📈 Sri Lanka Banks Record Slower Lending Growth in Q2 2026 Amid Tight Conditions

Sri Lanka’s banking sector saw a slower increase in willingness to lend during Q2 2026 following policy rate tightening in May, according to the Central Bank's Credit Supply Survey. • Overall Sector Trends • Willingness to lend increased across retail, corporate, SMEs, and State-Owned Enterprises (SOEs), but at a slower pace than Q1. • Lending appetite is expected to slow further in Q3 due to anticipated inflation, rising operating costs, exchange rate volatility, and geopolitical risks. • Lending appetite towards SOEs is projected to decline in Q3. • Loan Demand • Moderated growth in loan demand across all four sectors in Q2, driven by working capital needs, short-term loans, and investment revival. • SOE demand grew on financing for strategic infrastructure and renewable energy projects. • Demand is expected to rise across all sectors in Q3. • Asset Quality & Approvals • Overall Non-Performing Loans (NPLs) declined in Q2 due to retail sector improvements. • NPLs rose in corporate, SME, and SOE sectors due to exchange rate depreciation, Middle East crisis shocks, and cost pressures. • Banks expect NPLs to fall across all sectors in Q3 via debt recoveries and restructuring. • Rejection rates dropped for corporate and SOE loans due to higher-quality proposals, but rose for retail and SMEs amid stricter risk criteria.