• Growth is driven by low interest rates and relaxed vehicle import rules
• Sector’s strong liquidity and capital expected to support growth, improve valuations

Sri Lanka’s non-banking financial institutions’ (NBFIs) loans are expected to grow at 18% year-on-year (y-o-y) in the next 12 months to June 2026, with rising household liquidity and recalibration of LTV (Loan-to-Value) caps for vehicle imports, NDB Research said.

It said that the decisive reopening of motor-vehicle imports from February and removal of the two largest structural constraints on loan origination, LTV by the central bank, widening the eligible borrower base, and lifting average ticket sizes, will see a rise in demand for lower-priced private vehicles.

It also said that NBFI sector balance sheets are entering this cycle from a position of strength; liquidity buffers of Rs. 155 billion above the statutory minimum and CARs of 23.8% provide headroom to deploy assets.

“However, we see the sector needing to recapitalise balance sheet growth strains capital. We estimate the 2QFY26 liquidity to be Rs. 171 billion with CARs 21%,” NDB Research said.

On the demand side, it said that rising household liquidity and wallet sizes in the urban middle class create a natural catch-up in consumption and leasing volumes.

With benchmark interest rates anchored at 7.75% following 725 bps of cumulative easing since 2023.

“We see the low interest rate regime continuing, even seeing a further 100 bp cut in the next 12 months,” it added.

Taken together, these drivers set the stage for double-digit loan growth, gradual net interest margin compression of 60 bps offset by lower credit costs, and operating leverage that supports a sustained improvement in return on equity by 200 bps.

“We expect the sector to not only deliver earnings momentum but also command a valuation re-rating as investors’ price in the durability of a volume-led recovery,” NDB Research said.