New gold-loan rules strengthen safeguards; limited rating impact seen: Fitch

Sri Lanka’s tighter capital requirements for gold-backed lending would have a largely manageable impact on the banks and finance companies while strengthening the prudential safeguards, Fitch Ratings said, although several finance firms could face increased pressure on the already weak capital positions.

The revised framework, which takes effect on September 1, raises risk weights on gold-backed loans across both banks and finance companies, increasing the amount of capital the lenders must hold against such exposures.

“Fitch Ratings believes the Central Bank of Sri Lanka’s tighter capital treatment for gold-backed lending will have a mostly manageable impact on the rated banks’ and finance companies’ capital ratios, while supporting the risk profiles,” Fitch said.

The changes follow a rapid expansion in gold-backed lending after the vehicle import restrictions curtailed the traditional lending opportunities. The segment became increasingly attractive because of its low capital requirements.

Under the new rules, the loans with the loan-to-value (LTV) ratios below 70 percent, will carry a 10 percent risk weight for both the banks and finance companies, compared with zero previously. The higher LTV bands will also attract increased capital charges.

As a result, Fitch estimates the average risk density in gold-loan portfolios will rise to about 12 percent for the rated banks from one percent previously and to 26 percent for the finance companies from 5 percent.

The impact on the banks is expected to be modest because the gold-backed lending accounts for a relatively small share of their overall portfolios. Fitch estimates the common equity Tier 1 capital ratios could decline by between two basis points and 35 basis points based on the end-March 2026 exposures.

People’s Bank is expected to record the largest impact among the Fitch-rated banks, with gold loans accounting for around 20 percent of gross loans, although its conservative LTV profile should help contain the effect.

The finance companies are likely to face a more noticeable impact, due to their heavier reliance on gold-backed lending.

Fitch estimates the Tier 1 capital ratios at the four rated finance companies could fall by between one percentage point and slightly over five percentage points. 



Asia Asset Finance is expected to be the most affected, with the gold loans accounting for more than two-thirds of its lending portfolio.

LB Finance and Mahindra Ideal Finance could see their capital ratios decline by between one and two percentage points, while UB Finance may face an impact of about one percentage point.

The agency also highlighted concerns over the lenders already operating with limited capital headroom.

“For HNB Finance PLC (HNBF, A(lka)/Stable) and Merchant Bank of Sri Lanka & Finance PLC (MBSL, A(lka)/Stable), these changes will add pressure to the already strained capital bases, while Mercantile Investments and Finance PLC’s (BBB-(lka)/Stable) regulatory capital buffers would also decline,” Fitch said.

According to the agency, HNB Finance’s total capital ratio could move close to the regulatory minimum, while MBSL was already below the minimum Tier 1 and total capital requirements at end-March 2026. Capital injections and continued earnings retention would be important to restore stronger buffers at both institutions.

Despite the higher capital charges, Fitch expects the lenders to continue favouring gold-backed lending because it remains less capital intensive than many alternative lending products.

The agency said the revised framework is credit positive and complements the Central Bank’s move in May 2026 to lower the maximum LTV limits to curb the aggressive growth in the segment.

Fitch added that the eventual impact may be lower than the current estimates if the lenders reduce exposures before the rules take effect. However, it warned that a sharp decline in gold prices remains the main risk for institutions with large concentrations of gold-backed loans, as weaker collateral values could increase capital pressure.

The rating agency does not expect the new framework to result in rating actions, noting that the most affected issuers either benefit from external support or maintain adequate capital buffers.