Fitch Ratings has said that the Central Bank of Sri Lanka’s decision to tighten capital requirements for gold-backed lending is expected to have a largely manageable impact on the capital ratios of rated banks and finance companies, while also improving their overall risk profiles.

According to Fitch Ratings, the impact is expected to be more significant for finance companies than for banks, as gold-backed lending forms a larger share of their loan portfolios and has historically involved more aggressive underwriting practices.

Under the new directive, banks and finance companies will apply revised risk weightings for gold loans. Loans with loan-to-value (LTV) ratios below 70% will carry a 10% risk weight, while exposures in the 70%–100% LTV range will be assigned a 40% risk weight for both sectors.

For exposures above 100% LTV, a 100% risk weight will continue to apply. Fitch said these changes will increase the average risk density of gold-backed portfolios to around 12% for banks and 26% for finance companies, compared to previous levels of 1% and 5% respectively.

The agency noted that the impact on banks’ capital ratios will remain modest due to their relatively low exposure to gold loans.

It estimates that the effect on Common Equity Tier 1 (CET1) ratios will range between 2 and 35 basis points, based on exposures as of March 2026.

Among banks, People’s Bank is identified as having the highest exposure, with gold loans accounting for about 20% of its gross loan portfolio. However, Fitch said the overall capital impact is expected to remain limited due to the bank’s conservative lending practices.

For finance companies, the impact is expected to be more pronounced, with regulatory Tier 1 capital ratios potentially declining by between 1 percentage point and just over 5 percentage points.

Despite this, Fitch concluded that the sector remains adequately capitalised, with sufficient buffers above regulatory minimum requirements to absorb the changes.