Manageable Capital Impact from Higher Gold Loan Risk Weights 📈

The Central Bank of Sri Lanka’s tighter capital treatment on gold-backed lending will have a manageable impact on rated financial institutions, though finance companies face greater pressure than banks due to higher exposure and more aggressive underwriting. • Overall Risk Density Changes The revised risk weightings will increase the average risk density of gold portfolios from 1% to ~12% for Fitch-rated banks, and from 5% to ~26% for finance companies. The changes take effect on 1 September 2026. • Impact on Commercial Banks Effect on Common Equity Tier 1 ratios is modest, estimated at 2bp to 35bp. People’s Bank holds the highest exposure at ~20% of gross loans (peers are below 10%), but its conservative loan-to-value (LTV) profile limits the capital impact. • Impact on Finance Companies Regulatory Tier 1 capital ratios could decline between 1pp and just over 5pp. Asia Asset Finance PLC is most affected, with gold loans comprising over two-thirds of its book. LB Finance PLC and Mahindra Ideal Finance PLC face moderate pressure of 1pp-2pp. • Key Sector Pressures & Risks The regulatory changes add pressure to already strained capital bases at HNB Finance PLC (approaching minimums) and Merchant Bank of Sri Lanka & Finance PLC (already below minimum requirements at end-March 2026). While credit-positive for long-term stability, a sharp drop in gold prices remains the key downside risk for the non-banking financial sector.