All licensed financial institutions to expedite debt recovery

In a sudden move by the new Finance Minister, Sri Lanka’s licensed banks and financial institutions have been brought under the Debt Recovery (Special Provisions) Act No.2 of 1990 with the aim of improving debt recovery and financial system stability.

While the Act originally covers only the lending institutions which existed at the time of enactment, the new initiative is aimed at expanding the applicability to all licensed banks and licensed finance companies.

The Cabinet approved the proposal presented by Mahinda Rajapaksa, in his capacity as the Minister of Finance and Economic Affairs, to amend Section 30 of the Act in order to provide legal provisions towards this end.

Under this, many individuals and private sector companies who have obtained bank loans will be compelled to settle their debts or face legal action.

Several economic experts told the Business Times, the intention of amending the Act was to recover loans obtained by the public in an attempt to prevent the destabilisation of the banking and finance system as a result of current political instability.

The legislature of the country has provided judicial sale as well as extra judicial sale of property mortgaged ( parate execution) for the recovery of debt defaulted.

Parate execution has become the preferred method of recovery for banks after the introduction of the Recovery of Loans by Banks ( Special Provisions) Act No. 4 of 1990 when the loan is secured by mortgage of property.

The Debt Recovery ( Special Provisions) Act offers a number of methods of recovery of money lent, each with a varying degree of efficiency.

According to Treasury statistics, the total non-performing loan portfolio rose by 58 per cent or by Rs. 94 billion to Rs. 255 billion during the first eight months this year.

In August alone the non- performing loans shot up by 6.7 per cent to Rs. 16 billion compared to a growth of 4.7 per cent or Rs. 11 billion in July.

It has been revealed that banks have rescheduled some Rs. 155 billion worth loans during this period.

Another aim is to bring all those loan defaulters to book and recover their dues with interest expeditiously, an economic expert said, adding that it will also expose the names of loan defaulters during litigation.