Authorities agreed to include local-currency bonds in the restructuring program as they sought to appease overseas investors who are demanding that domestic debt holders should also share billions of dollars of losses

Some of the nation’s biggest lenders including Commercial Bank of Ceylon Plc. and Hatton National Bank Plc warn that a local debt restructuring will lead to capital impairment as banks are forced to set aside more money to cover losses.

“Already the banking sector is taking a toll on haircuts on dollar bonds,” said Sanath Manatunge, chief executive officer at Commercial Bank of Ceylon.

“For liquidity and statutory reasons, we have to have some bills and bonds. If that is also going to be subject to a haircut, then the industry might lose its resilience.”

The country’s biggest challenge after securing a $3 billion bailout from the International Monetary Fund in March is to reach a restructuring deal with creditors that would make its debt sustainable in the eyes of the Washington-based lender.

Banks’ reluctance to participate in a domestic-debt restructuring could complicate the process, which authorities hope to conclude before the first IMF review slated for September