It has also become necessary to evaluate whether the exercise of parate powers by commercial banks has achieved its objectives. According to banks and financial institutions, the very threat of parate action and publicity prompt defaulters to pay the debt. After fourteen years of the application of the debt recovery laws, it is therefore, fitting that an objective assessment be made to the recovery of debts through this legislation. The moderate development in the Sri Lankan economy in the past decade, saw a heavy demand for credit and the expansion of loan portfolios of banks. As banking is known to be a risky business, the monies placed on trust by depositors have to be prudently invested, but with a firm commitment to return funds to depositors when they call for it. In the circumstances, banks are duty bound to ensure the safety and soundness of their institutions by prudently deploying funds they mobilize. Loan defaults and non-performing advances are quite common in our part of the world. They have contributed to the maintenance of high interest spreads which in turn translate into high lending rates as banks tend to cover the cost of carrying large volumes of non-performing loans in their balance sheets. The cost of non-performing advances is therefore a charge on profits by way of provision to be made for these losses. Banks lose out on interest income that is rightfully theirs. Effectively therefore, the good borrowers pay the price for defaulting borrowers.
1/2  I am aware that banks have their own methodologies to evaluate risks when granting loans and advances and recently, they have been adopting modern methods of credit risk mitigating techniques based on the Basle Principles. To begin with, the lack of adequate knowledge of the industry, poor credit assessment skills and ineffective follow-up and supervision of loans are the key to non-recovery of debt. A banker who lends only against collateral without looking at the viability of the project is obviously imprudent. Sometimes, banks are not familiar with the industry to which a loan is granted - it is imperative that they are conversant with yields, markets and prices to be able to assess the viability of the project. In others, follow-up and monitoring is virtually non-existent. The close monitoring of a project during the 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.