It is said that most people who have gone to banks in this country have pledged gold items and taken vehicle loans.

A recent report released by the Central Bank of Sri Lanka indicates that a quarter, or 24.9 percent, of the total loans issued to the private sector by licensed commercial banks and financial institutions in Sri Lanka have been granted against gold articles and vehicle collateral. Simply put, as of today, one rupee out of every four rupees issued to the private sector is allocated for these two categories.

These loan categories have shown significant growth within a short period of 18 months. The combined percentage of vehicle and gold-backed collateral loans, which was recorded at 19.6 percent at the end of 2024, has increased to 24.9 percent by the end of June this year. Accordingly, its combined percentage has grown by 5.3 percent during the relevant 18-month period. Central Bank data confirms that the percentage of vehicle loans increased from 9.8 percent to 12.9 percent, and loans obtained against gold articles collateral increased from 9.8 percent to 12 percent.

This trend has significantly impacted the growth of private sector loans in the country's financial institutions. During that period, vehicle loans contributed 65 percent to the growth of private sector loans issued by financial institutions alone, while loans given against gold articles collateral accounted for a 25.8 percent contribution.

Central Bank Governor Dr. Nandalal Weerasinghe explained why such a large number of people resort to obtaining loans by pawning gold articles. He pointed out that gold loans are short-term financial facilities obtained for three or six months, and the main reason for their popularity is that they can be obtained very quickly and easily. Although there are no specific statistics on the exact reasons why people obtain gold loans, the Governor mentioned that people, especially in rural areas, largely take these loans for their agricultural activities and work to redeem their gold articles after harvesting.

However, the unique feature of this system is that the default rate for gold loans is very low, at just 0.2 percent.

There are also economic factors that have influenced this rapid loan expansion. The easing of vehicle import restrictions in the first half of last year led to an increased demand for vehicle purchases, which primarily impacted the expansion of vehicle loans. Similarly, the rise in international gold prices has directly contributed to the growth of gold article collateral loans.

However, the Central Bank of Sri Lanka warns that relying on vehicles and gold articles for such a high percentage of the total loan amount poses a hidden financial risk. If the market value of these collateral items were to fall, banks and financial companies could face risks. Dr. Nandalal Weerasinghe also stated that the Central Bank took steps to impose a maximum loan limit for vehicle and gold loans with the aim of mitigating this situation and the potential risks to the financial system.

The realism of the Central Bank's warning is evident from the recent behavior of international gold prices. The value of a gold sovereign, based on the international gold price of approximately US$1,393 at the end of January this year, had fallen by about 18 percent to approximately US$1,141 by the end of August. The report further emphasizes that if gold prices continue to fall in the future, the risk of institutions being unable to recover loans could increase due to the reduced value of the gold articles held as collateral.