SLBA calls for government engagement to facilitate debt recovery process.

COLOMBO (News 1st) - The Sri Lanka Banks' Association (SLBA) has called for the government's active involvement in facilitating the debt recovery process, cautioning that maintaining the status quo of failed borrowers at the expense of depositors is unsustainable. The Association emphasized the urgent need for the development of an effective insolvency regime to address the mounting financial challenges faced by borrowers.

In a statement released by the SLBA, which represents all licensed banks in Sri Lanka, it urged policymakers to engage with commercial banks through the Central Bank of Sri Lanka (CBSL) to establish a comprehensive and well-coordinated approach to alleviate the stress experienced by borrowers in default. The recent surge in debt recovery actions within the first four months of 2023 is attributed to the accumulation of legal actions that were suspended under the general moratorium granted by the CBSL since the first quarter of 2020.

The SLBA highlighted the importance of parliamentary attention to improve the management of troubled debt and borrowers, particularly small and medium-sized enterprises (SMEs). The Association proposed the implementation of a robust restructuring framework to salvage distressed firms when feasible, or alternatively, facilitate the efficient exit of non-viable firms to reallocate productive assets.

With gross loans extended by the banking sector amounting to approximately Rs 10.8 trillion as of March 31, 2023, the relief provided in the form of moratoriums, restructurings, and other payment relief measures over the past three years exceeds Rs 2 trillion. This support has benefited over one million customers in both retail and corporate segments, including facilities with elevated risk levels.

The SLBA stressed its commitment to maintaining stability within the banking system and protecting customer deposits and shareholder capital. The Association acknowledged that debt repayment defaults are driven by various factors, including the disruptions caused by the global COVID-19 pandemic.

The SLBA expressed concern over lobbying efforts by defaulting borrowers to seek preferential legislative intervention without considering the macroeconomic impact on the nation. It emphasized that preserving the status quo at the expense of depositors threatens the stability of the banking sector and the overall economy it supports.

The Association called for a Central Bank-led engagement with commercial banks to ensure a comprehensive decision-making process that effectively addresses the challenges faced by defaulting borrowers and industrialists.

The SLBA highlighted that debt repayment moratoriums, implemented in response to the April 2019 terror attacks, the March 2020 COVID-19 pandemic, and the 2021 economic crisis, have increased non-performing debts and hindered capital formation and credit provision to the economy. The Association cautioned against complacency regarding capital and liquidity measures, emphasizing the urgency to manage debt recovery without suspensions or delays.

The SLBA reminded that the option of parate execution, which facilitates efficient debt recovery and reduces the cost of financial intermediation, has been available to state banks and was subsequently extended to all licensed commercial banks through the Recovery of Loans by Banks (Special Provisions) Act No 04 of 1990.