A longstanding financial crisis in 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.
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, many of whom are women.
Although the law was originally intended to facilitate the recovery of large commercial debts, it is now being applied to small-scale loans, often without adequate borrower awareness or legal support.
The continued use of this mechanism in microfinance cases has drawn criticism from rights groups and legal experts, who warn of its impact on already vulnerable communities.
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.
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 sinister shape.
Concerns about the law’s application
The controversy arises from how this law is now being applied in rural areas to enforce repayments of small-scale loans taken from banks under microfinance schemes. These loans, ranging from Rs. 50,000 to Rs. 300,000, were largely targeted at women – particularly in war-affected or economically marginalised areas – as part of national financial inclusion initiatives.
The promise was simple: access to credit without the need for traditional collateral, aimed at empowering women entrepreneurs, small farmers, or informal traders. But the reality has diverged sharply.
Sampath Perera, a senior civil lawyer with extensive experience working with microfinance clients, noted that the application of the parate execution law in some microfinance cases had raised significant concerns about its suitability in such contexts.
“The parate law was originally intended to enable the recovery of large-scale commercial loans. Its use in recovering small-scale microfinance debts, often taken by individuals to support basic livelihoods, has led to outcomes that warrant closer examination,” he said.
Perera explained that in many instances, borrowers may not be fully aware of the terms of their agreements, including whether their land or property had been mortgaged. “When repayment becomes difficult due to factors like illness or poor harvests, borrowers are sometimes faced with legal notices and procedures they find difficult to understand or respond to,” he added.
He also pointed out that limited access to legal aid in rural areas made it harder for affected borrowers to seek advice or contest recovery actions. “There is a need to consider whether current legal frameworks adequately protect vulnerable borrowers, and whether more accessible, transparent, and proportionate recovery mechanisms should be developed for the microfinance sector.”
Disproportionate burden on women
Over the past decade, thousands of women have taken out multiple loans from Microfinance Institutions (MFIs), often under pressure or without full understanding of the repayment terms. As household incomes stagnated or disappeared during crises, especially after the Covid-19 pandemic and the 2022 economic collapse, defaults began to rise.
What followed was not support or restructuring but aggressive recovery strategies. Some commercial banks, now acting as microfinance lenders, began invoking the parate law to recover dues, often based on nominal land documents used as informal collateral.
In regions like Kilinochchi, Mullaitivu, Trincomalee, and Monaragala, women are receiving legal notices in Sinhala or English – languages they may not be able to read – informing 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 understand the implications; fewer still have the legal resources to fight back.
Take the case of K. Thanalakshmi, a 38-year-old widow from Batticaloa. In 2018, she borrowed Rs. 75,000 from a well-known finance company for her poultry business. When floods destroyed her coop and feed stock, she defaulted. Two years later, she received a parate notice from a licensed bank that had acquired the loan through refinancing.
The letter stated that her only remaining property – five perches of land inherited from her father – would be auctioned if she did not repay Rs. 142,000 within 14 days. “I didn’t even know I had signed land documents. They asked for copies of deeds as ID proof. Now they’re taking my land,” she said tearfully.
What makes the situation especially alarming is the legal imbalance. 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.
Lack of regulation
The broader issue lies with the unregulated nature of Sri Lanka’s microfinance sector. Unlike banks and licensed financial institutions, many MFIs operate without strict oversight from the Central Bank.
Although the Microfinance Act of 2016 attempted to introduce registration and supervision, its scope has remained limited. As a result, borrowers often fall into debt cycles, taking new loans to repay old ones, with interest compounding rapidly. In some cases, women hold up to five or six concurrent loans, creating unsustainable debt burdens.
In 2021, a Government-appointed Presidential Task Force estimated that nearly 200,000 women were trapped in microfinance-related over-indebtedness. In response, the Government announced a partial debt relief programme for selected districts and placed a temporary moratorium on parate executions for certain categories of loans.
However, implementation has been patchy, and lenders continue to exploit legal loopholes. There is currently no comprehensive legal framework to regulate debt recovery practices in the microfinance sector, especially concerning women borrowers.
Calls for reform
The human cost of this legal impunity is staggering. Local civil society organisations have documented rising cases of mental health issues, domestic violence, and even suicides linked to microfinance debt.
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 social ripple effects are equally concerning. The fear of asset seizure leads families to prioritise loan repayment over basic needs. In several cases, children have been pulled out of school to save costs, while women have taken up exploitative labour or migration. The original goal of microfinance – to empower women and reduce poverty – has in some areas been turned completely on its head.
Calls for reform are growing louder. Activists and financial rights groups are demanding that the Government introduce urgent amendments to exclude loans under a certain threshold – such as Rs. 500,000 – from parate enforcement.
Others are calling for a dedicated microfinance ombudsman to mediate disputes, ensure transparency in loan documentation, and protect borrowers from abusive practices. Central Bank officials have acknowledged the need for reform but cite legal complexities and the political challenge of balancing lender interests.
Sajini Uyangoda, a social activist who works closely with microfinance-affected women in the north and east, said the continued use of the parate execution law against small-scale borrowers had pushed many women into a state of fear and helplessness.
“For many of these women, microfinance loans were introduced as a lifeline – something that promised dignity, independence, and income. But over time, it became a trap. Now, with banks invoking the parate law to seize their land and homes, these women feel criminalised for being poor,” she said.
“We have seen cases where women who borrowed just Rs. 60,000 to start a small food business are now facing auction notices for family property. Many were unaware that the documents they signed gave lenders the power to take their land. There’s no transparency, no legal awareness, and no support,” Uyangoda added.
She noted that the psychological toll had been severe, with rising cases of anxiety, shame, and even suicides linked to over-indebtedness. “Women tell us they are skipping meals to repay loans or sending their children to work. The parate law is being used as a weapon against those least equipped to defend themselves. If this continues unchecked, we will not just witness a debt crisis, we are also compounding cycles of poverty and trauma.”