The Central Bank of Sri Lanka (CBSL) has capped lending against gold collateral at 70% of its value, in a fresh macroprudential move to contain rapid growth in gold-backed credit.
Under Central Bank of Sri Lanka Act Directions No. 02 of 2026, signed by Governor Dr P. Nandalal Weerasinghe, licensed commercial banks, licensed specialised banks and licensed finance companies must ensure that credit facilities secured by gold do not exceed 70% of the collateral’s value. The cap takes effect on 25 May 2026 and also applies to existing facilities renewed on or after that date.
The directions define “credit facilities” broadly to include pawning facilities, gold loans and any other credit extended against gold collateral. Lenders have also been instructed to maintain prudent valuation practices so that pledged gold reflects a true and fair market value.
CBSL said the measure was issued under Section 105(1) of the Central Bank of Sri Lanka Act No. 16 of 2023 to strengthen financial system stability and mitigate systemic risks. The bank pointed to a sharp rise in gold-backed lending in recent months and warned that volatile global gold prices and exchange-rate swings could erode the value of collateral held against such loans.
The gold cap was issued alongside a parallel tightening of vehicle financing limits, which the Central Bank cut for the second time in six months — also effective May 25. NewsFirst reported that the two measures were contained in a single direction covering both gold and vehicle credit.
Together they mark the Central Bank’s third lending-cap tightening this cycle, narrowing the credit channels through which household borrowing has expanded as gold prices and vehicle imports surged.
Update — June 15: Fitch says capital impact manageable
Fitch Ratings has assessed that the higher gold-loan risk weights will have “a largely manageable impact” on the capital ratios of rated banks and finance companies while strengthening their risk profiles, Ada Derana reported on Monday. Under the new directive, gold loans with loan-to-value (LTV) ratios below 70% will carry a 10% risk weight, up from zero, and exposures in the 70%–100% LTV band will be risk-weighted at 40% for both banks and finance companies — up from 20% at banks and from 100% on the above-70% portion only at finance companies. Exposures above 100% LTV remain at 100%.
The agency said the changes lift average risk density in gold-backed lending portfolios to about 12% for Fitch-rated banks and 26% for finance companies, from 1% and 5% respectively. It estimates the effect on banks’ common equity Tier 1 ratios at between 2 and 35 basis points based on end-March 2026 exposures. People’s Bank (Sri Lanka) (AA-(lka)/Stable) is identified as the most exposed, with gold loans accounting for about 20% of gross loans, although its conservative LTV profile is expected to limit the capital impact. For finance companies the hit is described as more pronounced but still manageable, with regulatory Tier 1 capital ratios projected to decline by between 1 percentage point and slightly over 5 percentage points.
