Nearly a quarter of Sri Lanka’s financial sector loans backed by vehicles, gold

Sri Lanka
By Editor_1
Gold-backed lending climbed to 12.0% from 9.8% over in 2025, supported by rising global gold prices -loansjagat.com

COLOMBO – Nearly one in every four rupees lent by Sri Lanka’s banks and finance companies is now secured against a vehicle or gold, the central bank said, warning that the growing concentration has left lenders exposed to falling collateral values.

The combined share of motor vehicle credit and gold-backed loans in total financial sector credit rose to 24.9% by end-June 2026 from 19.6% at end-2024, the Central Bank of Sri Lanka (CBSL) said in its Financial Stability Review 2026.

ousVehicle-related credit rose to 12.9% of total loans from 9.8% as pent-up demand was unleashed after import restrictions were eased in early 2025. Gold-backed lending climbed to 12.0% from 9.8% over the same period, supported by rising global gold prices.

While overall household debt remains below historical averages, the central bank moved to place targeted controls on these fast-growing sectors to avoid excessive buildup of risk.

When asked whether the Central Bank would move to curtail fast growing household debt Governor Nandalal Weerasinghe said that it was not of concern at the moment, but added that curtailment would be required only if the amounts were excessive.  “That is why for certain sectors, we brought in certain limits for gold and motor vehicles,” Weerasinghe explained.

Overall credit growth across banks and finance companies accelerated from 14.0% in June 2025 to a peak of 27.9% in March 2026, before easing to 26.4% in June. Pawning facilities at banks alone expanded 49.2% year-on-year.

The central bank flagged gold as a particular vulnerability after global gold prices fell about 18%, dropping from around 1,393 US dollars a sovereign at end-January 2026 to around 1,141 dollars by end-August.

“Further corrections in gold prices could weaken collateral values and increase asset quality risks, particularly given the strong growth in gold backed lending,” the report said.

In response, the CBSL lowered loan-to-value (LTV) limits on vehicles in November 2025 and May 2026. Maximum LTVs for new commercial vehicles were cut to 60 % and for other new vehicles to 40 %, while used vehicles were capped at 60 %. A maximum LTV of 70 % was imposed on gold-backed loans in May 2026, followed by higher capital risk weights in September.

The curbs have started taking effect, with credit growth at finance companies slowing to 45.0 % in the June quarter from 52.4 % in the previous quarter.

“We have tightened monetary policy as well in May, and we have seen the impact of that in the credit figures as well,” Senior Deputy Governor Dr Chandranath Amarasekara said.

“For the latest month available, we have seen credit to the private sector decelerating ‒ still growing, but decelerating by a substantial extent,” Amarasekara said.

The central bank noted that the full impact of these policy measures will materialize with a lag and will require continued monitoring.

-economynext.com

Editor_1
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