Central Bank warns of mounting financial risks from vehicle and gold loans

The Central Bank of Sri Lanka's latest Financial Stability Review has highlighted mounting financial risks stemming from a sharp increase in credit extended by finance companies, particularly through vehicle and gold-backed loans.

According to the central bank, the finance sector has experienced significant credit growth fuelled by rising consumer demand for vehicle financing and gold-backed lending products. This expansion in credit availability has coincided with growing levels of household debt across the economy.

The central bank's concerns centre on the widening private sector credit gap, which reflects the accelerating pace of credit expansion relative to economic fundamentals. This trend underscores risks associated with rapid credit growth outpacing the real economy's capacity to absorb additional debt obligations.

The Financial Stability Review indicates that finance companies have capitalised on strong demand for secured lending products, with vehicle and gold-backed loans emerging as primary drivers of sector growth. Regulators remain vigilant about potential implications for financial stability should household debt servicing capacity face strain from economic shocks or rising interest rates.

The central bank's assessment suggests the need for continued monitoring of credit quality and borrower resilience in these rapidly expanding lending segments.