📈 Strategic Vigilance: Strengthening State-Owned Banks

Sri Lanka's economic recovery hinge on reinforcing state-owned banks, identified as "systemic anchors" deeply intertwined with sovereign health. While fiscal metrics improve, institutional governance must now move beyond "cosmetic" reforms to ensure long-term stability. • Overall Financial Health Current stability is anchored by the IMF program, with inflation at 2.3% (Jan 2026) and reserves at US$ 6.8 Bn. However, legacy risks in state banks—such as high exposure to Government securities and SOE debt—remain critical focal points. • Asset Quality & Governance • Transparency: Urgent need to distinguish restructured loans from performing assets to avoid "quietly accumulating" distress. • Provisioning: Calls for conservative discipline to prevent shifting current risks into future years. • Autonomy: Shift from "nominal" public ownership to structured strategic accountability, linking bank boards to senior financial leadership. • Sector Breakdown & Mandate • Developmental Banking: Reaffirming the role of state banks in supporting Agriculture and SMEs without compromising commercial prudence. • Oversight: Strengthening follow-through on COPE recommendations to ensure accountability is "demonstrably strengthened" rather than episodic. • Key Highlights The summary emphasizes that banking sector discipline must match fiscal consolidation. As Sri Lanka emerges from a severe contraction, the credibility of state institutions is vital for rebuilding public trust.