Sri Lanka's which is recovering from a balance of payments crisis triggered by credit financed energy subsidies, saw non performing loans in the banking system rise to 5.6 percent of total by end 2013 from 3.7 percent a year earlier.
Moody's said 75 percent of the total increase in bad loans were from gold-backed or pawning defaults. World gold prices topped 1800 US dollars an ounce amid excessive money printing by the US Fed and fell to 1200-1300 dollar levels last year.
Gold bears expect the precious metal to fall to around 1,000 an ounce as the Fed pulls back is quantity easing.
Moody's said underwriting standards fell in Sri Lanka after 2009 and banks were advancing as much as 80 to 95 percent of loan-to-values against gold and were exposed once prices fell.