Sri Lanka’s banking sector is poised to see a continued decline in non-performing loans (NPLs) through the second quarter of 2025, marking a sustained recovery trend across corporate, SME, and state-owned enterprise segments, according to the Central Bank of Sri Lanka (CBSL).
The latest Credit Supply Survey for Q1 2025 highlights that NPLs have fallen for the third consecutive quarter. The index value for NPLs stood at -5.7 points in Q1, improving from -38.2 points in Q4 2024. This positive momentum has been attributed to enhanced cash flows, improved macroeconomic conditions, recovery-focused policies, and flexible repayment options.
“The decline is also supported by reduced interest rates and sustained recovery in key economic sectors,” the CBSL said.
While most segments recorded lower NPLs, the retail sector witnessed an increase, with the index rising by 16.3 points—a trend the Central Bank attributed to the ongoing high cost of living affecting household debt serviceability.
Looking ahead, the Central Bank expects a further broad-based decline in NPLs in Q2 2025, projecting the index value to fall to -30.9 points. This outlook is underpinned by several factors: the reduction in Personal Income Tax, anticipated interest rate cuts, SME concessions, continued economic stabilisation, and stronger business performance.
Meanwhile, loan demand is on the rise, with CBSL noting that the Q1 uptick was driven by improved economic activity, lower interest rates, political stability, low inflation, and a boost in business confidence. This upward trajectory is expected to continue into Q2, bolstered by anticipated economic growth and a potential relaxation of vehicle import restrictions.