gestation period or grace will often leads project to fruition and in turn will bring in repayment according to the repayment plan. these areas call for special attention by banks and financial institutions. the banks try to mitigate these lapses by the use of modern technology and intensive evaluation processes in granting loans and advances. even these attempts can be beaten by unexpected eventualities and by willful defaulters. while credit discipline and culture are of paramount importance for financial institutions ’ viability and the stability of the financial system as a whole, we need to strike a balance between the system viability and revival of enterprises / industries, in a manner that they can be going concerns and repay their debts. more recently, wide publicity has been given to chapter 11 of the united states bankruptcy code which allows a debtor to continue its operations under a re - organization plan. similarly, the indian government initiative in the form of sick industrial companies ( special provisions ) act was passed with the objective of ensuring timely detection of sick and potentially sick industrial companies, to expedite the revival of potentially viable units and closure of nonviable units is noteworthy. we are informed that india is also re - examining the provisions of this law. the prevailing labour laws and parate execution powers make it difficult for financially troubled enterprises to restructure and continue business operations. the exercise of parate execution powers lead only to closure of enterprises, although the law provides for restructuring. the purchase of the mortgaged properties by the bank at the auction sale through the exercise of rights of parate execution has resulted in another undesirable phenomena, that is the accumulation of foreclosed assets on the balance sheets of banks. undoubtedly, the closure of enterprises results in great cost to the economy by way of loss of output, loss of employment, defaults to creditors and low return to entrepreneurs. it is therefore, vital to have a sound procedure in place to assist ailing enterprises to overcome their problems, provided the enterprises are commercially viable and the problems are of a temporary nature. in this context, it is opportune time for sri lanka to consider the need for the enactment of a law comparable to the applicable laws in other countries and the preparation of guidelines for industrial restructuring in sri lanka. recognising the need, the central bank has set up a committee to review the laws for recovery of loans applicable to banking institutions. the committee comprises representatives of all relevant sectors and it is working towards arriving at a consensus on debt recovery

ranee jayamaha : promoting credit culture and expediting the process of debt recovery speech by dr ranee jayamaha, deputy governor of the central bank of sri lanka, at a workshop on proposed law on restructuring of sick industries and other legal issues at the centre for banking studies, rajagiriya, 1 february 2005. * * * honourable mr k c kamalasabayson, attorney general, mr sumant batra the guest speaker from india, distinguish guests, ladies and gentlemen. i am happy to be associated with this workshop aimed at deliberating on vital issues relating to the proposed law on restructuring of sick industries, and other legal and financial system issues on debt recovery by financial institutions. as you are aware, the two core objectives of the central bank are : to secure economic and price stability and financial system stability with a view to encouraging and promoting the development of productive resources of the country. debt recovery is one of the core elements of financial system stability and it depends on the performance of economic sectors, the industrial sector being one of the important areas. this is why the central bank has been interested in promoting credit culture and expediting the process of debt recovery. in recognition of this, in the year 1990, the central bank was associated in the enactment of a package of fourteen debt recovery related laws. one of these laws has enabled the extension to private commercial banks, the parate execution powers ie a roman dutch law principle to sell movable and immovable property secured to a bank as collateral to recover debt without recourse to courts of law. prior to the enactment of this law, the powers of parate execution were available only to financial institutions established by statutes passed in parliament. i am informed that a bill prepared to amend this law to further widen and strengthen the powers of parate execution granted to financial institutions could not be passed in parliament due to constitutional issues. the right to obtain injunctions against the execution of parate has thwarted the objectives of this law and this has resulted in banks being reluctant to lend to high risk borrowers even against security. with injunctions brought by the defaulters against the rights of exercise of parate execution by banks, the cost of recovery of bad debt has become phenomenal. against this background, banks and financial institutions are reluctant to deal with industries that have become unviable irrespective of the reason that has led to it. consequently, the sick and unviable industries are left alone without any outside financial or