ECONOMYNEXT – Sri Lanka’s loan demand and the willingness of banks to lend continue to go up in the December 2024 quarter and outlook for the first quarter of 2025 was also strong, a central bank report showed.
“The willingness to lend in the banking sector increased during 2024 Q4 compared to the previous quarter,” the central bank said.
“The observed increase in willingness to lend was driven by economic stabilization, stable interest rates, positive expectations for economic activity, improved liquidity positions and political stability.”
“During 2025 Q1, the willingness to lend is expected to further increase due to expected economic revival.”
Sri Lanka has seen high volatility in credit trends as loan demand surges and contractions since the end of a civil war under flexible inflation targeting.
As the monetary stability emerges about 18 to 24 months after a currency crisis, rates are cut with inflationary open market operations (money printed for private credit growth), triggering forex shortages and external currency.
Rates are then hiked steeply to save the rupee, which then leads to a credit contraction and a growth slowdown or an outright economic contraction if the original credit bubble ran long enough, critics have pointed out.
Bad loans then rise and bank try to recover loans instead of giving new ones. Loan demand also drops as business volumes fall as inflation and currency depreciation shatter consumer purchasing power. Many SMEs then go bust in the stabilization crisis.
The rise in bad loans had now halted.
“The observed decline in NPLs could be due to continued flexible payment options, reduced interest rates, enhanced cashflows and improved economic conditions,” the central bank said.
“The decline in NPLs is expected to continue in 2025 Q1, due to continuation of flexible payment options, expected further reduction of interest rates, and favorable economic outlook.”
Sri Lanka is now recovering from the worst currency crisis since the central bank was set up in 1951.
Up to the third quarter of 2024 the central bank ran exceptional monetary policy, operating a scarce reserve regime, but printed money in the last quarter, leading to falling reserves.
However in January credit demand dropped and excess liquidity from domestic operations was withdrawn.
It is not clear whether inflationary operations will resume under a single policy rate as when private credit picks up, leading to external troubles as in 2015/16, 2018 and 2019/2022. (Colombo/Mar14/2025)
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