The issue of parate execution continues to raise concern among stakeholders as Sri Lanka’s Small and Medium-sized Enterprises (SMEs) struggle to recover from successive economic crises.
The suspension of parate execution will end on 15 December and many fear its reinstatement could mean disaster for a sector that is essential for the country’s economic growth. However, there are also grave concerns from the banking sector regarding the continued suspension of parate execution in terms of the sustainability of Sri Lanka’s financial system.
Parate execution is a recovery mechanism granted to banks under the Recovery of Loans by Banks (Special Provisions) Act No.4 of 1990, allowing them to recover unpaid debts by selling borrowers’ assets without judicial intervention. Initially granted only to People’s Bank and the Bank of Ceylon in 1961, this power was extended to regional rural development banks in 1985.
Request for a longer grace period
Speaking to The Sunday Morning Business, Ceylon Federation of Micro, Small, and Medium-sized Enterprises (MSMEs) President Mahendra Perera provided insights into previous discussions with the current Government.
“Our federation has met twice with the Economic Council of the National People’s Power (NPP) prior to the General Elections and we have outlined six major issues faced by SMEs, including parate execution,” he said.
Perera emphasised the need for an extension of the suspension on parate execution. “We have requested at least another six months’ extension. This will give the Government time to suggest a proper plan for restructuring and addressing these challenges,” he added, while calling for loan restructuring with extended repayment periods.
He further noted that loans could be restructured for five to six years at reasonable interest rates below 10%, while adding that accumulated interest concerns must also be addressed.
“If the Government does not provide proper solutions, SMEs will face severe consequences again. Many SMEs see a green light under current policies, but the Government must address the disasters of the past five years, from the Easter Sunday attacks to Covid-19 and economic bankruptcy,” he said.
Voicing similar concerns, Federation of Chambers of Commerce and Industry of Sri Lanka (FCCISL) President Keerthi Gunawardane noted that banks, unfortunately, had not provided the necessary support for SMEs during the crisis and working capital had dried up across industries.
“The collapse of SMEs disrupts the broader economy as production halts and jobs are lost, and the economic impact is immense. Starting a business is difficult, but closing one is all too easy,” he noted.
While acknowledging that certain companies may have struggled with financial mismanagement, he emphasised that many had been thriving before the crisis. “Cash inflow has plummeted, leaving them unable to survive. Demand has decreased locally and internationally, which has been devastating for many export-oriented businesses,” he said.
From the banking perspective, Gunawardane acknowledged the need to protect depositors’ money, as banks may otherwise lose credibility, which would be harmful to the economy.
However, he emphasised the importance of supporting struggling businesses rather than auctioning off their assets, noting: “Even for bankers, selling these properties and businesses is challenging. It’s better to revive these companies and keep them running than to push them into bankruptcy.”
Recently, the Government held discussions with stakeholders on parate execution, with decisive action based on these still pending. As of November 2023, 557 parate executions had been carried out, with a total value of just Rs. 38 billion, representing a mere 0.4% of total loans and 2.7% of total impaired loans. Moreover, parate cases gazetted by banks from 1 January 2023 to 1 January this year stands at 1,410.
SMEs’ substantial stake in the economy
Speaking to The Sunday Morning Business, immediate past Chairman of the Ceylon National Chamber of Industries (CNCI) Canisius Fernando shared his apprehensions regarding the potential enforcement of the parate law.
“If the parate law is enforced again to recover defaulted borrowings, it will be disastrous. I do not believe the present Government will allow that to happen, as it has shown a consistent focus on the SME sector, which is already almost paralysed,” he said.
He expressed hope that Government policies to safeguard SMEs would materialise soon, where supportive policies would be implemented, adding that certain SMEs would require longer grace periods of 5-10 years to recover fully.
Highlighting the pivotal role of SMEs in the economy, Fernando noted that unless the SME sector transformed into one that was vibrant and active, economic development would be hindered.
“The impact of the crisis has not been limited to SMEs alone, as even medium and large-scale companies have scaled down operations or closed entirely due to high costs, workforce demands, and reduced demand,” he added.
Accordingly, commenting on the ripple effect, he noted that many SMEs served as subcontractors for larger companies and their survival was critical for the smooth functioning of large enterprises.
He further emphasised the need for a concerted effort from the Government and the private sector to support SMEs, adding: “There should be continuous support but also concrete decisions about the future of this sector, which is the backbone of the country’s economy. Low-income groups are always tied to SMEs, and we hope there will be concessions and policies to protect them.”
Need for loan restructuring at fairer rates
Meanwhile, MSME Chamber of Sri Lanka Media Secretary Susantha Liyanaarachchi described parate execution as a critical factor contributing to the economic crisis.
“Parate execution leads to a decline in production capacity, hindering local industries. If this issue isn’t addressed, it will escalate further. SME bankruptcy isn’t a problem created by SMEs; it’s a result of the economic crisis stemming from 2019 onwards, when single-digit interest rates rose drastically,” he said.
He added that the six-month grace period granted to SMEs was insufficient for them to recover from bankruptcy given that the pace of Sri Lanka’s economic recovery was slow, with a need for mechanisms to strengthen SMEs with low interest rates to revive the economy.
“Banks have made significant profits recently from this situation. The grace period should be extended to at least two years and loan restructuring should occur at fair interest rates.
“The archaic parate law is detrimental to enterprises. Over 200,000 businesses have already collapsed. We urge the Government to consider the fact that strengthening the economy is closely aligned with SME revival,” he asserted.
Reiterating similar sentiments, CNCI Chairman Kevin Edwards told The Sunday Morning Business that the high interest rates during the economic crisis had caused SMEs to fall behind on their financial commitments, which had led to parate execution. According to him, even though rates have now reduced, some banks are charging penal interest on rescheduled loans, further burdening SMEs.
“We hope the suspension of parate execution will be extended for at least another year, and banks must implement mechanisms to provide SMEs with a grace period,” he added.
He further noted that micro-enterprises were the most gravely affected and lacked access to formal financial institutions. “Micro enterprises can’t approach banks due to a lack of collateral. They are forced to rely on informal financial sources, where exorbitant interest rates trap them in cycles of debt. These finance houses are brutal and use harsh recovery methods, far worse than banks,” he said.
Edwards added that this situation called for a complete reevaluation, with systems in place to monitor SMEs’ operations and guide them in managing their finances better. While some businesses suffer from financial mismanagement, there are many genuine entrepreneurs who lack access to the funds they need to succeed.
There are broader social consequences of the fall of MSMEs, extending beyond economic collapse. Edwards further noted that the fallout affected families deeply and led to desperation, which in turn led to risky or illegal means of earning.
“If parate execution continues, there will be a large gap in the economy. For instance, many MSMEs operate around larger companies. If these MSMEs collapse, it will cause a ripple effect, leading to increased unemployment and social issues,” he concluded.
Double-edged sword
Speaking to The Sunday Morning Business, National Enterprise Development Authority (NEDA) Director Dhanuka Liyanagamage addressed the complexities of the issue, considering both perspectives.
“On the positive side, SMEs have breathing space for now, knowing that their assets won’t be taken away. However, it’s important to consider the banking side too. In some cases, there are willful defaulters who exploit this opportunity,” he said.
As a potential solution, he proposed that in the future, it would be necessary to apply this law on a case-by-case basis rather than universally, adding: “Otherwise, willful defaulters will continue to exploit it, jeopardising the banking system. If assets cannot be acquired in cases of default, banks and financial institutions will become reluctant to lend to SMEs. That would ultimately backfire on SMEs.
“This suspension is beneficial for SMEs, but it must be balanced with mechanisms to assess each case individually. The banks, to my knowledge, have their reservations and are not looking positively at an extension. It’s a double-edged sword, and ideally, a case-by-case approach would be the best solution.”
Banking perspective
At the time of parate execution suspension in February, Central Bank of Sri Lanka (CBSL) Governor Dr. Nandalal Weerasinghe expressed concern that restrictions on debt recovery mechanisms could impact credit supply.
He noted that if banks faced hurdles in recovering loans, they may become reluctant to extend credit to new borrowers. The CBSL emphasised the importance of further improving the debt recovery processes.
Meanwhile, the Sri Lanka Banks’ Association also noted the negative impact on banks by the Government’s decision to suspend debt recovery under parate laws and addressed the lobbying by a few individual willful defaulters who did not represent the broader business community.
Parate execution provision is one of several tools available to banks for debt recovery. Parate execution on assets securing bank debt (depositors’ funds) is used as a last resort, typically after all attempts to resolve a borrower’s insolvency are met with refusal to negotiate or review.
Speaking to The Sunday Morning Business, Association of Professional Bankers Sri Lanka (APBSL) President Halin Hettigoda highlighted that the association was deeply concerned about the temporary suspension of parate execution by the previous Government.
“While we acknowledge the need for borrower protection and economic stability, the absence of this critical mechanism has far-reaching negative implications for the banking industry and the broader financial system,” he said.
He noted that parate execution served as an essential legal tool that allowed financial institutions to recover outstanding debts efficiently, particularly in cases where borrowers failed to meet their obligations despite multiple avenues for negotiation and restructuring. By enabling banks to recover funds through the sale of collateral, parate execution ensures the financial health of lending institutions, which is crucial for maintaining liquidity and supporting the broader credit ecosystem.
Addressing the banking perspective, he noted that parate execution suspension had created significant challenges for banks. He noted that without the ability to recover debts through parate execution, Non-Performing Loan (NPL) ratios were likely to rise, undermining the financial stability of banks. This directly affects the capacity of banks to extend credit to individuals and businesses, ultimately stifling economic growth.
Hettigoda also noted that the erosion of risk mitigation mechanisms was a challenge, adding that parate execution was a key component of risk management for banks, particularly in lending to high-risk sectors. Its absence diminishes the ability of banks to mitigate default risks effectively, potentially leading to more conservative lending practices that could restrict access to credit for SMEs and other vital sectors of the economy.
In terms of reputational and operational strain, he noted that the inability to recover debts could lead to prolonged disputes between banks and borrowers, eroding trust in the financial system. Furthermore, banks must allocate additional resources to manage default cases, increasing operational costs and diverting attention from core banking activities.
“Moreover, the suspension of parate execution sends a signal of regulatory unpredictability, which could deter both domestic and international investors from engaging with Sri Lanka’s banking sector. This undermines the broader goal of fostering a stable and attractive financial environment.”
Vital to safeguard banking industry
Hettigoda added: “The APBSL strongly advocates the reinstatement of parate execution as a vital measure to safeguard the banking industry and maintain financial stability. However, we also emphasise the importance of complementing this mechanism with borrower-friendly practices such as enhanced financial literacy, transparent communication, and proactive debt restructuring programmes. Such measures will ensure that parate execution remains a last resort while upholding the integrity of the financial system.
“In conclusion, the suspension of parate execution, though well-intentioned, has created significant risks for the banking sector and the economy at large. We urge the current Government to reconsider this decision and collaborate with stakeholders to establish a balanced approach that protects both borrowers and lenders, ensuring the sustainable development of Sri Lanka’s financial system.”
Attempts by The Sunday Morning Business to contact Cabinet Spokesperson Dr. Nalinda Jayatissa regarding the Government’s decision on parate execution proved futile.
Further, the Central Bank and Ministry of Finance were also unavailable for comment.