Vehicle Loan Surge Puts Sri Lankan Financial Institutions at Risk

Sri Lanka’s financial institutions are witnessing a sharp rise in vehicle-backed loans in 2025, igniting fresh concern among analysts and regulators over growing credit exposure and potential threats to financial stability. The surge driven by renewed consumer demand, relaxed import restrictions, and aggressive lending campaigns has made vehicle loans one of the fastest-growing segments of the post-crisis credit market.

According to data from the Central Bank and industry sources, vehicle loans have expanded by over 30% this year alone. While this growth has temporarily boosted the automotive and leasing sectors, it also exposes banks and finance companies to heightened credit and liquidity risks. Experts warn that unless carefully managed, this trend could erode asset quality and depositors’ confidence echoing the early signs of previous financial imbalances.

Vehicle loans are typically consumption-based and depend heavily on borrowers’ income stability. Many of these borrowers work in the informal or gig economy, where earnings fluctuate. Although interest rates have eased, repayment capacity remains fragile. A sudden increase in rates or a slowdown in household income growth could quickly trigger defaults, especially as vehicle collateral depreciates far more rapidly than real estate or equity assets.

Analysts caution that the sector is showing early symptoms of credit overheating. During the 2018–2019 credit expansion, vehicle loans contributed significantly to non-performing loans (NPLs) when consumer spending cooled. The Central Bank’s Financial Stability Review has already identified asset-backed lending particularly in vehicles as an area requiring closer scrutiny and stricter prudential standards.

For depositors, the implications are indirect but critical. If financial institutions face rising defaults, pressure on capital buffers and liquidity could spread to the broader banking network, undermining depositor trust. This concern is particularly relevant for smaller finance and leasing companies that rely heavily on short-term deposits to fund their lending portfolios.

Some analysts also question whether certain lenders are overstating asset valuations or underestimating borrower risk to achieve lending targets. Such practices could distort financial statements and conceal underlying vulnerabilities.

To avert potential instability, experts urge the Central Bank of Sri Lanka to tighten loan-to-value (LTV) ratios, enforce enhanced risk-weighting on vehicle-backed assets, and conduct targeted stress tests on vehicle loan portfolios. Strengthening credit assessment frameworks and ensuring transparent reporting of sector-specific NPLs are seen as crucial steps to prevent systemic exposure.

As Sri Lanka’s economy stabilizes after years of turbulence, the Central Bank faces the challenge of balancing credit growth with prudence. Without swift and coordinated regulatory action, the ongoing boom in vehicle loans could turn into the next stress point for the country’s financial institutions, threatening both profitability and public confidence.