A financial crisis which has plagued Sri Lanka’s rural areas, particularly in the Northern and Eastern Provinces, is continuing to worsen as microfinance borrowers face mounting pressure from debt recovery actions. This situation has disproportionately affected women.
A process which was once envisaged to help those in poverty and women, has today become a curse for many who are being exploited.
The use of the parate execution law by banks and financial institutions has led to an increase in land seizures and legal notices being issued to low-income borrowers. Although the law was originally intended to facilitate the recovery of large debts, it is now being applied to small-scale loans, where victims are often vulnerable persons who lack awareness or adequate legal support. Over the years, the human cost of legal impunity which is involved in these situations is appalling. Experts and observers have long called for effective reforms to address the issue. Civil society organisations have documented rising cases of mental health issues, domestic violence, and even suicides linked to microfinance debt. In areas like Kilinochchi, Mullaitivu, and Monaragala, women, particularly from low-income communities are receiving legal notices in Sinhala or English – languages they may not be able to read, which is expected to inform them that their land or home will be seized unless they repay the outstanding loan, sometimes with penal interest rates as high as 40-60% per annum. Few microfinance borrowers understand the implications, and their lives are devastated when the legal action is enacted. Fewer still have the legal resources to fight back. Between 2015 and 2022, at least 80 suicides were reported in connection with microfinance-related harassment, according to Women’s Action Network (WAN). In many of these cases, victims had received repeated threats from loan officers or legal representatives invoking parate executions.
The troublesome legislation, the parate law, derived from provisions in the Recovery of Loans by Banks (Special Provisions) Act No.4 of 1990, allows licensed commercial banks in Sri Lanka to seize and sell mortgaged property without going through court proceedings. It was introduced to fast-track the recovery of non-performing loans from large borrowers and reduce the burden on Sri Lanka’s overburdened Judiciary. And under this provision, if a borrower defaults and has mortgaged an asset – typically land or buildings – the bank can initiate a ‘parate execution’ and auction the asset after due notice. This legal shortcut was once viewed as an efficiency reform. Today, it has taken on a more ominous shape and has left a trail of misery and victims.
The manner in which the parate law is used at a disproportionate level in such vulnerable communities makes the situation alarming. Parate execution bypasses the courts, giving borrowers little room to contest the auction unless they file an injunction – an expensive and time-consuming process. Many legal-aid services are unavailable in rural districts. Even when borrowers attempt to repay, banks demand the entire amount in one lump sum, refusing staggered payments or interest waivers.
The Government can no longer ignore the situation. The austerity measures from the IMF programme and the economic downturn which Sri Lanka experienced over the last four years, has pushed the cost of living high and out of reach of vulnerable communities. Many of them have been pushed below the poverty line. Having to deal with parate law and its diabolical actors, who prey on such vulnerable groups – women, is too much to bear for many. The calls for reforms to the legislation and relief must be addressed now. The victims need some impartial mechanism to be an independent arbiter. Some community groups have demanded that the Government introduce urgent amendments to exclude loans under a certain threshold – such as Rs. 500,000 – from parate law enforcement. Others have called a dedicated microfinance ombudsman to mediate disputes, ensure transparency and protect borrowers from abusive practices. The State must act, and now.