Small housing banks’ merger tests SL’s financial stability
View(s):By Bandula Sirimanna
Sri Lanka’s long-troubled state housing finance sector is set for its most consequential restructuring in decades, following the government’s decision to merge the Housing Development Finance Corporation (HDFC) and the State Mortgage and Investment Bank (SMIB) with two of the country’s largest state-owned commercial banks.
The move, approved by Cabinet in November 11, comes after the Central Bank flagged serious concerns about the long-term survival of both institutions.
Central Bank Governor Dr. Nandalal Weerasinghe did not mince words this week when he described the two specialised lenders as “burdened with unsustainable business models, poor profitability and an inability to meet minimum capital requirements”.
Speaking at a media briefing, he said the regulator had drawn up a “targeted consolidation plan” focusing on smaller banks to safeguard financial sector stability and protect depositors.
According to the plan, the government’s entire shareholding in HDFC incorporated under the Housing Development Finance Corporation Act of 1997 will be transferred to Bank of Ceylon (BOC), which will operate HDFC as its subsidiary. The State Mortgage and Investment Bank, established in 1975, will become a subsidiary of People’s Bank (PB) under a similar transfer of state-owned shares. Dr. Weerasinghe highlighted that both HDFC and SMIB had “low risk densities due to their heavy reliance on Employees’ Provident Fund (EPF)-backed loans”, which carry zero risk-weighting but also reflect the narrowness of their loan books.
Credit rating agency Fitch Ratings, in its latest review, supported this view, noting that the proposed transfers are unlikely to affect the ratings of BOC or PB.
Several financial and banking analysts fear that once absorbed into larger banks, low-income housing borrowers traditionally served by these institutions could be de-prioritised in favour of more commercially attractive segments.
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