The Central Bank of Sri Lanka has introduced new restrictions on loan facilities granted against gold collateral in an effort to strengthen financial sector stability and reduce risks faced by financial institutions.
The new regulations, issued under the authority of the Central Bank’s Macroprudential Authority, came into effect immediately from today (25).
According to the CBSL, the directive is mandatory for:
- Licensed commercial banks
- Licensed specialized banks
- Licensed finance companies
New Gold Loan Limit
Under the new regulation:
- Financial institutions can provide only up to 70% of the market value of pledged gold as a loan
This means customers seeking gold-backed loans will no longer be able to obtain higher financing percentages that were previously available in some institutions.
The Central Bank stated that the decision was taken following a significant increase in gold-backed borrowing in recent months.
Authorities are concerned that rapid growth in gold loan exposure could create broader risks for:
- Financial institutions
- Credit quality
- Overall financial system stability
The CBSL says the measure aims to:
- Promote prudent lending practices
- Strengthen resilience within the banking and finance sector
- Reduce vulnerabilities linked to excessive credit growth backed by gold assets
The move comes amid broader efforts by the Central Bank to tighten financial conditions, following recent measures including:
- Higher policy interest rates
- Stricter vehicle financing rules
- Currency stabilization initiatives
Economic analysts say gold-backed lending often rises during periods of:
- Economic uncertainty
- Inflation
- Reduced household liquidity
- High borrowing demand
The new limit is expected to moderate aggressive lending practices while protecting financial institutions from potential fluctuations in gold prices and repayment risks.
