Fitch Ratings has stated that the Central Bank of Sri Lanka’s tighter capital treatment for gold-backed lending is expected to have a largely manageable impact on the capital ratios of rated banks and finance companies, while simultaneously strengthening their risk profiles.
According to Fitch Ratings, the impact on Fitch-rated finance companies is likely to be larger than on banks because gold-backed lending accounts for a larger share of their loan books and underwriting has been more aggressive.
Banks and finance companies will adopt similar risk weightings under the new directive. Gold loans with loan-to-value (LTV) ratios below 70% will carry a 10% risk weight for both sectors, up from zero. For exposures in the 70%-100% LTV band, banks will apply 40% risk weight, up from 20%, while finance companies will also apply 40% to the full exposure, instead of 100% only on the portion above 70% LTV. Exposures above 100% LTV will remain risk weighted at 100% for both. This raises average risk density in gold-backed lending portfolios to about 12% for Fitch-rated banks and 26% for finance companies, from 1% and 5%, respectively, it said.
The agency further stated that the impact on banks’ capital ratios will be modest due to their relatively lower exposure to gold loans.
It estimates that the effect on common equity Tier 1 ratios will range between 2 basis points and 35 basis points, based on end-March 2026 exposures. People’s Bank (Sri Lanka) (AA-(lka)/Stable) is identified as having the highest exposure, with gold loans accounting for around 20% of gross loans, compared to below 10% for peer banks. However, the capital impact is expected to remain limited due to the bank’s conservative loan-to-value profile, it noted.
For finance companies, the impact is expected to be more pronounced but still manageable given buffers above regulatory minimum requirements. Fitch estimates that their regulatory Tier 1 capital ratios could decline by between 1 percentage point and slightly over 5 percentage points, the statement added.
