When a bank lends too much to one borrower or one connected group, it is not only that borrower taking a risk. Depositors and ultimately the financial system can be exposed too. The Central Bank has now amended the rules governing just how concentrated those risks can become.
The Central Bank of Sri Lanka has issued fresh amendments to the rules governing large exposures of licensed banks, adding another layer to a regulatory framework designed to prevent too much banking risk becoming concentrated in too few hands.
Banking Act Directions No. 05 of 2026 were issued on September 24 and amend the Large Exposures Directions originally introduced in March 2024.
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Behind the technical language lies a straightforward question.
How much of a bank’s financial strength should be allowed to depend upon one borrower – or upon several borrowers who, although appearing separately on paper, are sufficiently connected that trouble affecting one could affect the others?
It matters because concentration can turn what initially appears to be the failure of one company or corporate group into a banking problem.
A bank with thousands of borrowers may appear diversified. But if a disproportionately large amount of its lending is concentrated among a handful of major corporate groups, its actual risk can look very different.
Sri Lanka’s newer large-exposure framework was designed precisely to address that problem.
When the Central Bank introduced the framework in 2024, it moved the measurement of the exposure ceiling towards Tier 1 capital, expanded the concept of connected borrowers to include economic dependence and established a 25 per cent cap on large exposures relative to Tier 1 capital. The framework also provided transitional arrangements for banks carrying exposures above the new limits.
Tier 1 capital matters because it represents the core financial resources available to a bank to absorb losses. Measuring a very large loan against that capital therefore provides a clearer picture of what could happen to the bank if a major borrower fails.
The other important concept is the connected borrower.
Two companies do not necessarily have to share the same name or obvious ownership structure to create essentially the same credit risk. If one is economically dependent upon another, lending to both may in reality represent one concentrated exposure.
That is why modern banking supervision increasingly looks through corporate structures and asks whether apparently separate borrowers are genuinely independent risks.
The latest amendment therefore deserves attention beyond banking circles.
Sri Lanka has spent several years rebuilding confidence in its financial system following the economic crisis. Stronger bank capital, better supervision and tighter recognition of risk are not technical luxuries in that process. They are part of preventing problems inside individual institutions from becoming problems for depositors and eventually taxpayers.
But regulation on paper is only part of the equation.
The more important question is how aggressively the rules are supervised.
If a bank approaches a large-exposure ceiling, what happens? If several companies are economically connected, how quickly does the regulator identify the connection? And where legacy exposures exceed a newly imposed limit, how long should a bank reasonably be given to bring them down?
Those questions become especially important in an economy such as Sri Lanka’s, where a relatively small number of large corporate groups operate across multiple sectors and may simultaneously borrow from several financial institutions.
There is no suggestion in the September 24 Direction that the amendment was prompted by a particular bank or borrower. It would therefore be wrong to attach the regulatory change to any individual institution without evidence.
But its timing nevertheless provides a useful reminder of something much larger.
Banks do not lend only their shareholders’ money. Much of the money they intermediate ultimately belongs to depositors.
When one enormous loan performs well, the profits belong to the bank. When an enormous loan goes badly wrong, the consequences can travel considerably further.
That is why limits on large exposures matter. The real test of the Central Bank’s latest rules will not be how formidable they appear in a Direction.
It will be whether concentrated risks are identified and controlled before the borrower gets into trouble.
