Sri Lanka’s Cabinet of Ministers has approved adopting a new methodology for assessing credit risk at financial institutions, closing a gap in the Public Debt Management Act that leaves some of the state’s largest contingent liabilities without a yardstick.

The decision was announced by Cabinet Spokesman Nalinda Jayatissa, EconomyNext reported at 8.48 p.m. on Tuesday.

What the decision covers

The methodology applies to the risk the state takes on when it provides government guarantees or sub-loans to state-owned enterprises, under the provisions of the Public Debt Management Act. That Act was passed in 2024 under the previous administration.

A sub-loan is money the government borrows and on-lends to a state enterprise; a guarantee is a promise to repay a lender if the enterprise does not. Neither appears as government debt at the moment it is issued, which is why the framework for pricing the risk attached to them matters.

The gap being filled

The substance of the decision is in an exclusion rather than an inclusion.

Jayatissa said that neither the Central Bank nor financial institutions that partly or wholly lend or borrow for their own businesses fall within the definition of “public enterprises” in the Public Debt Management Act.

That definition is what triggers the Act’s risk-assessment machinery. Institutions outside it are not covered by the standard process — so a guarantee or sub-loan extended to one of them has, on the Cabinet’s own account, had no prescribed method for assessing the risk it carries.

“Therefore, there is a necessity to formulate an appropriate methodology for assessing the … credit risk in relation to providing guarantees or sub-loans, taking into account the unique nature of those institutes, higher level debt financing, liquidation and market risk, necessity of regulation and importance of their potential systems,” Jayatissa said.

Why this is not a technical footnote

The institutions described — bodies whose core business is itself lending and borrowing — are the ones whose balance sheets carry leverage by design. The spokesman’s own list of what the new method must weigh says as much: higher levels of debt financing, liquidation risk, market risk, and the systemic importance of the institutions concerned.

In other words, the entities the Act’s standard definition excludes are precisely those where a state guarantee is hardest to price and where failure would be most consequential. A general-purpose methodology built for a utility or a manufacturing corporation does not transfer to a bank, which is the reason a separate one is being written.

The Act’s exclusion of the Central Bank is of a different character and is ordinary practice — a monetary authority is not a public enterprise in the commercial sense and is not the concern here.

Not reported

No figure has been published. Nothing in the filing states the stock of outstanding guarantees or sub-loans to the institutions concerned, how much of it would fall under the new methodology, or what the state’s exposure amounts to.

Nor does the filing name the institutions affected, say who prepared the methodology or who will apply it, give a date for it to take effect, or state whether it requires a gazette, a regulation under the Act, or any further parliamentary step. It does not say whether existing guarantees will be reassessed under the new method or only future ones.

On sourcing. This is a single-source report, which is unusual for a cabinet decision and is noted here deliberately. This desk searched for the same decision across the other verified newsrooms and found no independent filing: Hiru’s desk covered two other decisions from Tuesday’s post-Cabinet briefing — on the Ayurveda Act and on imported tyres — but not this one. The only other published account traced was an aggregator’s rewrite of the EconomyNext report, which adds nothing and does not count toward this site’s credibility index. The government’s own cabinet-decisions page at cabinetoffice.gov.lk could not be reached from this host.

Sources: EconomyNext — Cabinet approves new credit risk assessment method.