Climate shocks accelerate Sri Lanka’s push for financial sector consolidation
The Sri Lankan banking and financial sector enters into a critical phase of transformation as a result of the combination of the shock implications by climatic changes and inherent inefficiencies in the system.
This has prompted the Central Bank (CB) to expedite the long-term plan for consolidation.
The damage inflicted by Cyclone Ditwah in the latter part of 2025 and early 2026 has exposed banks, finance companies, and insurance firms to natural disaster stresses reinforcing the need to have a resilient finance sector.
Unveiling the CB’S Policy Agenda for 2026 and Beyond last week, CB Governor Nandalal Weerasinghe revealed the Master Plan formulated by the Central Bank for the consolidation of banks, finance companies, with the aim of ensuring systemic sustainability.
“Beyond these short-term measures, recurring natural disasters remind us of the broader risks climate-related shocks pose to financial system stability,” he noted, referring to the immediate relief extended after the cyclone.
Cyclone Ditwah, which caused an estimated US$4.1 billion assessment by the World Bank in damages and economic risk transmitted its impact to the financial sector through several channels. The government says a more comprehensive assessment of post-reconstruction work would be put the figure at $2.8 billion.
Banks and nonbank finance companies with high exposures to small and medium-sized enterprises and regional lending saw their asset quality risks rise as borrowers remained in a state of poor recovery.
General insurance companies saw a surge in property, motor, and SME-related claims that severely pressured profitability.
Meanwhile, tighter lending standards and broader economic disruption were likely to slow credit growth, while losses in agriculture and tourism disrupted financial flows across the economy.
The Central Bank has issued a circular mandating temporary debt relief for affected borrowers. Licenced banks were required to suspend capital and/or interest repayments for three to six months, without charging interest on deferred amounts.
Banks were also encouraged to extend new loans with a minimum three-month grace period and a capped interest rate of 9 per cent per annum for up to two years, while relaxing certain operational constraints such as Credit Information Bureau-based rejections and penalty fees.
However, CB officials stress that relief measures alone are insufficient. The consolidation Master Plan aims to enable institutions to achieve the scale and balance sheet strength needed to support large, complex investments critical for economic growth.
“Consolidation is also expected to facilitate greater investment in technology, promote financial inclusion, and foster healthy and sustainable competition within the financial system,” Governor Weerasinghe said.
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