Banking sector Willingness to Lend Index up in Q2, to moderate in Q3 2025

A new Central Bank of Sri Lanka (CBSL) report last week said the banking sector's Willingness to Lend Index grew in the second quarter of 2025, continuing a nine-quarter upward trend to reach a five-quarter high.

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However, while the trend is expected to continue into the third quarter, the Index, or willingness to lend, shows a slight dip.

The Willingness to Lend Index reached 59.6 in Q2 2025, up from 57.3 in the previous quarter.

"This observed increase was led by prevailing economic and political stability, stable interest rates, improved liquidity positions in banks, and expectations regarding general economic activities," the CBSL said in its Credit Supply Survey: Trends in Q2 and Outlook for Q3 2025. The survey covers Licenced Commercial Banks and Licenced Specialised Banks, and the Willingness to Lend Index is much like a business confidence index for banks.

During 03 2025, the increasing trend is expected to continue due to favourable liquidity positions of banks, economic revival, and positive economic outlook, the banking regulator said.

However, the Index value shows a dip from 59.6 in Q2 2025 to 41.4 in Q3 2025, lower than the previous three quarters and Q4 2024's Index value of 47.5.

The CBSL report said that during Q2 2025, the upward trend in demand for loans increased due to reduced interest rates, increased wages, vehicle imports, and improvements in business activities. Due to the expected further reduction in interest rates, increase in vehicle imports, and improved business confidence, the demand for loans is expected to further increase during Q3 2025, it said.

On non-performing loans (NPLs), the CBSL said the overall number of NPLs decreased during Q2 2025 as well. This could be attributed to a reduction in interest rates, improved cash flow generation, effective recovery and collection efforts, ongoing flexible payment options, and supportive economic conditions.