ECONOMYNEXT – Sri Lanka’s demand for loans is expected to expand further in the third quarter of 2025, on top of high growth in the second quarter, a survey conducted by the central bank has found.
“During 2025 Q3, loan demand is expected to increase across all sectors, driven by the increase in vehicle imports, low interest rates, rising consumer confidence, and favourable business and economic outlook,” the central bank said.
“Due to the expected further reduction in interest rates, increase in vehicle imports, and improved business confidence, the demand for loans is expected to further increase during 2025 Q3.”
The survey comes as concerns are rising that the last rate cut by the central bank may have pushed domestic credit and investment to such a high level that it may hinder the repayment of foreign debt, even though money is not being printed per se to trigger forex shortages.
Banks are also getting resources to lend by mortgaging their past dollar collections to the central bank through dollar-rupee inflationary swaps, further pushing up domestic credit and reducing it ability to collect dollars by outright purchases, analysts have warned.
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Low rates also discourage savings including by high networth individuals and banks who own bonds from past deficits.
The outlook for loan demand was indicated by an index number of 80.2 points in the third quarter, up from 67.6 in the second quarter.
The willingness to lend in the third quarter was 41.5 points, lower than the 59.6 percent actually seen in the second quarter. The projected outlook in the previous survey for the willingness to lend was 45.3 points.
Analysts have warned that a ‘single policy rate’ if implemented aggressively through inflationary open market operations, will push Sri Lanka to a second default. But so far a scarce reserve regime, is being operated up to August 22.
At the moment banks are not being given resource to lend without deposits and a scarce reserve regime seems to be operated.
The interbank market, which is the market where loan to deposit imbalance are cleared, has been edging up at a snail’s pace, but there has been moral suasion, market participants say.
When markets are not cleared on an ongoing basis, pent up imbalances, coupled with losses of confidence, require very high rates to clear.
Meanwhile non-performing loans have reduced and is expected to reduce further, the central bank survey said.
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