By a special correspondent
Sri Lanka’s record-breaking private credit expansion in 2025 is widely celebrated as proof of economic recovery. But a deeper examination reveals a more troubling narrative: one where rapid credit creation may be outpacing real income growth, embedding fresh vulnerabilities into an already fragile financial system.
Private sector borrowings surged to Rs. 262.6 billion in November, lifting outstanding private credit to Rs. 10 trillion a 26% annual jump. While authorities frame this as a confidence-driven revival, the composition and drivers of this growth raise uncomfortable questions about credit quality, currency exposure, and policy trade-offs.
A large share of new lending has flowed into asset-backed and consumption-oriented credit, particularly gold loans, vehicle loans, and short-term working capital facilities. This creates the illusion of productive expansion while quietly increasing collateral risk. In an economy where asset prices remain volatile and incomes uneven, a downturn could quickly erode recovery values, leaving banks exposed.
Moreover, the credit boom has been fueled less by export-led earnings and more by currency distortion. Rupee depreciation incentivized importers to borrow aggressively and exporters to delay dollar conversions, artificially inflating domestic credit demand. While beneficial to liquidity in the short run, this behavior strains foreign exchange management and complicates reserve stability especially when central bank swap operations are involved.
The contrast with government credit is telling. Lending to the state grew just 0.1% YoY, while credit to public corporations fell over 11%. This divergence suggests that private credit growth is not the result of broad-based public investment or infrastructure expansion, but rather a narrow, market-driven response to easier monetary conditions.
The situation worsened after Cyclone Ditwah, when the CBSL rolled out sweeping credit relief: repayment suspensions, concessional loans, waived penalties, and relaxed CRIB standards. While socially necessary, these measures further blur risk pricing and delay the recognition of stressed assets. History shows that such regulatory forbearance often pushes problems forward rather than resolving them.
Inflation remains another fault line. While the CBSL projects only a temporary rise, IMF assessments warn inflation could exceed the 5% threshold, forcing tighter policy later. If rates rise abruptly, today’s rapid credit growth could become tomorrow’s non-performing loan crisis.
Even the government’s 3% concessionary loan scheme for Ditwah-affected businesses carries hidden risks. Channeled through banks, it transfers credit risk to financial institutions while political pressure encourages rapid disbursement. Efforts to register SMEs and formalize the informal sector are commendable but credit alone cannot substitute for productivity, governance, and tax compliance reforms.
In essence, Sri Lanka’s private credit boom may be less a sign of durable recovery and more a high-speed gamble on stability. Without stronger income growth, export competitiveness, and risk discipline, the current expansion risks repeating a familiar cycle: credit-led optimism followed by painful correction.