Sri Lanka’s NBFIs safe from risks after proposed gov’t debt restructuring plan

The plan does not directly impact the government debt holdings that NBFIs have stocked up on.

Sri Lanka’s proposed government debt restructuring plan will reduce funding and liquidity risk for non-bank financial institutions (NBFIs), says Fitch Ratings.

“The plan avoids direct impact on the local-currency government debt holdings of NBFIs and commercial banks, easing uncertainty over the entities’ capital, funding and liquidity profiles,” the ratings agency wrote in a commentary.

The latest proposal is not expected to prompt a loss of depositor confidence in the banking system, which would have raised contagion risk for NBFIs’ deposits and bank funding lines. 

However, Fitch warned that the proposal is only one aspect of the sovereign’s debt sustainability plan, and the weak economic environment continues to pose downside risk for NBFIs and banks.

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The government debt holdings of Sri Lankan NBFIs mainly comprise local-currency treasury securities to meet regulatory liquid-asset requirements and for investment returns.

Finance and leasing companies (FLCs) have boosted government debt securities holdings amid a weak economic outlook, lacklustre lending opportunities and a preference for stronger liquidity buffers at a time of extreme market uncertainty.  Such holdings are not excessive, at around 8% of sector assets at end-March 2023, but any direct impact from a government restructuring plan would have added to asset quality and earnings pressure arising from Sri Lanka’s difficult economic backdrop, Fitch said.

These securities also comprise a larger proportion of banking-sector assets, and any losses arising from a restructuring could have further constrained banks’ capacity and willingness to provide funding to the NBFI sector.