The Sri Lankan Cabinet has given its approval for a significant restructuring within the state banking sector, aimed at bolstering the financial strength of two smaller, specialised institutions.

The decision involves transferring Housing Development Finance Corporation (HDFC) Bank shares to the Bank of Ceylon, and the shares of the State Mortgage and Investment Bank (SMIB) to People's Bank.

The proposal was put forward by President Anura Kumara Dissanayake in his capacity as the Minister of Finance, Planning and Economic Development.

The move is designed to integrate the two relatively small, specialised institutions—HDFC Bank and SMIB—into the larger state banks as subsidiaries.

HDFC Bank, a licensed specialised bank listed on the Colombo Stock Exchange, will become a subsidiary of the Bank of Ceylon.

The State Mortgage and Investment Bank (SMIB), a fully state-owned licensed specialised bank, will be acquired by People's Bank, also operating as a subsidiary.

According to the government statement, the Central Bank of Sri Lanka had previously noted that the current business models of HDFC Bank and SMIB were unsustainable.

This was attributed to their limited ability to raise deposits, poor profitability, and failure to meet the necessary minimum capital adequacy requirements.

Both banks have historically played important roles in the nation's housing sector.

HDFC Bank has financed over 100,000 housing units, pioneering products like subsidised loans and partnering with international bodies such as the Asian Development Bank.

It is currently focusing on "green mortgages" and housing linked to small and medium enterprises (SMEs) to aid the country's recovery.

The SMIB has a long legacy of financing thousands of homes through low-cost mortgages, particularly in rural and urban development.

The government believes this consolidation will ensure the overall stability of the banking sector and protect the interests of depositors.