Presenting movable assets as collateral for credit

CRIB Director/General Manager Pushpike Jayasundera

• CRIB, CBSL and Finance Ministry joint initiative to usher new era with revolutionary amendments to financial legislature

The Credit Information Bureau of Sri Lanka (CRIB) together with the Central Bank of Sri Lanka (CBSL) and the Finance Ministry, is reshaping the local financing landscape by introducing mortgage of moveable assets by rolling out major legislative reforms. Under the Secured Transactions (Amendment) Act No. 17 of 2024, CRIB is setting up a Secured Transaction Registry (STR) with technical assistance from the International Finance Corporation (IFC) of the World Bank Group, in order to establish a strong and effective credit infrastructure in the country. In this interview CRIB Director/General Manager Pushpike Jayasundera answers some of the most pressing questions that have been raised with regard to this highly anticipated development. 

Q: Why are MSMEs in Sri Lanka facing challenges with credit facilities?

A: Due to the nature of these businesses, micro, small and medium enterprises (MSMEs) in Sri Lanka have unduly constrained access to credit on commercial terms due to their lack of fixed assets that can be presented as collateral. MSMEs also often lack standardised credit policies unlike larger corporations, which can result in inconsistent credit assessment decisions that may lead to increased risk of bad debt. Additionally, the ability of debtors to impose delays through court action created leverage for settlements adverse to the interest of creditors 

Q: What were the existing regulations for moveable assets as collateral in banks and non-banking finance and leasing institutions?

A: While there were no regulations against presenting moveable assets as security against loans in Sri Lanka, banks and other financial institutions remained reluctant to accept movables. This is largely due to the high risk involved, as well as lack of an official mechanism to register security interests in moveable assets, and to determine priority in a security giver’s collateral. The only movables accepted as collateral are jewellery and motor vehicles primarily.  

Q: Why does Sri Lanka need a Secured Transactions System?

A: Secured transaction systems are established to facilitate the extension of credit secured on moveable assets and intangible collateral. A well-functioning secured transaction system can deepen Sri Lanka’s financial services market by making credit available to a wider range of borrowers such as MSMEs, entrepreneurs and self-employed individuals, who would otherwise have no access to credit. It will also protect the rights of creditors in secured lending, thereby increasing their willingness to provide financing against moveable collateral. 

Improving access to credit for MSMEs, entrepreneurs, and self-employed individuals, will empower and enable them to contribute towards the growth of the national GDP, with MSMEs playing a significant role in rebuilding as well as diversifying the economy as Sri Lanka steadily re-emerges from the worst socio-economic crisis faced by the island.  

Q: What are the key features of a Secured Transactions System?

A: There are three key features that are mandatory for setting up of fully-fledged secured transaction system. They are:

• Simple, inclusive rules for creating security interests
• Clear and reliable provision of notices through an agile and highly efficient database/filing system
• Effective procedure and protections backed by legislature in case of default, including enforcement and repossession 

Q: How is Sri Lanka setting up this Secured Transactions System?

A: Sri Lanka has passed a ground-breaking legislature last year with the enactment of the Secured Transactions Act, No.17 of 2024, which establishes the critically needed institutional and regulatory framework to govern the secured transactions system in Sri Lanka. The enactment of this legislature will:

• Establish the Secured Transactions Registration Authority, tasked with overseeing the registration of security rights in moveable property
• Determine priorities among creditors holding competing security rights in moveable properties by establishing clear guidelines, while also providing a standardised framework for conducting transactions and resolving disputes
• Establish and maintain a Secured Transactions Registry that serves as a comprehensive database/filing system to facilitate greater efficiencies as well as transparency in registering moveable assets 

Q: What is the Secured Transactions Registry?

A: It is an electronic database/ filing system, in which secured creditors (banking and non-banking financial institutions, private lenders) can register and give public notice of their security interests in moveable assets of companies and individuals upon the execution of the loan transaction. Rather than the transfer of possession, the registry allows creditors to legally enforce security interest over the moveable asset, thereby securing the legal right to dispose of the said asset in case of loan default. This public notice recorded in the register enables other prospective lenders to make informed lending decisions on the same moveable property or debtor. Buyers can also ensure that any moveable assets they are about to purchase are free of existing security interests registered by another party based on the information recorded in the registry. 

Q: What assets can be presented as moveable collateral?

A: There are a variety of assets that can be presentable as moveable collateral:

•  Personal property that does not fall under fixed assets (i.e. equipment, goods)
• Changeable property (i.e. harvested crops)
• Intangible property (i.e. account receivables, deposit accounts, license rights, intellectual property rights, etc)
• Payment instruments or documents (i.e. promissory note, bill of exchange, stock certificate, warehouse receipt, etc)
• Proceeds – property received by the 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) 

Q: What is the role of the Credit Information Bureau (CRIB) in establishing this new financing infrastructure?

A: The bureau has been tasked with the responsibility of establishing and maintaining the Secured Transactions Registry. This includes registering notices of security in collateral filed by any person in relation to any transaction of moveable assets, registering notices of interest of a judgement creditor, and to maintain records of all expired notices for a period of ten years from the date of expiry. 

We also consider it our responsibility and obligation to educate our general public of the progress we are making through financial legislature and reforms, and to ensure they are aware of the benefits they stand to gain with the possibility of presenting moveable assets as collateral.