Last year, against the backdrop of an unprecedented economic crisis, the Sri Lankan government introduced domestic debt optimisation (DDO). This was a necessary step in lessening the yearly repayment burden by spreading the amounts due to domestic public lenders over a longer time frame.

The crisis that began unfolding in late 2021 and escalated by April 2022, with Sri Lanka experiencing its sovereign debt default, led to a notable increase in the non-performing loan (NPL) ratio. By mid-2023, the NPL ratio for the banking sector stood at 13.3%, up from 7.6% in 2021.

According to the Central Bank of Sri Lanka, at that time, the local banking sector held a significant portion of government securities, which comprised international sovereign bonds and Sri Lanka Development Bonds. Given this scenario, the Central Bank aimed to minimise the impact of the DDO on the banking sector to maintain stability and soundness in the financial system.

Solid performance

That approach has paid off. The banking sector has delivered a solid financial performance for the year ending December 2023. However, it may not be as stellar as the performance in the previous year for some licensed commercial banks.


Madhusha Thavapalakumar is the business editor of a national newspaper in Sri Lanka

Experts believe that the banking sector’s reported financial performance exceeds their expectations

This is because 2023 was marked by significant state reforms, increased taxes and high interest rates. Despite these challenges, experts believe that the banking sector’s reported financial performance exceeds their expectations.

For instance, Nations Trust Bank (NTB) experienced substantial growth, with its operating profit before tax (PBT) increasing by 74%, with profit after tax (PAT) rising by 59% compared to the previous year. DFCC Bank, meanwhile, also showed impressive growth, with its PBT and PAT more than quadrupling from the previous year’s figures.

Bumpy year

Last year was a bumpy one in terms of policy rates. The Central Bank conducts eight monetary policy review meetings per year, during which the monetary board determines whether to increase, decrease or maintain the policy rates. To address the economic challenges, the bank revised the rates downwards four times, increased one time and maintained the rates three times.

The banks saw a significant increase in interest expenses, attributed to the lagging effects of repricing time deposits at higher rates following the Central Bank’s policy rate revisions. As a result, some of the LCBs experienced a dip in profitability.

The Sri Lankan rupee has become one of the top-performing currencies against the US dollar

Risk factors

According to First Capital Research, even though an improvement in NPL is expected amid recovery of economic indicators, there could be adverse risks to the central bank’s profitability, in case of an increase in provisioning of the banks.

First Capital Research is also of the view that the recent temporary suspension of parate execution – exercised by lending banks to recover non-repaid debt by selling assets – may not be preferable with financial institutions, as it could further slow down the recovery of NPLs.

As the Sri Lankan rupee has become one of the top-performing currencies against the US dollar, appreciating by 8% in 2024 and over 12% in 2023, it has a downside: negatively affecting the banking sector’s loan book.

However, research by Sri Lankan investment bank CAL suggests that even as interest rates decrease and net interest margins contract, local commercial banks are poised to increase their earnings, thanks to significantly reduced impairment charges. Most banks have already set aside provisions for approximately 50%-52% of their impaired sovereign bond positions.

At this juncture, the banking sector is proving resilient. And while it’s difficult to predict how the world economy might steer a course through a period of instability and uncertainty – and what that might mean at a local level – the outlook for Sri Lanka’s financial institutions is more positive than it once was. 

A stable banking sector ensures the availability of capital for businesses to expand operations, creates jobs, and stimulates economic growth; all of which are vital during a period of recovery and serve as the building blocks for a nation’s long-term prosperity.