Banks channelled 70% of credit to productive sectors: HNB CEO

Addressing the Sri Lanka Economic Association and Gamani Corea Foundation Economic Forum on ‘Financial Sector Resilience Amidst External Shocks: Managing Policy Challenges for Financial Stability,’ Pallewatte said the composition of credit growth had been misunderstood, with business lending accounting for the lion’s share of new advances. “Credit growth in the banking sector was almost at its peak last year. Even though I don’t have the exact numbers, I would say at least 70% would have gone to productive sectors because consumption growth was relatively subdued,” he said. He said the depreciation of the rupee had significantly increased the working capital requirements of manufacturers and other businesses reliant on imported raw materials, resulting in higher demand for bank financing even where production volumes remained unchanged. The rupee depreciated 5.6% against the US dollar in 2025. “If a factory wanted to continue operating at the same capacity, it simply needed more rupees to finance imported inputs. That naturally increased the demand for bank credit,” he explained. Pallewatte said banks had also seen strong lending to export-oriented businesses, while consumer-related borrowing remained comparatively muted. “We have not seen much growth in credit card portfolios or consumption-related personal lending. What we have seen is gradual growth in housing finance, and that is a positive development,” he said, noting that home financing had continued to expand this year. He rejected suggestions that the banking sector had disproportionately channelled funds into vehicle purchases following the relaxation of import restrictions, arguing that the segment had attracted greater attention because of the backlog in demand accumulated during the import ban. “There was a significant period without vehicle imports. Naturally, many people who had delayed purchases wanted to own vehicles once imports resumed,” he said. “It is not that the sector directed funds to the wrong sectors. Vehicle finance perhaps received disproportionate attention because its growth was more visible.” Economists have likewise argued that the surge in vehicle imports has been widely misconstrued. In November 2025, JB Securities estimated that transport equipment and personal vehicle imports reached $ 1.851 billion in the first 11 months of the year, with the full-year total projected at around $ 2.1 billion. It noted that vehicle imports accounted for only 12.86% of current account outflows up to November 2025, while Central Bank of Sri Lanka (CBSL) reserves increased by over $ 200 million during the month, arguing that stable exchange rates, strong remittance inflows, and peak tourism would further strengthen the external position. Pallewatte acknowledged that banks, as custodians of depositors’ funds, remained bound by prudent risk management and regulatory requirements, limiting their ability to take excessive credit risks. However, he argued that the banking sector had nevertheless played a pivotal role in supporting Sri Lanka’s economic recovery. “I don’t think the country could have achieved growth of more than 5% if the financial sector had not taken some level of risk,” he said. While there remained scope for banks to undertake greater calculated risk-taking, he said this would require continued improvements in policy consistency, institutional processes, and the broader operating environment. Earlier, Pallewatte said Sri Lanka’s banking sector had demonstrated its resilience during the country’s economic crisis but would need to adapt to a rapidly evolving risk landscape shaped by geopolitical uncertainty, cyber threats, climate change, and an emerging shortage of experienced talent. He said geopolitical tensions, shifting global trade dynamics, and supply chain disruptions had become interconnected risks capable of affecting banks’ asset quality and liquidity, while the rapid migration towards digital banking had heightened cybersecurity threats for both institutions and customers. Pallewatte also warned that climate-related risks were becoming increasingly material for Sri Lanka’s financial system given the economy’s dependence on agriculture and climate-sensitive value chains. He identified the post-pandemic migration of skilled professionals as another structural challenge facing the industry, saying capability gaps across middle and senior management would take time to address. Despite these challenges, Pallewatte expressed confidence in the sector’s capacity to withstand future shocks, citing comfortable capital adequacy and liquidity levels, together with stronger recovery planning developed in the aftermath of the economic crisis. “The banking sector has the capacity to manage these challenges. The question is how quickly we adapt to this combination of emerging risks while continuing to strengthen resilience,” he said.

Banks channelled 70% of credit to productive sectors: HNB CEO | Daily FT