CB says LTV cap on vehicle loans has served its purpose

Cap may be removed soon I  Imports will not increase similar to the past

By Chandeepa Wettasinghe
The loan-to-value (LTV) cap set on vehicle imports may be removed soon as its intended aim has been fulfilled, Central Bank Governor Arjuna Mahendran said.
 “Basically the 70/30 thing was an import reduction measure. We don’t intend to make it a permanent part of the landscape,” Mahendran said.
 The present government’s Interim Budget in January 2015 had reduced taxes on small cars—with an engine displacement of less than 1,000cc—by 15 percent, to let less well-off families be able to afford a car. The August Parliamentary elections may have factored into the policy decision.
 Research by JB Securities (Pvt) Ltd. showed that the number of small cars registered in 2015 increased ten folds to 52,382, from 5,496 in 2014.
 The total number of vehicles registered in 2015 increased to 660,199 from 427,514 in 2014 as well.
 The low-tax policy had resulted in many individuals exploiting the already low interest rates to fully lease their car imports, and utilizing them extensively due to low oil prices.
 Last October, the Central Bank seeing the excessive expansion in credit caused by vehicle imports directed commercial banks to set the LTV at 70 percent with immediate effect, for motor vehicle financing. 
Finance Minister Ravi Karunanayake however intervened on behalf of the vehicle importers in the country and as a result the new LTV rule was delayed till December 1.
 LTV cap and the uncertainty, combined with the budget cycle had also had an effect, decreasing the number of vehicles registered during the final calendar quarter of 2015.
 “There was an excess in imports last year, and now I’m also suggesting that things are tapering off fast, so I’m hoping that we can just lose this completely,” Mahendran said.
 The authorities may be hoping that imports will not increase similar to the past due to increasing interest rates and the increased taxes slapped on in the 2016 Budget.’
 Transport experts have continuously insisted that implementing congestion charges may be a more apt solution.
 This would force some to use public transportation, while bringing in more state revenue, which could be used to improve public transportation and the road network.