Sri Lanka loan demand is expected to rise sharply in the third quarter of 2025, driven by improved business confidence, vehicle imports, and lower interest rates, according to a new survey by the Central Bank of Sri Lanka.
Strong consumer confidence and low interest rates fuel Sri Lanka loan demand surge
Sri Lanka’s credit market is poised for another period of accelerated growth as loan demand shows strong momentum heading into the third quarter of 2025. According to a recent Central Bank of Sri Lanka (CBSL) survey, the country’s appetite for credit has expanded significantly during the second quarter and is set to grow further, backed by improving economic sentiment and supportive policy measures.
The CBSL noted that Sri Lanka loan demand is projected to increase across multiple sectors, with key drivers including rising consumer confidence, a favorable economic outlook, and the lifting of restrictions on vehicle imports. Low interest rates have further strengthened borrowing appetite, encouraging both businesses and individuals to seek new financing opportunities.
The central bank highlighted that the anticipated reduction in lending rates in the coming months is likely to fuel further credit growth. This is expected to result in increased borrowing activity among companies looking to invest and expand operations, as well as consumers pursuing big-ticket purchases. Analysts say this trend reflects growing optimism about the country’s economic recovery trajectory following several challenging years.
Despite this positive momentum, some experts have raised concerns about the potential risks associated with rapid credit expansion. They warn that the recent policy rate cuts by the central bank may have pushed domestic credit to levels that could complicate foreign debt repayment. Although no direct money printing is occurring, analysts caution that increased domestic credit could indirectly pressure foreign exchange reserves.
Banks have also been sourcing additional funds by mortgaging their past dollar collections through dollar-rupee inflationary swaps with the central bank. While this provides short-term liquidity, experts suggest it could limit banks’ ability to accumulate foreign currency through outright purchases. As a result, the balance between domestic credit growth and external financing stability remains a delicate issue.
The CBSL survey revealed that the loan demand outlook index climbed to 80.2 points in Q3 2025, a notable rise from 67.6 in Q2. However, willingness to lend slightly declined to 41.5 points in Q3, compared to 59.6 points in the previous quarter. This divergence suggests that while borrowers are increasingly eager to access credit, lenders may remain cautious in extending financing, likely due to macroeconomic uncertainties and regulatory considerations.
Another factor shaping the credit market is the broader monetary policy environment. Analysts have warned that implementing a single policy rate too aggressively through inflationary open market operations could increase the risk of a second sovereign default. For now, the central bank continues to operate under a scarce reserve regime, maintaining a careful balance between credit expansion and reserve protection.
Liquidity conditions in the interbank market, where mismatches between loans and deposits are typically resolved, have also seen slow improvements. Market participants note that moral suasion has played a role in stabilizing rates, but they warn that unresolved imbalances could eventually lead to sharp rate adjustments if not managed effectively.
On a more positive note, the survey indicated that non-performing loans have declined and are expected to continue trending downward in the coming months. This improvement reflects both better borrower repayment capacity and more disciplined lending practices by financial institutions.
Economists believe that if the current growth in loan demand is accompanied by sound risk management and stable monetary policy, Sri Lanka’s banking sector could play a pivotal role in supporting broader economic expansion. However, they emphasize that excessive credit growth without adequate foreign reserve buffers could create new vulnerabilities in the financial system.
The coming months will be crucial in determining whether the strong surge in Sri Lanka loan demand will translate into sustainable economic growth or create pressure points in the financial sector. With policymakers signaling continued support for economic recovery, both lenders and borrowers are entering Q3 with cautious optimism.