Commercial banks extend July private sector credit by a whopping Rs.202bn

• Brings total 7-month private sector credit to a mammoth Rs.902bn
• Translates to a faster 19.6% growth in such credit through July, picking up from 18%

Credit to Sri Lanka’s private sector continued its strong momentum in July, with the licensed commercial banks extending over Rs.200 billion for a second consecutive month, marking 2025 as a year of record growth in private sector lending.

According to the Central Bank’s latest data, the commercial banks expanded total outstanding private sector credit by Rs.201.5 billion in July, following Rs.221.6 billion in June. The cumulative credit extended in the first seven months of 2025 reached Rs.901.6 billion, surpassing Rs.790 billion extended in all of 2024 and reflecting a year-on-year growth of 19.6 percent, up from 17.9 percent through June.

In the 12 months through July, the licensed banks extended Rs.1.49 trillion in private credit. Preliminary, the Central Bank data suggests this credit expansion has been broad-based, covering sectors including agriculture, industry, services and personal loans, although growth has not been uniform.

The Central Bank left its key policy rate, the Overnight Policy Rate, unchanged at 7.75 percent during its July meeting, noting expectations for faster private sector credit growth in the second half of the year, as the impact of previous rate cuts, including the one in May, continues to feed through the economy. The average weighted prime lending rates, the benchmark for lending to the top-tier borrowers, currently stand at 8.16 percent.

Analysts attribute the rising demand for loans to low borrowing costs, relative political and policy stability and improved business and consumer confidence. A recent Central Bank credit survey indicated high willingness among the banks to lend and strong appetite for fresh loans from businesses and households.

The quarterly financial reports of commercial banks for the period ended June 2025 show that the lenders remain confident in the borrowers’ repayment capacity, reflected in the low provisions for potential nonperforming loans or reversals of previous provisions.

Private sector credit is widely regarded as a key indicator of economic health and activity. The financial services component of the services sector Purchasing Managers’ Index has consistently led growth in the services sector, reflecting the boost from the declining borrowing costs since mid-2023.

However, some economists caution that the rapid pace of credit expansion could pose risks to the external sector and price stability, given Sri Lanka’s ongoing recovery from a foreign currency shortage. The Central Bank has downplayed such concerns, noting historically low or negative credit growth in previous years, due to high interest rates and low government borrowing. The public enterprises’ repayments have also freed funds for private sector lending, a phenomenon the Central Bank terms “crowding-in” of private sector credit.