Related-party guarantee rules for banks eased, reporting requirement tightened

• New Determination takes effect 1 Sept., replaces 2024 Determination and its 2025 amendment
• Corporate guarantee cover raised to 100% for ‘BBB-’ and above-rated guarantors, up from a 60-80% cap
• Machinery mortgages allowed as collateral for the first time, capped at 50% of valuation
• Treasury letters of undertaking now accepted for loans to Govt. Ministries and SOEs, previously not provided for
• Related-party reporting shifts from an unspecified format to two named FinNet electronic returns
• All other collateral ratios, covering property, shares, gold, cash and debentures, remain unchanged

The Central Bank of Sri Lanka (CBSL) has loosened the terms under which licensed banks may rely on corporate guarantees when lending to related parties, while allowing machinery to be pledged as collateral for the first time, under a revised Determination on insider lending.

Banking Act Determination No. 01 of 2026, dated 28 August 2026, takes effect from 1 September 2026, replacing Determination No. 04 of 2024 and its 2025 amendment. It was issued under Sections 47 and 76K of the Banking Act, No. 30 of 1988, as amended. 

Signed by CBSL Governor Dr. Nandalal Weerasinghe, the directive said the rules were intended to mitigate potential conflicts of interest and prevent banks from extending more favourable treatment to related parties.

The clearest change is to corporate guarantees. Previously, a guarantee from a third-party concern could cover only 80% of a related-party loan where the guarantor was rated ‘AAA’ to ‘AA-,’ dropping to 60% for guarantors rated ‘A+’ to ‘BBB-.’ That tiered structure has now been scrapped. 

Under the new Determination, any guarantor rated ‘BBB-’ or above, the lowest rung of investment grade, can back the full 100% of the loan.

A second change adds an entirely new collateral category that did not exist before: mortgages over machinery, capped at 50% of the asset’s value as determined by an external valuation obtained within six months of the loan being granted, subject to periodic review under Board-approved internal valuation policies.

A third change applies specifically to the public sector. Where a licensed bank lends to Ministries, Departments of the Government of Sri Lanka, or State-Owned Enterprises (SOEs), it may now accept a letter of undertaking or other instrument issued by the General Treasury instead of conventional security, provided the instrument confirms adequate budget provision for the liability and is disclosed in the Government’s financial statements as a commitment. This option was absent from the 2024 rules.

Reporting requirements have also been tightened procedurally. Banks previously reported related-party transactions quarterly, from the quarter ended 31 December 2024, in a format left unspecified by the CBSL. Under the new rules, reporting begins from the quarter ending 30 September 2026, through two specifically named web-based FinNet returns, BSD-QF-06-RPC and BSD-QF-06-RPI.

Every other collateral ratio in the framework is unchanged, including Government or CBSL securities at 90% of value, cash deposits at 90%, gold at 70%, freehold property with a primary mortgage at 80% of forced sale value, Colombo Stock Exchange-listed shares at 50%, corporate debentures rated ‘AAA’ to ‘BBB-’ at 50%, and life insurance policies at 75% of surrender value.

One provision carries over unaltered: a company that becomes a related party solely because a director or partner also sits on the bank’s board may still borrow under a standard loan agreement, provided it commits the borrower to furnish approved collateral within 90 calendar days if its credit quality deteriorates to Stage 3 under Banking Act Direction No. 13 of 2021.