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Sri Lankan Banks Shift from Treasury Bills as Private
Credit Demand Strengthens
Referenced Article:
“Sri
Lanka banks cut Treasury bill holdings as private credit picks up”
Published on: September 10, 2025
Source: EconomyNext
Author: EconomyNext Editorial Team
Summary of the Article
This blog discusses the recent shift by Sri Lankan banks
away from high dependance on Treasury bills. Marking a significant adjustment
in financial market dynamics, banks are reallocating funds from government
securities to lending activities. The article says how banking behavior is
changing in response to broader economic conditions while also highlighting the
implications for interest rates, government borrowing and overall market
stability.
Introduction
Bank holdings of bills reached a high of 2,825 billion
rupees in February 2025. By June 2025, they had dropped to about 2,737 billion
rupees, according to data from the central bank. This shows a decrease of 88
billion rupees. The Refferenced article highlights a key development in the
financial sector. Commercial banks are currently reducing their exposure to
buying Treasury bills to support government borrowing but they had previously
been significant buyers of Treasury bills . This adjustment comes at a time
when demand for private sector credit is beginning to recover while reflecting
improving confidence in economic activity.
The Trade Off Between Government Securities and Private
Credit
This shift between government securities and private credit
illustrates the classic trade-off between government borrowing needs and
private sector financing from a theoretical standpoint. When banks direct their
liquidity towards government securities, fewer funds are available for
businesses and households. However as private credit regains momentum, banks
are reallocating resources suggesting that market conditions are gradually
normalizing. This also expresses the operation of the crowding out effect, which
says government borrowing can limit private investment but in this case the
effect is easing.
Implications for Interest Rates and Monetary Policy
The reduction in Treasury bill holdings also has
implications for interest rates and monetary policy. A decline in bank demand
for government securities can push yields upward while increasing the
government’s cost of borrowing. Meantime, greater private credit creation helps
growth but may raise inflationary pressures while making requirements for
careful management by the Central Bank. This dynamic shows how the debt market,
interest rates, and banking sector decisions are closely interlinked within the
broader financial system.
Rebalancing Towards Economic Recovery
The development signals a cautious but positive turning
point for Sri Lanka’s economy as a whole. The rebalancing of bank portfolios
from government securities towards private lending reflects improving business
confidence and stronger financial intermediation while the challenges are
remaining. This case underscores the importance of understanding how policy,
markets and institutional behavior converge to shape economic outcomes in real
time.
Personal Analysis
This development expresses the balance between money markets and capital markets as well as the role of financial intermediation. Fund movement from Treasury bills to private lending demonstrates how banks act as intermediary firms, reallocating liquidity towards sectors that generate higher economic value. The case also reflects the crowding out theory which says heavy government borrowing can reduce private sector access to funds. Here is the reversal suggests improved credit flow to businesses. Furthermore, the adjustment aligns with the loanable funds theory, as interest rates are influenced by shifts in demand and supply of credit between government and private borrowers. This event emphasizes how real world policy, market demand and institutional decisions converge to shape outcomes in the financial system.
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