Sri Lanka banks have shifted their financial strategy, cutting foreign borrowings and increasing overseas investments as monetary stability improves. This move reflects growing foreign currency deposits and reduced reliance on credit lines, positioning the sector for stronger net foreign assets.
Sri Lanka banks cut borrowings and raise foreign investments amid improved stability.
Sri Lanka banks have significantly reshaped their foreign currency strategy in the year leading up to June 2025, according to the Central Bank’s latest Financial Stability Report. The banking sector increased foreign currency deposits locally while reducing foreign borrowings, channeling more funds into loans and investments abroad.
As of the second quarter of 2024, Sri Lanka banks held foreign currency balances of 2.9 billion US dollars in overseas institutions, a decline of 790.2 million dollars compared to the previous year. Domestic systemically important banks accounted for 1.4 billion dollars, while foreign banks held 1.2 billion dollars. At the same time, foreign currency liabilities rose 7.6 percent to 13.3 billion dollars by the end of June 2025, driven mainly by increased forex deposits since mid-2023.
Banks reduced foreign borrowings by 11.2 percent, choosing not to renew several credit lines. Instead of borrowing to lend domestically, Sri Lanka banks used their dollar balances to invest in syndicated loans and foreign sovereign securities. Analysts have recommended that the government work with local banks to structure syndicated loans to settle maturing debt without relying on central bank dollar swaps.
Flushed with foreign currency, Sri Lanka banks financed foreign governments and regional entities, including India’s State Bank of India and a Singapore-based energy company. The central bank noted that funds previously held in overseas balances were redirected toward foreign sovereign securities, with D-SIBs contributing 84.8 percent of these investments. Although such investments carry minimal credit risk, they remain sensitive to exchange rate fluctuations.
The report also highlighted a strategic shift toward Fair Value Through Other Comprehensive Income (FVTOCI) holdings, giving banks more flexibility in managing liquid sovereign investments. The combination of reduced credit line exposure, increased deposits, and foreign investments led to a sharp increase in net foreign assets. By the end of the second quarter of 2025, net foreign currency assets had surged by 42.5 percent year-on-year to 1.5 billion dollars, surpassing pre-crisis levels.
Sri Lanka banks had previously borrowed heavily after the civil war to finance government debt. However, past inflationary policies and forex risk guarantees led to foreign exchange shortages and heavy losses during the currency collapse. With monetary stability restored and interest rates adjusted, banks have rebalanced their positions by holding strong foreign assets.
Economists note that with Sri Lanka’s high private savings rate, building reserves and maintaining a stable exchange rate is achievable. However, stronger legal frameworks are needed to keep the central bank’s policies in check and prevent future monetary shocks. As Sri Lanka banks continue their foreign investment drive, their role in stabilizing the financial system and supporting the broader economy is becoming increasingly significant.