Central Bank re-emphasises why parate law should stay

• Asserts strong debt recovery laws would ensure protection of interests of both deposits & genuine borrowers

Weighing in on the pressure to weaken the parate execution powers that lie with the banks, the last recourse to recover moneys lent to willful borrowers, the Central Bank Governor, Dr. Nandalal Weerasinghe once again cautioned of adverse impacts to small and medium businesses which are genuinely in need of money if the country goes down in that path.
“We have even in an earlier occasion explained why we need the parate law and I don’t think I need to make it clear again,” Dr. Weerasinghe said in response to a question over the parate law last week, at an event held to unveil Central Bank’s annual policy statement.

“If there is no recourse for the banks to recover the loans in default even after renegotiation of the terms and restructuring, there will be no system for them to give loans to the SMEs out of your deposits”, as both segments will suffer, he added explaining why a country must have stronger debt recovery laws for its sound functioning.
Although the laws may be called differently in other jurisdictions, all countries including the advanced economies have much stronger mechanisms to recover loans in default.
Dr. Weerasinghe said mortgages are the largest business of any banking system and the absence of stronger recovery laws could make their financial system weaker.  
The Central Bank has even before defended the banks’ parate rights to protect the interests of both depositors as well as to genuine and viable businesses which are paramount at present to revive them and also to accelerate growth through channeling more money into the real economy.
Even the Sri Lanka Banks’ Association also in a statement in late December raised concerns over the threats they see on the parate rights they have and explained why such rights should be protected.  

From around last year, lobbying against either outright taking away of or weakening of the parate execution rights – the ability of a bank to sell the mortgaged assets to recover the loan in default after exhausting all other options – have been gaining momentum, as the banks have moved against the underlying assets of some borrowers who have either been deliberately defaulted or have missed installments continuously due to repeated crises in the last few years.
In December, the Central Bank said in the past eleven months, parate law had been executed against only 557 cases and a sum of only Rs.38.0 billion had been recovered. This worked out to only 0.4 percent of the overall credit disbursed by the banks and 2.7 percent of the total stage 3 loans which are around Rs.1.4 trillion.
In December, a group of borrowers had handed over a petition against parate execution to Industries Minister Ramesh Pathirana and Justice Minister Wijeyadasa Rajapakshe at a conference, and the latter had told that major reforms to the law would be made as banks are allegedly using the law to their advantage.