Fallout between banks and SME triggers new lending oversight unit
The resumption of the parate execution law, allowing banks to seize mortgaged properties without court approval, poses a bigger threat to remaining SMEs, business owners say, adding that banks are leveraging this law to liquidate assets at undervalued prices, often favouring select buyers and leaving original owners in major debt.
Certain banks are rushing to take such action without giving due consideration to the borrower’s actual reason for default and any attempts taken to repay despite their actual challenges to settle, a small business owner said. “For example, a borrower who borrowed to construct a reception hall plus a small hotel in the upcountry just before Covid-19 had to abandon his project, which became a non-viable investment,” a banking source said. “He had been trying to repay the capital in whatever feasible way in which he could earn money, but was being threatened by his bank with a petition and seizing his valuable proposed business property. The borrower had been repaying a certain amount agreed with the bank for more than three years. But the bank wants him to deposit more,” he said.
Bankers said that the complaints originate from a small subset of businesses, indicating that the funds they borrowed may have been misallocated to unintended activities.
Stressing the importance of looking after depositors, Damith Pallewatte, Managing Director/ CEO HNB, points out that not many who are making noise as they are facing repercussions have engaged with the banks about the parate law. “This claim is coming from a handful of businesses where the money that was borrowed is likely to have been diverted into other activities that were not intended. We are lending depositors’ money. We have around 3 million depositors and only about 100,000 borrowers. It is important to recognise the responsibility that bankers have to their depositors,” he told the Sunday Times Business.
Mr. Pallewatte noted that about 250,000 small and medium enterprises and microfinance businesses bank with HNB. “Businesses being closed isn’t a trend. They struggle and make their way through. But some won’t make it. Banks help them very much to overcome their challenges.”
All these years during the pandemic and the economic crisis, the banks have done a substantial number of rescheduling and restructures and given massive capital and interest waivers, moratoriums, reduced interest rates, and tenure extensions to make monthly repayments more affordable, Thimal Perera, CEO DFCC said.
“Parate is considered only as a last resort where there is no hope of business revival to protect the depositor’s savings. All these years during the pandemic and the economic crisis, the banks have done a substantial number of rescheduling and restructures and given massive capital and interest waivers, moratoriums, reduced interest rates, and tenure extensions to make monthly repayments more affordable.”
Mr. Pallewatte also noticed that there are a handful of lobbyists with irregular behaviour who are trying to misinterpret the parole execution law. “We need to be mindful here whether we believe 99.9 per cent reality or 0.01 per cent noise (opposition). Parate is the very last action a bank might resort to protect depositors’ funds. It’s not by any means a threat to a “genuine” SME customer who used the borrowed money for the purpose for which it was intended. Liquidating acquired properties is subject to stringent scrutiny by the Central Bank, too whereas banks need to seek their prior clearance if, at all, a property is to be disposed of at below market value. I suggest there has to be some education process to make SMEs familiar with the life cycle of banking facilities and, more importantly, how responsible they are in utilising borrowed money for its intended purpose.”
Meanwhile, the Sri Lanka Banks’ Association (SLBA) has rejected claims by some borrowers about potential parate actions after a grace period, assuring that banks do not plan widespread proceedings. The decision to execute the parate law is never made in an ad hoc manner by the banks but only as a last resort. They would normally go through several rounds of rescheduling the loans in consultation with the borrowers before resorting to parate, Kapila Ariyaratne, CEO SDB Bank, told the Sunday Times business.
Both small businesses and some bankers are looking towards the regulator for a solution. “The Central Bank should establish a unit with effective and experienced staff in lending to look into any unethical and unwarranted actions by financial institutions, if any, in using parate or other methods to recover loans. Any complaints should be seriously evaluated,” a medium-sized business owner in the construction sector said.
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