Mortgaging struggling assets

Aldoris, the choon- paan karaya, came down the lane this time playing a mournful tune on his speaker as if reflecting the disturbing crisis facing his countrymen.

The trio was gathered at the gate and just as he reached them, he said bakery sales have dropped by 50 per cent owing to the high prices of the products. “Janathavata den ganan walata kaema ganna bae (People can’t afford to buy at current prices),” he said preparing to distribute three maalu paan to the trio.

“Samawenna, ada apita oney maalu paan dekai. Ekak api beda gannawa anik eka Sir-ta, mokada apita salli madi (Sorry… we just need two today – one for us and one for Sir, as we are short of cash),” said Kussi Amma Sera, as she proceeded to break the maalu paan into three equal pieces.

“Harima amaru thathvayak. Gam wala inna aya harima amaruwen eka welai davasakata kanney (What a situation… many people in rural areas are struggling to have one meal a day),” said Serapina.

“Gam wala inna magey nedayo kiyanawa janathawa jeevath wenne idam wala wawana deval walin kiyala (Relatives from my village say many people are surviving on what they grow on the land),” noted Mabel Rasthiyadu.

At this point, Kussi Amma Sera rushed into my office room to hand over the maalu paan which I broke into four equal pieces and took just one. “Maeka anith aya ekka beda-ganna (Share it with the others),” I said, just as the home phone rang.

It was Arthika, my nonsensical economist friend also known as good-for-nothing Somey, on the line and he wanted to discuss a common problem faced by big and small companies these days – parate execution – a law which allows the sale of mortgaged properties without going through a legal or formal court process.

This process has been in the news since the COVID-19 pandemic and the economic crisis saw many, mainly small companies – SMEs and MSMEs (micro, small and medium enterprises) – collapsing and struggling as banks moved to acquire these properties when the period of moratoriums (granted on loan disbursements) ended as they were unable to repay their loans.

A court judgment last year decreed that third party properties can also be seized, which was not the case earlier. For example, if the property of a director is mortgaged by a company seeking a loan – earlier such property could not be seized. Now if a company has taken a loan mortgaging the private property of a company director, it could be seized. This was a victory for banks, bankers said.

The latest move this week by the government, bowing to the requests of numerous companies facing parate execution, is to suspend the operation of the parate execution law till December 2024. Bankers said this would put more pressure on banks and suspected the decision may be connected to elections as many of these companies represent key voter segments. “More provisioning for bad loans may have to be made in our accounts,” one banker grumbled. There have been accusations that banks were resorting to parate execution and selling off property at higher prices, securing gains much higher than the loan amounts.

Back to our conversation, Arthika said he too believed the suspension of the parate execution law may be connected to elections. “Maybe and in fairness to the banks, these loans are based on deposits of depositors whom banks are answerable, to eventually ensure loans are duly repaid,” I said.

“That is also true but companies are also struggling these days and during the crisis period with little business, what do they do if they don’t have money to repay the loans. Yes, the law clearly states that you have to repay your loans. If not, properties mortgaged as collateral can be sold off by the banks,” he said.

“This is a perennial problem for SMEs and now the government is talking of amending the parate execution law to balance the rights of lenders and borrowers,” I said.

On Tuesday, in another move to support aggrieved enterprises, it was announced that the Asian Development Bank (ADB) has agreed to provide working capital support to revive enterprises affected by the economic downturn. The Cabinet decided that of this Rs. 20 billion facility, Rs. 15 billion will be used to strengthen existing and new enterprises and the remaining amount of Rs. 5 billion will be used to support enterprises under the non-performing loan category.

While the government is concerned over the rapid rise in parate executions, Central Bank Governor Nandalal Weerasinghe is of the view that parate execution is essential for debt recovery by banks as well as ensuring access to finance for MSMEs. He has said that banks are operating with 80 per cent of funds deposited by customers and, therefore, protecting their interest was important even to support genuine and eligible entrepreneurs.

“Parate is used only as a last option to deal with wilful defaulters and bankrupt borrowers and it is the legal remedy for banks to recover defaulted loans,” he told a recent forum.

Representatives of MSME associations claim that business operations of nearly 90 per cent of this sector in Sri Lanka is worsening following stringent legal action of banks to recover overdue loans. They have said these companies are facing difficulties due to high taxes, rising electricity tariff and other costs. According to official data, between January 2023 to January 2024, 1,410 property acquisitions have been made under the parate law.

The data also revealed that of 1.3 million MSMEs in Sri Lanka at the beginning of 2015, this figure had dropped to 1.0 million by 2023 with over 200,000 factories permanently closed and over 50,000 factories temporarily closed. National Trade Protection Council President Mahendra Perera told reporters that the Government would have to consider providing relief to MSMEs due to multiple crises caused by the economic crisis and factors beyond their control.

He had called earlier for the immediate suspension of the parate law (which has now been done) to give breathing space to these struggling companies.

As I was winding up, Kussi Amma Sera brought in my second mug of tea, leaving me to reflect on the large number of people who have lost employment due to the collapse of small and medium scale companies resulting in a dissatisfied segment of people whose vote will count at elections – and may even have to share a