Widening private sector credit-to-GDP gap points to potential systemic risks

THE Central Bank of Sri Lanka (CBSL) releasing its Financial Stability Review 2025 report yesterday said that despite the strong momentum in recent private sector credit growth, a widening private sector credit-to-GDP gap points to potential emerging risks in the financial system.

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The gap, which turned positive in mid-2024, has continued to widen through 2025 amid sustained credit growth.

"This suggests a potential accumulation of systemic risk within the sector," the CBSL said. "However, higher GDP growth in tandem with credit expansion would support a healthy expansionary phase conducive to financial stability."

Credit-to-deposit ratios across the banking sector began to recover after remaining weak earlier in the year. The CBSL attributed this to a gradual improvement in bank lending and a stronger appetite for loans among businesses and households.

Survey data showed that banks' willingness to lend and borrower demand both increased in the second quarter, supported by low interest rates, stable liquidity, and improved confidence in the economic outlook.