Sri Lanka’s loan demand stays red hot

By Mirror Business

Colombo, May 15 (Daily Mirror) - Sri Lanka’s businesses and households borrowed at one of the fastest monthly paces on record in March, even as the economy began showing signs of fresh stress from the Iran war, raising questions over whether firms were rushing to secure loans before borrowing costs climbed further.

New Central Bank data showed commercial banks expanded loans to the private sector by Rs.258.4 billion in March, almost doubling the Rs.144.4 billion recorded in February and coming just shy of the all-time monthly high of Rs.262.6 billion seen in November last year.

For ordinary consumers, private sector credit reflects how much banks are lending to businesses and individuals for activities such as expansion, imports, working capital, housing and vehicle purchases. Strong credit growth is generally seen as a sign of rising economic activity and confidence.

The Iran war, which erupted at the end of February, has already begun to push up global oil prices, weaken regional economic sentiment and place fresh pressure on Sri Lanka’s fragile post-crisis recovery.

Since then, inflation has accelerated sharply while market interest rates have also started edging higher. Colombo consumer prices rose 5.4 percent in the 12 months through April, up from 2.2 percent previously, signalling that price pressures are returning faster than expected.

At the same time, the Average Weighted Prime Lending Rate, a key benchmark for commercial borrowing costs, has risen to 9.79 percent, increasing by 44 basis points since the conflict began.

The pressure is also beginning to show in the currency market.

The Sri Lankan rupee weakened further against the US dollar yesterday across several commercial banks, with some banks quoting selling rates around Rs.330 per US dollar, reflecting rising demand for foreign currency and concerns over the country’s external sector.

A weaker rupee typically raises import costs, particularly fuel, which can further fuel inflation and eventually translate into higher interest rates.

Banks themselves are also becoming more cautious.

Several lenders raised provisions against possible loan losses in the March quarter, warning that worsening macroeconomic conditions and heightened geopolitical uncertainty could affect borrowers’ ability to repay loans in the coming months.

This suggests that while credit demand remains strong for now, banks are simultaneously preparing for tougher conditions ahead.

The strong lending growth has brought total private sector credit expansion in the first three months of the year to Rs.485.4 billion, up 27.1 percent from a year earlier.

Sri Lanka had already recorded its highest-ever annual private sector credit expansion in 2025, with loans rising by over Rs.2 trillion as lower interest rates and improved economic conditions fuelled borrowing demand after the country emerged from its worst economic crisis.

However, with inflation resurging, the rupee weakening and global uncertainty intensifying, markets are now closely watching the Central Bank’s next monetary policy decision later this month for clues on whether borrowing costs could rise further.