Talks between Sri Lanka and its international bondholders will seek common ground on how much of a hit should be incurred by domestic banks and holders of debt of the country's state-owned enterprises (SOEs), two sources with direct knowledge said.

One source said the two sides were "close to a solution" and expecting an agreement in principal to be reached in October, though a couple of issues had still to be agreed upon. Fresh talks were expected to be arranged within days, the source added.

"We do not want to see other SOEs foreign creditors being treated better than the central government foreign bondholders," the source added on condition of anonymity. "The second issue is the participation of local banks."

A government source in Colombo told Reuters on Thursday that the government was also hopeful the debt restructuring talks would be wrapped up by end-October.

The country of 22 million people tipped into its first foreign debt default in May 2022, after a severe shortage of dollars triggered its worst financial crisis since independence from Britain in 1948. The country has over $12 billion in international bonds outstanding.

As part of its debt overhaul, Sri Lanka has asked its international bondholders to take a 30% haircut to help restructure its debt and the talks, which kicked off last September, are still ongoing. The debt overhaul also affects a number of SOEs - such as SriLankan Airlines.

A delegation from the IMF is currently in Colombo as part of the evaluation process for the first review of the $2.9 billion four-year program which Sri Lanka secured in March.

President Ranil Wickremesinghe is expected to meet the IMF Managing Director on the sidelines of the UN General Assembly meetings in New York where high level meetings kick off next week and is expected to travel to China in mid-October, the Colombo source said.

It is still unclear if the IMF board will require more details on financing assurances from Sri Lanka's official creditors - including China - to pass the review and release of the next tranche of funding.

However, overseas private creditors were happy to push ahead and try to close a debt rework deal without such a commitment from bilateral creditors, the sources said.

A discussion among creditors as to whether instruments linked to the country's economic growth could be part of the restructuring was also still ongoing, with a number of options such as step-up or step-down payments in the mix. Payouts on these instruments reflect a better-than-expected economic performance or provide a country with more financial room to manoeuvre if growth comes in below expectations. (Reporting by Jorgelina do Rosario and Karin Strohecker in London, and Uditha Jayasinghe in Colombo; Editing by Toby Chopra)