NBFI SECTOR
Compiled by Tamara Rebeira
CHARTING SECTOR STABILITY
Jayantha Rangamuwa delves into the shifts shaping Sri Lanka’s NBFI sector
Q: How do you assess the performance and direction of the non-banking financial institutions (NBFI) sector today, especially as it navigates consolidation and regulatory reforms?
A: The sector is at a strategic decisive point.
Despite the recent economic volatility and liquidity pressures, the NBFI sector has demonstrated remarkable resilience, supported by a more stable macro environment, improved collections, stronger liquidity buffers and a renewed focus on sustainable credit growth.
The direction is shifting towards quality over quantity. The Central Bank of Sri Lanka’s emphasis on consolidation, governance and capital adequacy is steering NBFIs towards a leaner, robust and transparent system.
Institutions that embrace digital transformation, prudent risk management and disciplined growth will emerge stronger while those that delay the inevitable will struggle to remain competitive.
Q: The Central Bank’s consolidation road map has placed strong emphasis on stability and governance. How should financial institutions prepare for the next phase of regulatory tightening?
A: The next phase will require proactive transformation rather than reactive compliance; and to this end, institutions must prepare in three core areas.
First, capital strengthening is essential – through retained earnings, efficient balance sheet structuring and diversified funding sources – to meet rising regulatory thresholds.
Second, governance and risk culture must evolve beyond checklists with deeper board oversight, stronger audit functions, independent risk committees and a more embedded culture of accountability.
And third, digital compliance and data accuracy will be critical, as regulators expect real-time tech driven reporting supported by upgraded core systems, improved data integrity and automated processes. Institutions that align early with regulatory direction will transition smoothly and strengthen market confidence.
Q: What challenges and opportunities do you foresee for mid tier NBFIs as the sector moves towards mergers, capital strengthening and improved asset quality?
A: This phase is characterised by a survival of the fittest dynamic for mid tier players. Key challenges include the inability to raise mandated minimum capital independently, the high costs of non-performing loan (NPL) management, provisioning and technology upgrades, and the cultural and systemic integration risks of mergers.
However, successful amalgamations present strong opportunities: greater scale, improved access to capital and operational synergies. A combined entity gains a more diversified loan book, cheaper institutional funding and enhanced public confidence, positioning it for growth in a recovering credit market.
Institutions that combine capital discipline, digital agility and strong governance will be best placed to rise into the sector’s upper tier.
Q: How important are governance, compliance and risk management in building long-term resilience for financial institutions?
A: They are fundamental – recent years have underscored that financial resilience depends not merely on profitability but trust and discipline.
Governance provides direction and ensures ethical, sustainable decision making; compliance safeguards institutional integrity and regulatory confidence; and risk management balances growth with prudence, preventing asset deterioration and liquidity stress.
When these three pillars work together, an institution becomes resilient, predictable and sustainable – even in volatile macroeconomic conditions.
Q: With inflation stabilising and interest rates gradually easing, how is the current macroeconomic environment influencing borrower sentiment and credit demand?
A: We are already seeing a gradual revival in borrower confidence – lower interest rates are easing repayment burdens, improving affordability and strengthening the credit cycle.
Three clear trends are emerging: a stronger demand for SME and business expansion loans, in manufacturing, agriculture value chains and trading; improved asset quality as household cash flows stabilise; and a gradual increase in consumer credit demand especially in leasing, personal finance and housing related credit.
While sentiment is improving, borrowers remain cautious, and institutions must ensure that growth remains responsible, data driven and risk controlled.
Q: Are there specific asset segments or industries where you expect higher growth – or higher risk – over the next few years?
A: We expect higher growth in several key asset segments. MSME and working capital loans will expand as the economy recovers with a strong demand from tourism, export linked industries and minor agriculture – all core segments for NBFIs.
Leasing is also poised for growth, given that it represents around 41 percent of licensed finance companies’ assets, supported by pent up demand for vehicles and machinery, following easing import restrictions and broader economic stabilisation.
Green and sustainable finance will accelerate under the Sustainable Finance Roadmap 2.0, which targets US$ 1 billion in green MSME loans by 2028. This aligns with the national goal of achieving 70 percent renewable energy by 2030.
However, some segments carry higher risks. Pawning and gold backed lending continue to grow in volume, reflecting household stress and potential exposure to vulnerabilities from gold price volatility or recovery challenges.
Unsecured personal loans also remain sensitive with the risk of overextending consumer credit as demand picks up, requiring NBFIs to maintain strict underwriting standards. The evolving EV market will add both growth potential and risk, requiring careful monitoring as policies and consumer adoption patterns develop.
Prudent institutions will need to balance growth opportunities with strong risk assessment, sector level vigilance and responsible credit expansion.
