Sri Lankan banks show increased willingness to lend as credit demand surges

• Commercial banks expanded outstanding credit by Rs. 441.5 bn in 2Q, up sharply from Rs. 274.6 bn in 1Q

Sri Lanka’s banks are showing a greater willingness to lend in response to heightened loan demand, a trend expected to accelerate in the third quarter of 2025. 

This indicates that the country is in the early stages of a new credit expansion cycle, following a period of credit contraction during the recent economic crisis.

According to Central Bank’s periodic credit supply survey, banks’ willingness to lend reached a high of 59.6 index points in the second quarter of 2025, up from 57.3 in the first quarter. This marks the ninth consecutive quarter of positive growth in lending sentiment. This willingness is projected to continue through the current third quarter, buoyed by favourable banking sector liquidity, the ongoing economic revival, and a positive overall outlook.

Meanwhile, demand for loans, which has already expanded for eight consecutive quarters, is expected to intensify further in the third quarter. This signals higher credit disbursements by licensed banks, building on a second quarter that also saw record growth in private sector credit.

For instance, licensed commercial banks expanded their total outstanding private sector credit by a mammoth Rs. 221.6 billion in June alone, the largest growth recorded in a single month.

In the second quarter (April to June), commercial banks increased their total outstanding private sector credit by Rs. 441.5 billion, a sharp acceleration from the Rs. 274.6 billion extended in the first quarter (January to March). This brings the total credit growth for the first six months of the year to a huge Rs. 716.1 billion.

The survey cited declining interest rates, rising vehicle imports, and improved business confidence as key reasons for the expected acceleration in credit demand.

The benchmark average prime lending rate (APLR), the rate offered to banks’ most creditworthy customers, fell by two basis points last week to 8.07 percent. This follows the Central Bank’s statement in July confirming that its 25-basis-point policy rate cut in May was successfully transmitting to market rates.

 A pent-up demand for vehicles is also fuelling loan growth, with just over 135,000 vehicles registered in the first seven months of the year, prompting strong demand for financing.

This rapid credit expansion follows a period of contraction throughout 2023. The cycle began in the second half of last year as the economy started recovering from the deep recession of 2022-2023. As foreign currency availability improved through the normalisation of remittances and a recovery in tourism, the Central Bank began easing its monetary policy in June 2023, paving the way for the current cycle.

In July, the Central Bank downplayed concerns about the economy overheating, noting that the country is recovering from a period of credit contraction. Furthermore, the Central Bank noted that borrowing by State-Owned Enterprises (SOEs) -which previously crowded out the private sector- is now declining as they settle existing facilities rather than taking on new debt.

A categorical breakdown in the survey revealed that while the willingness to lend to SOEs has decreased, the outlook for lending to the retail, corporate, and SME sectors has improved. In a positive sign for bank asset quality, the non-performing loan (NPL) ratio fell during the second quarter, a trend that is expected to continue.