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

ECONOMYNEXT – 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 percent by end-June 2026 from 19.6 percent at end-2024, the Central Bank of Sri Lanka (CBSL) said in its Financial Stability Review 2026.

Vehicle-related credit rose to 12.9 percent of total loans from 9.8 percent as pent-up demand was unleashed after import restrictions were eased in early 2025. Gold-backed lending climbed to 12.0 percent from 9.8 percent 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 responded saying that it was not of concern at the moment.

“Household debt, obviously, people are taking loans for economic activities,” “If that is excessive only we would, that’s why for certain sectors, we brought in certain limits for gold and motor vehicles,” Weerasinghe said.

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

The central bank flagged gold as a particular vulnerability after global gold prices fell about 18 percent, 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 percent and for other new vehicles to 40 percent, while used vehicles were capped at 60 percent. A maximum LTV of 70 percent 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 percent in the June quarter from 52.4 percent 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. (Colombo/Oct12/2026)