Fitch Ratings, based in Colombo, reported on June 15, 2026, that the Central Bank of Sri Lanka’s implementation of stricter capital requirements for gold-backed loans is expected to have a manageable effect on the capital ratios of banks and finance companies that it rates, while also enhancing their risk profiles.
The anticipated impact will be more significant for finance companies compared to banks, as gold-backed lending constitutes a larger portion of their overall loan portfolios and their lending practices have been notably more aggressive.
Under the new regulations, banks and finance companies will adopt consistent risk weightings. Loans with a loan-to-value (LTV) ratio below 70% will now have a risk weight of 10% for both sectors, an increase from the previous zero percent. For loans with LTV ratios between 70% and 100%, banks will apply a risk weight of 40%, up from 20%. Finance companies will also categorize the entire exposure at 40% rather than only the amount exceeding 70% LTV. Loans with LTVs above 100% will continue to be risk-weighted at 100% for both categories, leading to an average risk density in gold-backed portfolios of approximately 12% for Fitch-rated banks and 26% for finance firms, up from 1% and 5%, respectively.
Despite the changes, the effect on banks’ capital ratios is expected to be limited due to their lower levels of exposure to gold loans. Based on data from the end of March 2026, Fitch estimates that the common equity Tier 1 ratios for banks may be impacted by between 2 and 35 basis points.
People’s Bank of Sri Lanka (rated AA-(lka)/Stable) has the highest exposure, with gold loans accounting for around 20% of its total loans, in contrast to less than 10% for its competitors. However, the capital impact is anticipated to be minimal due to the bank’s conservative LTV management.
In contrast, four Fitch-rated finance companies are likely to experience a more significant impact, although it should remain within manageable limits given their capital buffers above regulatory requirements. Their Tier 1 capital ratios could decrease by between 1 percentage point and just over 5 percentage points. Asia Asset Finance PLC (rated A+(lka)/Stable) is expected to be the most affected, as gold-backed loans make up over two-thirds of its lending portfolio.
Gold loans account for approximately one-third of the loan books at both LB Finance PLC (rated A-(lka)/Stable) and Mahindra Ideal Finance PLC (rated AA-(lka)/Stable), suggesting moderate capital pressure of around 1 to 2 percentage points. UB Finance PLC (rated BB(lka)/Negative) may also see a decline of roughly 1 percentage point, despite its gold loans constituting less than 20% of its total lending portfolio. Other rated entities may experience limited effects, ranging from 5 to 80 basis points.
For HNB Finance PLC (rated HNBF, A(lka)/Stable) and Merchant Bank of Sri Lanka & Finance PLC (rated MBSL, A(lka)/Stable), these regulatory changes will exert additional pressure on already strained capital positions, while Mercantile Investments and Finance PLC (rated BBB-(lka)/Stable) will also see a decrease in its capital buffers. HNBF’s total capital ratio may approach the regulatory minimum, and MBSL was already below the required Tier 1 and total capital thresholds as of the end of March 2026. To ensure compliance, capital infusions and ongoing capital growth will be crucial for both HNBF and MBSL.
Following restrictions on vehicle imports, lenders rapidly increased their gold-backed loans due to the low risk weights associated with this type of financing. Although the updated framework is considered positive for credit from a prudential standpoint and aligns with the lower LTV caps introduced in May 2026 to moderate aggressive lending growth, financial institutions are still likely to prefer gold loans due to their lower capital intensity compared to other loan products.
The ultimate effects on banks and finance companies may be less severe than anticipated if lenders adjust their portfolios prior to the new regulations coming into effect on September 1, 2026, assuming gold prices remain stable. Additionally, the short-term nature of gold loans supports this flexibility. For lenders with high concentrations of gold loans, a significant drop in gold prices poses the main risk, as it may increase LTV ratios, weaken collateral coverage, and heighten capital pressures.
Fitch Ratings does not foresee any rating changes as a result of the new guidelines, as the most impacted entities are either supported by external factors or possess sufficient capital buffers to absorb the effects.
