Govt  Moves to Major Housing Finance Overhaul amid HDFC/ SMIB Crisis

Sri Lanka is set to carry out its most significant restructuring of the state housing finance sector in decades, following the government’s decision to merge the Housing Development Finance Corporation (HDFC) and the State Mortgage and Investment Bank (SMIB) with two major state-owned commercial banks.

The Cabinet approved the plan on November 11, 2025, responding to urgent warnings from the Central Bank about the long-term viability of both specialised lenders. Central Bank Governor Dr. Nandalal Weerasinghe described HDFC and SMIB as “burdened with unsustainable business models, poor profitability and an inability to meet minimum capital requirements,” underscoring the urgency of the move.

Under the restructuring, HDFC’s entire government shareholding will be transferred to Bank of Ceylon (BOC), which will manage it as a subsidiary. Similarly, SMIB will become a subsidiary of People’s Bank (PB) through a transfer of state shares. Both banks have traditionally relied heavily on Employees’ Provident Fund-backed loans, giving them low risk-weighted assets but also reflecting a narrow loan portfolio.

Credit rating agency Fitch Ratings supports the mergers, noting that HDFC and SMIB each represent only 1–1.5 percent of the acquiring banks’ assets. Fitch expects government capital injections to ensure that the consolidation does not weaken BOC or PB’s capital buffers. However, the agency warned of potential pressure, as both banks already face capital constraints due to high exposure to government securities.

 Analysts note that the consolidation aims to protect depositors and maintain housing finance continuity. Yet, critics caution that absorbing HDFC and SMIB into larger banks may dilute their focus on low-income housing borrowers, who risk being sidelined in favour of more commercially profitable segments.

Fitch has placed both HDFC and SMIB on Rating Watch Positive, reflecting anticipated stronger state backing. Dr. Weerasinghe emphasized the stakes: “Strengthening financial sustainability is essentialnot optional.”

For thousands of households reliant on state housing credit, the government’s move could determine whether the sector is revitalised or merely postpones deeper, structural reforms. The coming months will reveal whether this bold consolidation secures stability and broad access to affordable housing financeor leaves traditional borrowers behind in the push for financial efficiency.