Tuesday May 19, 2026
Tuesday May 19, 2026
Tuesday, 19 May 2026 02:12 - - {{hitsCtrl.values.hits}}
The Central Bank of Sri Lanka (CBSL) has intensified efforts to consolidate the banking and non-bank financial sector, identifying three finance companies for merger discussions while warning that many smaller commercial banks face growing sustainability pressures under current operating conditions.
The issue came under focus during a recent Committee on Public Finance (CoPF) meeting with CBSL officials, where lawmakers questioned regulators over the rapid expansion of credit in the financial system and the progress of long-discussed consolidation reforms.
According to figures presented to the Committee, private sector credit extended by licenced commercial banks expanded by Rs. 2.1 trillion in 2025, representing growth of 25.2%, while finance company lending grew by nearly 49%.
CoPF members warned that the pace of credit expansion could become destabilising if weaker institutions were not strengthened through consolidation and improved supervision.
Responding to questions from lawmakers, CBSL officials said the regulator had already implemented a Non-Bank Sector Consolidation Master Plan, under which finance companies are assessed against a weighted supervisory scorecard covering governance, capital, liquidity, and operational sustainability.
Institutions are required to maintain a minimum threshold of 60 marks out of 100 to continue operating independently. CBSL officials revealed that only three finance companies currently remained below the required threshold and had been directed to identify merger partners ahead of the 31 March 2028 deadline.
CBSL Governor Dr. Nandalal Weerasinghe said the regulator had already significantly reduced the number of finance companies operating in the system through earlier consolidation efforts.
“We have brought down I think over 55 finance companies now below 30. Consolidation has been happening over a period of time,” he told the Committee.
The Governor indicated that pressure for consolidation was now increasingly shifting towards smaller commercial banks as operating costs and regulatory requirements intensified.
“In the current time, it is very difficult for small commercial banks to survive depending on the requirement of technology, core banking systems,” Dr. Weerasinghe said. “They don’t have sufficient business to survive and have investment to sustain this business.”
CBSL officials confirmed that banks with assets below Rs. 400 billion had been placed under a strengthened supervisory framework involving half-yearly assessments of quantitative and qualitative indicators, including governance, liquidity, and capital adequacy.
Dr. Weerasinghe said the CBSL was encouraging market-driven mergers among weaker institutions rather than pursuing forced consolidation backed by taxpayer support.
“This is a process we can’t forcefully merge,” he said. “Otherwise the Government will have to intervene and support in terms of tax relief and some contribution. We don’t want to make that a cost to the taxpayer.”
However, the Governor stressed that specialised lending institutions focused on micro, small and medium enterprises (MSMEs) would not automatically be required to merge, provided they remained financially sound and complied with regulatory capital requirements.
“There are certain small banks that will remain,” Dr. Weerasinghe said, pointing to institutions serving regional and microfinance markets. “We are not encouraging those banks to merge with the large banks. But banks that are having issues in terms of governance and capital liquidity can have an impact on the overall system stability.”
CBSL officials said the regulator’s approach reflected concerns that undercapitalised or poorly governed institutions could create wider systemic vulnerabilities during periods of rapid credit growth and rising economic uncertainty.
The CoPF discussion also touched on broader financial sector vulnerabilities, including non-performing loans in parts of the State banking sector and rising stress among SMEs facing tighter recovery actions by lenders.
Lawmakers queried CBSL officials on the status of proposals to establish a special purpose vehicle or “bad bank” to absorb distressed assets from State-owned financial institutions.
Dr. Weerasinghe said the establishment of a “bad bank” or development bank ultimately remained a Government policy decision rather than a regulatory initiative by the CBSL.
“I can see the Government has been talking about establishing a development bank or establishing a ‘bad bank’ to absorb some of the bad assets and do the liquidation,” he said.
The Governor also highlighted the recently enacted insolvency and bankruptcy framework as an important mechanism to support viable businesses undergoing financial distress.
“One of the instruments to help SMEs is to protect the enterprise and bail out the entrepreneurs,” Dr. Weerasinghe said. “The enterprise can continue through the insolvency process.”
