• Banks given three years to diversify lending
• Push aims to shift corporates to capital markets

The Central Bank of Sri Lanka (CBSL) has directed licensed commercial banks to diversify their lending exposures over the next three years, in a move designed to push corporates and State-owned enterprises (SOEs) toward capital markets for funding, Central Bank Governor Dr. Nandalal Weerasinghe said.

Speaking at the Invest Sri Lanka forum held last Thursday (27 April), Dr. Weerasinghe highlighted the risks associated with the current heavy dependence on the banking sector for capital by both private and public sector entities. He explained that the banking sector is structurally unable to meet medium- to long-term funding needs due to a mismatch between its short-term liabilities – such as customer deposits – and the long-term nature of business capital requirements.

“I don’t think the bank will ever be able to provide medium- to long-term capital for the higher economic growth we need in this country for the next several years,” Dr. Weerasinghe stated, emphasising the need to develop alternative financing channels.

In Sri Lanka, businesses and SOEs primarily rely on banks for financing, with minimal engagement in the capital markets. According to Dr. Weerasinghe, this practice is unsustainable for long-term economic growth and places undue strain on the banking system.

“That is where the capital markets must be the source of raising medium- to long-term capital,” he noted, pointing out that developed economies commonly rely on market-based financing for sustained business expansion and infrastructure development.

From a financial stability perspective, the Governor said the Central Bank is prioritising a structural shift to reduce overexposure by banks. “Maintaining the stability of the financial system is important to maintain the stability of the banking system,” he added.

To that end, the Central Bank has issued a regulatory directive requiring banks to gradually reduce excessive credit concentrations and diversify their exposures over the next three years. The move is expected to encourage corporates and SOEs to look beyond the banking sector and increasingly tap into capital markets such as the Colombo Stock Exchange and bond markets to meet their funding needs.