Sri Lanka Banks Booked Bumper Profits on a 12% NPL Book

Sri Lanka’s banks still had 12.0 percent of loans in Stage 3 at the end of June 2025, while first-half profit after tax reached 187.8 billion rupees. Gross bad loans were 1,464 billion rupees, only 10 billion rupees below the first-quarter stock, even as the Central Bank’s second-quarter soundness tables showed fatter interest income and a thicker capital ratio.

That print was sold as a recovery. The sequel was different. Stage 3 later fell into the single digits because the loan book grew, and first-quarter 2026 profit after tax slipped to 85.1 billion rupees from 91.6 billion a year earlier.

The 12 Percent Book That Printed the Profits

The Central Bank’s second-quarter 2025 soundness run put the Stage 3 ratio, including undrawn amounts, at 12.0 percent, down from 12.7 percent at the end of March. Absolute gross non-performing loans eased to 1,464 billion rupees from 1,474 billion. On a year-on-year view the stock was still heavier: gross bad loans were up 4.4 percent at about 1.46 trillion rupees.

THE JUNE 2025 PRINT

• Stage 3 ratio: 12.0 percent of gross loans, including undrawn amounts, at the end of June 2025.
• Bad-loan stock: 1,464 billion rupees, 10 billion rupees below the first-quarter total.
• First-half profit: 187.8 billion rupees after tax, against 93.6 billion rupees in the first quarter.
• Balance sheet: assets 23.8 trillion rupees, up 14.9 percent from 20.7 trillion a year earlier.

Gross loans in that quarter were 12.3 trillion rupees, up 11.4 percent, while investments jumped 26.2 percent to 9.9 trillion rupees, a reminder that a large share of the recovery still sat in securities rather than in a cleaned private-credit book. Deposits rose 12.9 percent to 19.2 trillion rupees, and the regulatory capital ratio improved to 19.4 percent from 18 percent, fed by retained earnings.

The ratio had barely moved from the crisis plateau. Central Bank chart packs put Stage 3, including undrawn amounts, at 13.6 percent in the third quarter of 2023, 12.3 percent at the end of 2024, and 12.7 percent again in the first quarter of 2025. A 0.7 point quarter-on-quarter dip left almost one loan in eight still impaired.

First-Half Totals Were Read as a Quarterly Leap

Net interest income in the Central Bank’s second-quarter tables was 501.1 billion rupees, against 251.4 billion in the first quarter. Pre-tax profit was 291.2 billion rupees against 146.6 billion, and after-tax profit was 187.8 billion rupees against 93.6 billion. Those second-quarter lines sit almost exactly on top of the first-quarter figures, which is how a half-year total gets misread as a three-month explosion.

The year-on-year comparison is the honest one. Coverage of the same Central Bank file put first-half 2025 profit after tax up 68 percent, with net interest income up 26.8 percent at 501.1 billion rupees. That is a strong half, not a quarter in which income doubled overnight.

Boston Consulting Group’s November 2025 roundup of ten banks that make up about 95 percent of the industry by size recorded an 81 percent year-on-year jump in net profit to 158.6 billion rupees. Sample net interest income was 433.6 billion rupees, up 32 percent, the cost-to-income ratio improved 660 basis points to 35.0 percent, and the net interest margin widened 63 basis points to 4.3 percent. Private-bank profit growth, BCG wrote, was “majorly driven by decline in provisions.”

Full-year 2025 then showed how much of that burst was front-loaded. Central Bank data put sector profit after tax at 369 billion rupees for the year, up 19.3 percent, with pre-tax profit up only 3.7 percent to 583.7 billion rupees. Net interest income rose 11.7 percent to 1.02 trillion rupees, non-interest income jumped 49.8 percent to 275 billion rupees, and impairment charges fell to 59.4 billion rupees. Return on equity was 16.7 percent and return on assets 2.5 percent, with the credit-to-deposits ratio still a conservative 69.9 percent.

Government Banks Booked the Steeper Profit Jump

The earnings split was lopsided. In BCG’s ten-bank sample, government banks’ net profit rose 202 percent and private banks’ net profit rose 38 percent. Pre-provision operating profit at the state lenders surged 149 percent, against 11 percent at the private banks, so the state-bank spike was an income-line event, not only a provision reversal.

H1 2025, BCG TEN-BANK SAMPLE

Default risk, BCG found, eased across large and mid-sized private banks, while government banks reported a deterioration in Stage 3 ratios in the same half. The lenders that printed the steeper profit jump were not the ones cleaning the book. Sample credit-to-deposit ratios sat at 57.1 percent, down 154 basis points, with government banks still the more cautious lenders. Bank of Ceylon later posted a record 120.8 billion rupees of pre-tax profit for 2025, which kept the state franchise at the centre of the earnings story even as its asset-quality path lagged.

Deputy Minister of Industries Chathuranga Abeysinghe said in April 2025 that more than 12,000 small firms needed to be brought back into the credit system, and that banks could lend to NPL customers without accounting-standard restrictions. That policy helped the revival talk. It also meant some of the Stage 3 stock could be rolled rather than resolved.

Stage 3 Loans Fell to 9.4 Percent by March 2026

The ratio only broke out of the 12 percent band after banks started lending again. Central Bank figures put Stage 3, including undrawn amounts, at 11.2 percent in the third quarter of 2025 and 9.7 percent at the end of 2025, the first single-digit reading since the second quarter of 2022. By the end of March 2026 the Stage 3 loans ratio of 9.4 percent compared with 12.7 percent a year earlier.

STAGE 3 RATIO, INCLUDING UNDRAWN AMOUNTS

1. Third quarter of 2023: Hits 13.6 percent, the peak in the Central Bank chart pack.
2. End of 2024: Stands at 12.3 percent after a slow grind lower.
3. End of June 2025: Prints 12.0 percent as first-half profits jump.
4. End of 2025: Falls to 9.7 percent, the first single-digit reading since the second quarter of 2022.
5. End of March 2026: Reaches 9.4 percent as credit growth hits 24.4 percent.

The stock of Stage 3 loans fell 8.5 percent to 1,363.4 billion rupees from 1,490.2 billion, a real reduction of 126.8 billion rupees. Gross loans and receivables jumped 24.4 percent to 14,565.1 billion rupees from 11,708.8 billion, so a large part of the ratio move was a bigger denominator. Net Stage 3 loans to total loans dropped to 3.8 percent from 5.8 percent, and Stage 3 impairment coverage rose to 59.5 percent from 54.1 percent.

Stage 3 loans ratio of the sector declined to 9.4% at end Q1 of 2026 compared to 12.7% at end Q1 of 2025, supported by the credit expansion and a slight drop in stage 3 loans.

Central Bank of Sri Lanka, financial sector performance note, 5 June 2026

A 450 billion rupee recapitalisation allocation in the 2024 budget was not drawn that year, after nine large banks filed plans and the Central Bank finished its asset-quality review. The 2025-26 clean-up ran through retained earnings and loan growth, not a taxpayer cheque.

Gold Pawning Took Nearly a Fifth of New Credit

The loans that pulled the ratio down were not a broad industrial rebound. Central Bank credit data for the first half of 2026 show gold-backed lending rose 211.9 billion rupees, or 23.6 percent, to 1.11 trillion rupees. Pawning took 18.6 percent of the 1.14 trillion rupees of new private-sector credit, and its share of total loans rose to 9.9 percent from 8.3 percent. Personal loans and financial services took 58 percent of first-half new credit, against 39 percent for non-financial businesses.

WHERE THE NEW LOANS WENT, H1 2026

• Pawning: Up 211.9 billion rupees to 1.11 trillion rupees, 18.6 percent of new private credit.
• Personal loans: 58 percent of first-half new credit, with gold-backed loans almost half the personal increase.
• Financial and business services: Up 212.7 billion rupees, or 27.1 percent, to 996.8 billion rupees.
• Larger stocks still elsewhere: construction outstanding 1.91 trillion rupees, wholesale and retail trade 1.13 trillion rupees.

A credit-supply survey for the second quarter of 2026 found the overall number of non-performing loans fell against the first quarter, led by retail. Corporate, SME and state-owned enterprise books went the other way, with banks citing weaker repayment after rupee depreciation and Middle East-linked shocks, plus some exposures migrating into Stage 3. Respondents expected NPLs to fall across all four sectors in the third quarter, on better cash flow and more restructuring.

Earnings Cooled When the Loan Engine Restarted

Once banks had to fund a 24.4 percent jump in loans, the 2025 earnings model faded. In the first quarter of 2026, net interest income still rose 9.8 percent to 270.7 billion rupees, but profit before tax fell 5.6 percent to 134.3 billion rupees and profit after tax fell 7.1 percent to 85.1 billion rupees. Total assets were 25,809.7 billion rupees, up 11.3 percent, while investments barely grew, up 3.1 percent to 9,369.6 billion rupees, as the mix shifted off the securities pile.

Q1 2025 VERSUS Q1 2026, CENTRAL BANK FSI

The same file shows the capital and liquidity cushion shrinking as risk-weighted assets grew. The capital adequacy ratio was 18.3 percent at the end of March 2026, against 19.4 percent a year earlier, and the rupee liquidity coverage ratio fell to 267.9 percent from 342.4 percent. Buffers stayed above the floors. They were no longer the crisis-era surplus built while banks sat on government paper.

A June 2026 Central Bank note said credit growth of 24.4 percent compared with 7.9 percent a year earlier, and that Stage 3 coverage had risen to 59.5 percent. The clean-up and the boom were the same event: more loans, a slightly smaller bad stock, and a thinner margin on a working bank rather than a securities shop.

The May Rate Rise Is Already Slowing New Loans

The Central Bank raised its policy rate to 8.75 percent in May 2026. Commercial-bank credit to the private sector then expanded by 246 billion rupees in June, 169 billion rupees in July and 106 billion rupees in August, with year-on-year growth easing to 24.5 percent from close to 30 percent. Outstanding private credit was 11.5 trillion rupees in July, 1.2 trillion rupees, or 12.1 percent, above end-December 2025. The average weighted new lending rate rose to 12.65 percent in August from 11.33 percent in March, and new SME loans reached 13.08 percent.

HNB Stockbrokers wrote at the end of September that loan books grew about 5 percent in the second quarter of 2026 from the prior quarter, and that the May hike plus tighter lending rules would weigh on the second half. Governor Nandalal Weerasinghe said the Bank did not then see a need for further tightening and would keep watching the data. L.R.C. Pathberiya, the Central Bank’s economic research head, said the slower credit flow was still enough to support growth.

On 1 October 2026 the Central Bank released Financial Soundness Indicators for the second quarter of 2026, covering provisional data to the end of June. The post did not list the new Stage 3 print in the text.

𝐅𝐢𝐧𝐚𝐧𝐜𝐢𝐚𝐥 𝐒𝐨𝐮𝐧𝐝𝐧𝐞𝐬𝐬 𝐈𝐧𝐝𝐢𝐜𝐚𝐭𝐨𝐫𝐬 – 𝐐𝟐 𝐨𝐟 𝟐𝟎𝟐𝟔

The Central Bank of Sri Lanka has released the 𝑭𝒊𝒏𝒂𝒏𝒄𝒊𝒂𝒍 𝑺𝒐𝒖𝒏𝒅𝒏𝒆𝒔𝒔 𝑰𝒏𝒅𝒊𝒄𝒂𝒕𝒐𝒓𝒔 𝒇𝒐𝒓 𝑸𝟐 𝒐𝒇 𝟐𝟎𝟐𝟔, presenting key developments in the banking and finance companies… pic.twitter.com/m4Ar6Wg1Oj

— CBSL (@CBSL) October 1, 2026

The June 2025 file showed banks could earn a great deal while 12.0 percent of the book was still Stage 3. The March 2026 file showed they could cut that ratio to 9.4 percent once they lent again, and that the profit burst did not survive the shift. What the new quarterly tables will show is whether gold-backed personal credit and a slower loan month in August keep the ratio falling, or whether the corporate and SME slippage already flagged in the second-quarter survey starts to climb back into the headline number.

Frequently Asked Questions

How Does the Central Bank Define Stage 3 Loans?

From 1 January 2022 the banking-sector soundness tables have been built on SLFRS 9, so Stage 3 is the impaired bucket rather than the older overdue NPL classification. The headline ratio used in the quarterly Financial Soundness Indicators includes the undrawn portion of facilities; a parallel series excluding undrawn amounts is published in the chart packs and can sit a tenth of a point away from the headline print.

When Did Sri Lanka Bank Stage 3 Loans Peak After the Default?

The Central Bank chart pack puts the Stage 3 ratio including undrawn amounts at 13.6 percent in the third quarter of 2023, the high point of the post-default series. It then spent more than a year in a 12.3 to 12.9 percent band before the 2025 credit rebound pulled it to 9.7 percent by year-end, the first single-digit reading since the second quarter of 2022.

Did the Government Use Its Bank Recapitalisation Fund?

The 2024 budget set aside 450 billion rupees for a bank recapitalisation roadmap after the Central Bank completed an asset-quality review of nine large banks. Those banks filed recapitalisation plans, the assessment was finished, and the Central Bank later recorded that the funds were not needed in 2024, so the 2025 profit retention and 2026 loan growth carried the buffers instead.

How Large Is Boston Consulting Group’s Sri Lanka Bank Sample?

The November 2025 H1 roundup covers three government banks, three large private banks and four mid-sized private banks, ten names that BCG says account for about 95 percent of the industry by size, out of 12 licensed commercial banks and six licensed specialised banks excluding foreign banks. Its 158.6 billion rupee profit total is the sample, not the Central Bank’s 187.8 billion rupee sector figure for the same half.