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 on Monday in its Financial Stability Review 2026, warning that the 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% at end-June 2026, from 19.6% at end-2024, EconomyNext reported. Vehicle-related credit climbed to 12.9% of total loans from 9.8% as demand was released by the easing of import restrictions in early 2025. Gold-backed lending rose to 12.0% from 9.8% on higher gold prices. Pawning facilities at banks alone expanded 49.2% year-on-year.

The report is a statutory document, issued under Section 70(1) of the Central Bank of Sri Lanka Act, No. 16 of 2023, and generally covers data up to end-June 2026, according to the Central Bank’s release.

The warning beneath the headline numbers

The Central Bank’s own summary contains a finding none of the day’s filings led on, and it runs through both halves of the sector.

In banking, the Stage 3 loans ratio fell and impairment coverage on those loans improved — the conventional signs of a recovering loan book. But Stage 2 loans rose during the second quarter, which the Central Bank reads as “a potential build-up of credit risk among borrowers amid elevated credit expansion.” Stage 2 is the underperforming category that loans pass through on the way to Stage 3.

Finance companies show the same divergence more sharply: Stage 3 improved while Stage 2 increased steeply, which the Central Bank attributes partly to Cyclone Ditwah and the Middle East conflict. In that sector the impairment coverage ratio declined, meaning less cushion precisely where the pipeline is filling.

The Central Bank also cautions that relief measures — debt moratoria and concessionary repayment arrangements granted after Ditwah — “risk distorting the true impact on the financial sector by masking impaired loans and delaying non-performing loan recognition.” Read together with the improving Stage 3 ratio, that is the Central Bank advising against taking its own headline asset-quality figure at face value.

Capital and liquidity buffers stayed above regulatory thresholds across both sectors, but both moved the wrong way: bank capital adequacy ratios fell as risk-weighted assets outgrew capital accumulation, and liquidity ratios eased as banks shifted out of government securities into private lending. At finance companies, borrowings grew faster than deposits — which the Central Bank flags as increasing interconnectedness with the banks.

Gold is the named vulnerability

The report singles out gold. Global gold prices fell about 18%, from around US$1,393 a sovereign at end-January 2026 to around US$1,141 by end-August, on the Central Bank’s figures.

“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.

Governor Nandalal Weerasinghe, asked whether the Central Bank would move to curtail fast-growing household debt, said it was not a concern at present. “Household debt, obviously, people are taking loans for economic activities,” he said. “If that is excessive only we would, that’s why for certain sectors, we brought in certain limits for gold and motor vehicles.”

Those limits are already in place. Maximum loan-to-value ratios on new commercial vehicles were cut to 60% and other new vehicles to 40%, with used vehicles capped at 60%, across November 2025 and May 2026. Gold-backed loans were capped at 70% LTV in May, with higher capital risk weights added in September. The Central Bank raised its overnight policy rate in May 2026 and has since held it at 8.75%.

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. Finance company credit growth slowed to 45.0% in the June quarter from 52.4% in the previous quarter — the same 52.4% this desk reported from the Central Bank’s Q1 2026 review in June, which confirms the comparison period.

Senior Deputy Governor Dr. Chandranath Amarasekara said the tightening was showing up in the data: “We have tightened monetary policy as well in May, and we have seen the impact of that in the credit figures as well.” For the latest month available, he said, credit to the private sector was “decelerating — still growing, but decelerating by a substantial extent.” The Central Bank noted the full effect of the measures will arrive with a lag.

Worth keeping in proportion: 45.0% annual credit growth is a deceleration from 52.4%, not a slow rate.

More than a third of listed firms cannot cover their interest

A second strand of the review surveyed 204 companies listed on the Colombo Stock Exchange. The share with an interest coverage ratio below one — operating profit insufficient to meet interest payments — rose to 37.7% in the first half of 2026 from 33.8% a year earlier, EconomyNext reported.

That happened despite strong sales. Revenue jumped 22.0% year-on-year, up from 7.6% growth a year earlier, with the automobile sector expanding 138.9% after vehicle imports reopened and power and energy firms lifted by higher prices.

Costs rose faster. Higher sales added Rs. 199.0 billion to revenue, but cost of sales rose Rs. 152.3 billion and administrative, distribution and other operating expenses a further Rs. 52.3 billion — Rs. 204.6 billion in total, more than the revenue gain. Aggregate net profit fell 6.1% to Rs. 136.8 billion from Rs. 145.7 billion, and EBITDA slipped 0.4%.

The aggregate interest coverage ratio fell to 3.7 times from 4.2 times but “remained comfortably above one,” the report said, indicating listed companies on average could still service their debt. Trading and distribution was the only sector with an aggregate ratio below one, at 0.7 times, alongside negative net profit. Construction and engineering carried the highest debt-to-equity levels with depressed earnings; food, beverage and tobacco and real estate were the strongest performers. Borrowing costs as a share of average debt rose slightly, following May’s policy rate increase.

Climate risk, and where it connects

The review devotes a section to climate, warning that the increasing frequency and severity of extreme weather threatens asset valuations, borrower repayment capacity, credit quality and macroeconomic stability — particularly in agriculture, fisheries and infrastructure, EconomyNext reported.

Cyclone Ditwah is the illustrating case. It struck in November 2025, affected all 25 districts, and caused estimated direct physical damages of US$4.1 billion, about 4% of GDP, under the World Bank’s GRADE assessment — a figure the Central Bank stresses covers direct destruction only, excluding lost production, income and recovery time.

Looking ahead, it warns of an anticipated migration of loans into Stage 2 and Stage 3 — the same mechanism the sector data above already shows beginning, here named as a forecast. It also flags the insurance sector, where Ditwah claims have raised reinsurance receivables and heightened underwriting, liquidity and counterparty risks.

The Central Bank’s judgement on the period overall was that the system “remained stable during the first half of 2026,” supported by economic recovery, adequate capital and liquidity buffers and improved fiscal performance.

A note on the name: two of the day’s three filings call the document the Financial Stability Review 2026 and the third the Financial System Stability Review 2026. Both trace to the Central Bank — that is the report’s title and the website path its series sits under, respectively. They are the same document.

Not reported

No other Sri Lankan newsroom had filed on the review at the time of writing — the Daily FT, which covered the 2024 edition, had not published on this one. The filings do not give the Stage 2 and Stage 3 ratios in figures, only their direction, nor the size of the private sector Credit Gap the Central Bank says household lending continues to widen. Neither the number of listed companies with an interest coverage ratio below one, nor which large corporates drove the aggregate profit contraction, is identified.

Sources