Credit Card Usage and Debt Rising in Sri Lanka Create new Implications

By: Staff Writer

October 07, Colombo (LNW): Recent trends in Sri Lanka show an increase in both the use of credit cards and the rates of default on credit card payments, according to a local study.

The research highlights that improper management of credit card spending has led to significant changes in consumption patterns and buyer behavior among cardholders.

This has resulted in a surge in compulsive purchases, unrealistic optimism about financial capacity, and eventually unmanageable credit card debt levels. The consequences of these patterns include economic burdens and stress that are difficult to control.

The study suggests that while compulsive buying and unrealistic optimism play significant roles, other factors also influence credit card use, debt accumulation, and related stress.

These include social pressures, situational factors, depression, guilt, and family conflicts. The researchers emphasized the need to explore these additional elements to gain a deeper understanding of their impact on credit card behavior and financial wellbeing.

Consumer spending via credit cards is on the rise in Sri Lanka, with outstanding credit card debt in licensed commercial banks increasing by nearly one billion rupees in August 2024.

The total credit card debt now stands at Rs. 150.6 billion, reflecting a rise of Rs. 942 million compared to the previous month. However, this amount is still Rs. 736 million below the total credit card debt recorded at the end of the previous year.

In August, licensed commercial banks provided Rs. 135.2 billion in net credit to the private sector, more than double the amount extended in July.

Although credit card debt grew during this period, it accounted for only a small portion of the total increase in private sector credit.

There are currently fewer than 2.0 million active credit cards in Sri Lanka, which suggests limited recovery in credit card spending since the rates were dramatically increased in 2022, a move that almost halted consumer spending.

Following the rate hike to as high as 36%, many banks tightened their credit conditions, particularly on credit cards.

Although rates have since fallen by about 10 percentage points, they remain relatively high, limiting the resurgence of credit card-based spending when compared to other loan rates.

Despite these constraints, recent data from August 2024 indicates the beginning of a new credit cycle, hinting at a potential increase in credit card debt.

Promotional offers, discounts, and installment payment schemes are gradually returning after a two-year gap, potentially driving higher credit card use in the coming months.

The approaching festive season and recent decreases in energy, utility, and food prices may also encourage people to increase discretionary spending, further raising credit card debt levels.

As consumer confidence grows, credit card usage in Sri Lanka could see a significant uptick, leading to a complex balance between financial growth and the risk of rising debt.

Credit Card Usage and Debt Rising in Sri Lanka Create new Implications.