Banks slammed for archaic collateral lending as regulators demand shift to risk-based models

Dr. Nandalal Weerasinghe

K.G.P. Sirikumara

Sri Lanka’s banking and finance sector has been issued a blunt warning to abandon its heavy reliance on collateral-backed loans and transition to risk-based credit evaluations. 

The stark directive was delivered by top financial regulators during the launch of the Credit Information Bureau of Sri Lanka’s (CRIB) new customer-facing mobile application, myCRIB, held in Colombo last Friday.

Speaking at the launch, CRIB Chairman and Central Bank Deputy Governor K.G.P. Sirikumara directly challenged the archaic mindsets dominating the local banking fraternity. He criticized the industry’s dependency on disproportionate asset backing. 

“...I would say that a talented capable learned banker people like you would never believe that obtaining a collateral worth of Rs. 100 million and giving a loan of Rs. 10 million is a big task,” he stated. “You know that it’s not real banking,” he added.  He told the audience of bankers that the industry’s true objective must shift.  “The real challenge is moving away from collateral based lending or dependency to go towards more risk based evaluations and to simplify lending decisions,” Sirikumara stressed.

Central Bank Governor Dr. Nandalal Weerasinghe, attending as the Chief Guest, echoed this urgency, framing the bureau’s new technological application as a critical mechanism to overcome information asymmetry, which he identified as “one of the biggest constraints on the credit markets”.  He emphasized that the introduction of modern credit intelligence allows banks to better assess creditworthiness based on financial information rather than static assets. This capability, he stressed, is an essential instrument that banks can use to “reduce the barriers to credit faced by SMEs, informal sectors, and first-time borrowers,” communities that have historically been locked out of formal credit channels alongside women-owned businesses and rural populations. However, Dr. Weerasinghe also drew a hard line on the ethical and operational responsibilities that come with rapid digital expansion into alternative data. As the push for financial inclusion becomes increasingly data-driven and technology-reliant, the Governor noted that the governance of financial institutions is paramount.  “Data quality, privacy, cybersecurity, and social awareness must remain critical items,” he warned.  He urged the sector to embrace these new frameworks safely, stating that “Responsible innovation is another vital component” and that “Sri Lanka must continue embracing these developments while maintaining a strong risk strategy in the financial services industry”.

For this transition to succeed safely, Sirikumara reminded banks that they bear the ultimate responsibility for the data feeding these modern systems.  “Data is good as much as that is clean, that is good and dependable,” he explained, pointing out that while CRIB maintains the technological platform, the source of this crucial data is always the banking and financial sector itself. (NF)

Pix by Waruna Wanniarachchi