Sri Lanka’s macrofinancial conditions improve in 2025, risks persist : CBSL

Sri Lanka’s domestic macrofinancial conditions strengthened further in 2025, supporting continued credit expansion, though external vulnerabilities remained a concern, according to the Central Bank of Sri Lanka (CBSL). 

Credit growth accelerated significantly, with banks and Finance Companies (FCs) expanding lending, particularly to the private sector, while exposure to the public sector contracted in line with fiscal consolidation. 

The banking sector’s credit‑to‑deposits ratio continued to rise, but the widening credit‑to‑GDP gap underscored the need for vigilance against systemic risks.

Global uncertainties, including Middle East conflicts, commodity price volatility, and adverse weather, were noted as potential threats to credit quality.

Banking sector performance 

According to the CBSL, credit growth in the banking sector surged by 21.4% year‑on‑year by the end of 2025, compared to just 4.1% in 2024. Lending expanded across multiple sectors, with credit to financial services rising sharply by 148%. Loan quality improved, with stage 3 loans declining to 9.7% from 12.3% a year earlier. Liquidity and capital buffers moderated but remained well above regulatory thresholds, with the Capital Adequacy Ratio (CAR) at 17.9% and return on equity at 16.6%.

Finance Companies sector performance  

The FCs sector also recorded rapid growth, with gross loans and advances rising by 51.9% year‑on‑year, driven mainly by vehicle‑backed and gold‑backed lending. The stage 3 loans ratio fell to 6.1% from 11.5% in 2024, reflecting stronger recoveries. Profitability improved significantly, with profit after tax reaching Rs. 61.5 billion in the first nine months of the 2025/26 financial year, a 45% increase. Liquidity remained above minimum requirements, while the sector’s CAR moderated to 18.7% due to credit expansion.

Financial markets performance 

Financial markets remained resilient in 2025, supported by stronger fundamentals and investor confidence. The Colombo Stock Exchange posted gains, with the All Share Price Index rising 41.9% and the S&P SL20 up 26.6%. Market capitalisation increased by 41.7% compared to 2024. Government securities yields remained broadly stable, while foreign inflows into Treasury bonds reflected improved sentiment. The Sri Lankan rupee depreciated by 5.6% in 2025 after two years of appreciation, though exchange rate volatility was contained and interbank forex liquidity improved. Surplus liquidity in the domestic money market contributed to moderating short‑term interest rates. (Newswire)

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