The long-dreaded Parate Law, which allows banks to seize mortgaged properties without court orders, is back in force. With over 260,000 small businesses already shuttered since the economic crisis, the revival of this law from July 1 is sending shockwaves through Sri Lanka’s struggling entrepreneur community. As debate erupts, some argue it will prevent banking collapse others fear it could trigger a deeper crisis.
The controversial Parate Law, which grants banks the authority to auction mortgaged properties without a court order in the event of loan defaults, has officially come back into effect from midnight on June 30.
The government, which had previously suspended the enforcement of this law for three months, has now reintroduced it, following an earlier six-month suspension imposed by former President Ranil Wickremesinghe.
What is the Parate Law?
In essence, the Parate Law allows banks to recover unpaid loans directly by seizing and auctioning properties offered as collateralnwithout needing to obtain court approval. This is particularly applicable when a borrower defaults on a loan even after the agreed repayment period has passed.
Commonly referred to as the foreclosure law, it enables a bank’s board of directors to organize a public auction of the pledged property and use the proceeds to recover outstanding dues, including accrued interest.
Prior to 1990, only public banks like the Bank of Ceylon, People’s Bank, and the State Mortgage and Investment Bank were empowered to use this law. However, the Recovery of Loans Granted by Banks (Special Provisions) Act No. 04 of 1990 extended this authority to all licensed commercial banks, both public and private.
An amendment in 2011 (Act No. 01 of 2011) introduced certain restrictions. Under this change, if the loan amount is below Rs. 5 million, banks can no longer invoke foreclosure rights directly and must instead seek court approval to recover their dues.
For loans exceeding Rs. 5 million, banks are allowed to auction the mortgaged property and are legally obligated to return any remaining funds to the borrower after the debt is settled.
What Does This Mean for the Economy?
The reimplementation of this law has sparked heated debate. The Sri Lanka Chamber of Small and Medium Enterprises has warned that the decision could devastate micro and small-scale businesses. According to their spokesperson, Susantha Liyanarachchi, of the 1,017,000 businesses in operation in 2022, around 263,000 have shut down following the country’s economic collapse. Many of these entrepreneurs are now at risk of losing personal and family properties, not because of mismanagement but due to macroeconomic fallout beyond their control.
At a media briefing on June 30, Liyanarachchi pleaded with the government to postpone the Parate Law for at least another year to give small businesses a fighting chance at survival.
On the other hand, academic economists argue that reinstating the law may be critical for the health of the financial system. Professor Wasantha Athukorala of the University of Peradeniya noted that the failure to act against defaulters would only encourage widespread non-repayment of loans ultimately threatening the entire banking sector. “If people think they can escape loan obligations without consequences, it undermines trust in the financial system,” he told BBC Sinhala. “Parate Law will put a stop to that. It’s painful but necessary.”
Meanwhile, Deputy Minister of Economic Development Professor Anil Jayantha Fernando acknowledged that the law could cause hardships for some. He assured the public that the government is prepared to consider mitigation mechanisms and alternative solutions for affected borrowers and businesses.
As the country continues its slow recovery from one of the worst economic crises in its history, the reactivation of the Parate Law signals a major shift in policy raising both alarm and hope in equal measure.
