Sri Lanka to “Restructure two Housing Banks to Stop Looming Crisis”

The government has taken approved a bold restructuring initiative for two specialised banks Housing Development Finance Corporation Bank (HDFC Bank) and State Mortgage & Investment Bank (SMIB)  as part of a broader effort to shore up the country’s financial stability and safeguard depositors’ interests.

Ownership Transfer

 Under the approved plan, the Government will transfer its shareholding in HDFC Bank into Bank of Ceylon (BOC), making the housing finance specialist a subsidiary of the state-owned commercial bank. At the same time, all shares in SMIB will be acquired by People’s Bank, placing SMIB under its wing.

Background and Financial Challenges

 Both HDFC Bank and SMIB serve a critical purpose: providing housing-related financial services in Sri Lanka. HDFC Bank was established under the Housing Development Finance Corporation Act No. 7 of 1997 and is listed on the Colombo Stock Exchange. 

 SMIB, formed under Act No. 13 of 1975, is fully state-owned and focused on mortgage financing. Yet both banks have been underperforming. HDFC Bank’s latest published financials show a net loss of around LKR 352 million, with return on equity (ROE) at –4.39% and return on assets (ROA) meaningfully negative at –0.54%. 

The bank’s market capitalisation is just LKR 2.88 billion and its price-to-book ratio stands at a weak 0.37, underlining market concern about its profitability and asset quality.

 For SMIB, the broader picture suggests weak deposit-raising capacity, low profitability and failing to meet capital adequacy norms—factors cited by the Central Bank of Sri Lanka as underpinning the push for restructuring. 

Rationale for Restructuring

Why restructure? First, integrating these weaker specialised banks into stronger state banks allows for economies of scale, centralised risk management and access to deeper deposit bases. It emphasises that the housing finance niche cannot thrive in isolation when deposit mobilisation is limited and regulatory demands (such as capital adequacy) are not met. 

Second, from a systemic risk perspective, weak specialised banks raise concerns over contagion within the financial system and erode depositor confidence especially in a pressured macro-economic environment.

 Third, through the restructuring, the banks’ housing mandate can be preserved while being supported by stronger parent institutions capable of absorbing shocks and providing strategic direction.

Strategic Challenges

However, the restructuring must go further than ownership changes. It must address core strategic failings: lack of diversification, weak profitability, low capital buffers, and sub-par asset quality. At HDFC Bank, the negative ROE and ROA reveal that returns are not covering cost of equity and assets are not generating sufficient incomeraising questions about business model viability. 

At SMIB, its niche focus on housing finance may not be sufficient in a challenging interest rate and economic climate, unless operational efficiencies and business scope are widened.

Policymakers should set clear milestones: accelerated deposit growth, improvement in net interest margin, reduction in non-performing loans (NPLs), and enhancement of capital adequacy ratios and integration of digital banking capabilities. These should be tracked publicly to ensure the restructuring yields measurable improvements and does not simply become a cosmetic ownership shift.

In sum, the Cabinet-approved transfer of shares in HDFC Bank and SMIB into larger state-owned banks is a welcome recognition that these specialist institutions have not progressed satisfactorily on their own. With HDFC Bank posting losses and SMIB under regulatory strain, the need for decisive action is clear. 

But success will depend on more than structural change it will require rigorous business model overhaul, stronger governance and ongoing regulatory oversight if depositors and the housing finance sector are to reap the benefits of stability and growth