"Interest waivers (part or full) not uncommon in banking practice"

The recent controversy about a Bank of Ceylon part interest-waiver for the recovery of capital saw at least one leading businessman and two bankers and an accountant/bank director agreeing that this is permissible, and indeed desirable, if such an inducement can lead to a substantial recovery of a loan gone bad.

Ratna Sivaratnam, Chairman of the Aitken Spence Group of Companies said that bad debts in the course of trading activities are commonly encountered by businesses and it is normal to negotiate agreements to come to "some settlement".

"Most of us think that litigation should be the absolute last resort," Sivaratnam said. "It is like throwing good money after bad."

He said that interest waivers and even sometimes waiver of part of the capital is resorted to in these matters. This happened often when the tourism industry got into trouble after July 1983 and during the JVP insurgency of 1989.

"We got many concessions by way of deferred payments and interest waivers, partly or fully," he said. "In 1983 the Central Bank intervened to persuade the banks to facilitate such settlements. This is international practice. It is useless letting the patient die and get nothing."

Hatton National Bank Managing Director Rienzie Wijetillake said that he tended to look at defaulters in three categories — those who have fallen into that predicament as a result of the failure of their business, people in trouble because of bad management and the wilful defaulters.

"I have no sympathy at all for the third category," he said. "The other day I went to a hotel which owes us a lot of money. Only five rooms were occupied. What can somebody in that predicament do? I can’t throw the book at such a borrower who’s in trouble due to a situation not of his making."

Where there was bad management, they would try their best to rehabilitate the business. Where there was business failure due to circumstances outside the control of the borrower, Wijetillake said that the banks would view the problem with a lot of sympathy and help as far as possible.

Mr. Nihal Fonseka, Director/CEO of the DFCC Bank, said that bad debts are a fact of life, whether banks like it or not. Ideally, the bank should be able to recover all the capital it has loaned and the interest that arises. But in reality, there are times when that becomes impractical and negotiations are attempted to come to an arrangement about what is possible with the client.

Fonseka explained that at the first stage, most lenders are willing to forego penal interest imposed on defaulters. The major objective from the bank’s point of view is to recover the capital and as much as possible of the interest. It is also necessary to assess the forward risk.

If you allow a bad loan to go on, interest builds up and it becomes worse affecting the chances of any recovery. So it is sometimes necessary to cut your losses.

"Waivers are a well known banking practice," Fonseka said. "It happens in banks to varying degrees."

Mr. Deva Rodrigo, the well known accountant and Director of the People’s Bank agreed that where there is penal interest, that’s the first area of relief a lender will extend. He explained that such penal interest is imposed as a deterrent to default. "Very often it is ridiculous," he said. "No one can live with it."

He said that reasonable settlement terms offered were good commercial decisions to recover what is possible. Sometimes companies might give a lender equity in place of cash when they find they can’t service a loan.

Waivers are a well known banking practice, Rodrigo said.