- SMEs in Sri Lanka have unduly constrained access to credit on commercial terms. Credit secured on movable assets is severely underutilized, in large part due to high risks and transaction costs. Real property-land and buildings- is often the only collateral considered to have reliable value in granting credit to businesses which is confined to the established clientele of large firms.
- Lenders when financing against moveable need to account for significant default and enforcement risks. Double collateralization of the same asset to different lenders – due to weaknesses in the moveable registration system is said to be a common feature.
- The ability of debtors to impose delays through court action creates leverage for settlements adverse to the interests of creditors. These factors combined with the transaction costs, drive up the cost of credit and constrain its availability against moveables.
The overall function of a secured transaction system is to simply facilitate the extension of credit secured on movables and intangible collaterals. In order to perform this function well, the system needs the following features.
- Simple, inclusive rules for creating security interests
- Clear and reliable provision of notices through a speedy, inexpensive filing system
- Effective procedures and protections in case of default, including enforcement and repossession.
A well-functioning system, if implemented as described above, of secured lending helps substantially to deepen financial services markets by making credit available to far wider range of firms and individuals than would have access otherwise
The Secured Transactions Register is a filling system, either electronic database or in hard copy based registration system, in which Secured Creditors (Financial Institutions, Leasing Companies and Private Lenders) can give notice of their security interests in the movable goods of an enterprise or individual.
Under this system a lender who offers credit to the debtor taking any moveable property as collateral which belongs to the latter would register his ‘security interest’ in this register upon execution of the loan transaction. In this case, creditor will not take possession of goods but only legally enforce his security interest over the asset and will secure a legal right to dispose the said asset in case of loan default. Notice in register will give prior notices to the prospective lenders who can take lending decision on the same moveable property based on the information published by the first secured party.
In normal circumstances, it is in the best interest of each purchaser to ensure that the goods that they are about to purchase are free of prior security interests registered by another party.
- Personal property - any property that is not real property (i.e. equipment, goods),
- Changeable property – some real property in some places can become personal property (i.e. harvested crops),
- Intangible property - (i.e. account receivables, deposit accounts, license rights, intellectual property rights),
- Payment instruments or documents (i.e. promissory note, bill of exchange, stock certificate, warehouse receipt)
- Proceeds – property received by a debtor for the sale or exchange of property subject to a security interest (i.e. cash received for the sale of equipment that is collateral for a debt).
The law titled “Secured Transactions Act No 49 of 2009” has been passed in the Parliament with the objective of promoting the interest of the national economy and economic activity by improving access to credit to Small and Medium Enterprises (SMEs) in particular, for the purposes of,
- Promoting commercial activities through a new set of provisions which facilitate and secure loans granted on the security or pledge, mortgage or obligation of easily saleable moveable property such as machinery, stock in-trade, book debts by utilizing collateral recognized in the transactions specified in Section 2 (other than transactions excluded in Section 3 of the Act).
- Establishment and the maintenance of a filing office called “Secured Transactions Register” with the objective of providing,
I. Information on prior security interests of movable property to enable financial institutions to make informed business decisions.
II. Means of perfection of security interests of secured creditors in a debtor’s moveable property as against buyers, subsequent creditors and insolvency of such borrowers. This law was certified on 25th September 2009 and has become operative from 1st August 2011. Regulations governing the Secured Transaction Register has been gazzeted on 5th August 2011.
Under the provision of Section 7.1 of the proposed law, Credit Information Bureau of Sri Lanka (Bureau) established by the Credit Information Bureau Act No 18 of 1990 which has all the necessary infrastructure facilities, is imposed with the responsibility of maintaining the Secured Transactions Register (Register). The Bureau is required to
- The maintenance in the manner prescribed by the Minister, the Register of Secured Transactions and the registration of secured interests of movables.
- To register a notice of security in collateral filed by any person in relation to any transaction referred to in paragraph 2 above.
- To register a notice of interest of a judgment creditor.
- To maintain a record of all expired notices of a period of ten years from the date of expiry thereof.