📈 CBSL Q1 Financial Report: Systemic Risks Rise Amid Rapid Credit Growth

The Central Bank of Sri Lanka (CBSL) reports that the financial system remained resilient in Q1 2026 despite geopolitical tensions and external pressures. However, a widening positive credit-to-GDP gap signals rising systemic risks, prompting new macroprudential lending restrictions. • Overall Developments & Measures: To curb rapid collateral-based lending, CBSL imposed a 70% maximum loan-to-value (LTV) ratio on gold-backed credit and slashed vehicle financing LTV limits by 10 percentage points, effective 25 May 2026. • Banking Sector Performance: • Credit granted accelerated by 24.4% YoY at end-March 2026 (vs. 7.9% last year), driving the credit-to-deposit ratio past 70% for the first time in 3 years. • Asset quality improved as the Stage 3 loans ratio dropped to 9.4% (from 12.7%). • Profit after tax (PAT) declined by 7.1% YoY due to higher operating costs, while the Capital Adequacy Ratio (CAR) moderated to 18.3%. • Finance Companies Sector: • Credit expanded rapidly by 52.4% YoY, heavily driven by a 69.2% surge in gold-backed lending and a 52.8% rise in vehicle financing. • Stage 3 loans ratio improved significantly to 4.4% (from 8.6%). Profitability strengthened with PAT up 28.8% for FY2025/26. • Financial Market Pressures: • The Colombo Stock Exchange weakened with the ASPI down 1.4% as of end-May. Net foreign outflows reached US$ 103.4 Mn. • Government securities yields trended upward, further pressured by a 100-basis-point policy rate hike in late May. _Note: Based on CBSL's latest Financial Sector Performance Report data._