. Such measures will not only protect the interests of borrowers but also support lenders by fostering cooperative relationships that enhance debt recovery outcomes.

3. Protection of essential assets:

Emphasising the need for asset protections will prevent sudden business closures and ensure the continuity of critical functions. By allowing SMEs to maintain operational integrity, we contribute to the overall health of the local economy.

4. Sector-specific safeguards:

Implementing special provisions for industries like agriculture and manufacturing—vital sectors in Sri Lanka—will help shield these industries from destabilising debt recovery practices. Tailoring reform efforts to meet the unique challenges faced by these sectors is key to supporting employment and enhancing economic resilience.

5. Balanced debt recovery framework:

We advocate for a framework that fairly considers the rights of both borrowers and lenders. Such a balanced approach fosters financial integrity, offering SMEs structured paths to recovery while preventing cycles of insolvency that burden the economy.

6. Global models for debt restructuring:

Looking at successful frameworks in countries like Australia, we can identify debt restructuring mechanisms that provide structured pathways for business recovery. 

Key practices to consider include:

• Voluntary administration: This assists businesses in exploring recovery options while continuing operations, providing essential flexibility for negotiations with creditors.

• Deeds of company arrangement: Enabling businesses to negotiate manageable debt repayments will facilitate stabilisation and rebuilding efforts.

• Safe harbour protections: These protections shield directors from personal liability when acting in good faith to resolve financial challenges, promoting responsible financial management without the immediate threat of insolvency.

7. Judicial supervision for transparency:

Implementing judicial oversight in debt recovery processes ensures accountability and prevents arbitrary asset seizures. This balanced approach can align with global practices and enhance financial fairness and economic stability.

8. Promoting economic resilience: 

We propose that Parate law reform be framed as a pro-growth initiative that aligns with Sri Lanka’s broader economic recovery strategy. Effective debt restructuring and protective mechanisms will support SMEs as vital engines of growth, attracting investment and improving overall economic stability.

Conclusion:

We believe our proposed reforms are crucial for safeguarding the future of MSMEs in Sri Lanka. We can foster a business environment that nurtures growth, stability, and resilience by advocating for a more equitable debt recovery process. We urge your support for these initiatives and look forward to working collaboratively toward a brighter economic future for all Sri Lankans.