Sri Lanka’s financial sector is entering a period of heightened scrutiny as regulators move to tighten supervision over vulnerable banks and finance companies amid rising concerns about systemic risks. Senior Central Bank officials told Parliament that weaker institutions may struggle to survive unless they strengthen governance standards, improve capital positions, or pursue mergers with stronger partners.
The warning came during a recent session of the Committee on Public Finance (CoPF), where lawmakers questioned officials from the Central Bank of Sri Lanka (CBSL) about the health of the financial system and the growing pace of lending across the economy.
Figures submitted to the Committee showed that licensed commercial banks expanded private sector credit by more than Rs. 2 trillion in 2025, recording growth exceeding 25 percent. Finance companies posted even sharper expansion, with lending increasing by almost half during the same period.
Parliamentarians voiced fears that rapid credit growth, if combined with weak supervision or undercapitalised institutions, could create significant vulnerabilities within the financial system. Concerns were also raised about whether smaller institutions possess the financial strength and governance structures necessary to withstand future economic shocks.
CBSL Governor Dr. Nandalal Weerasinghe acknowledged that the environment has become increasingly challenging for smaller lenders. He explained that rising technology costs, stricter compliance obligations, and the need for continuous investment in modern banking infrastructure are placing heavy pressure on institutions with limited business volumes.
According to the Governor, maintaining advanced core banking systems and meeting modern regulatory standards now requires substantial financial resources, making long-term survival difficult for some smaller commercial banks.
To address these concerns, the CBSL has expanded supervisory oversight for banks with assets below Rs. 400 billion. These institutions are now monitored through enhanced reviews conducted every six months, focusing on liquidity, governance practices, operational sustainability, and capital adequacy.
The Central Bank also revealed progress under its Non-Bank Sector Consolidation Master Plan, which uses a weighted assessment model to evaluate finance companies. Institutions failing to meet the required supervisory standards are encouraged to seek mergers or restructuring arrangements.
Officials confirmed that three finance companies remain below the minimum regulatory threshold and have been directed to identify merger partners before March 2028.
Despite the consolidation push, the Governor emphasised that regulators are not seeking to eliminate all smaller institutions. He noted that specialised lenders focused on microfinance and regional business sectors continue to play an important role in supporting small and medium-sized enterprises (SMEs), particularly in underserved communities.
However, Dr. Weerasinghe warned that institutions suffering from governance failures, weak liquidity, or inadequate capital buffers could undermine confidence in the broader financial system if left unaddressed.
The Committee discussion also widened to include concerns over rising non-performing loans within parts of the State banking sector and financial stress facing many SMEs. Lawmakers questioned CBSL officials about proposals to establish a special purpose vehicle, commonly referred to as a “bad bank,” to absorb distressed assets from struggling State-owned institutions.
The Governor clarified that such proposals remain policy decisions for the Government rather than initiatives directly driven by the Central Bank. He also pointed to Sri Lanka’s recently introduced insolvency and bankruptcy framework as a key mechanism designed to help financially distressed but viable businesses continue operations while restructuring their debts.