Finance companies lobby for skimpy down payments on motor cars, three-wheelers

Sri Lanka’s finance companies are continuing to lobby the regulators to bring down the down payments on motor cars and three-wheelers in a bid to propel their leasing portfolios, which have experienced a hit in the recent times.    

The country’s Central Bank early this year lowered the Loan-To-Value (LTV) ratios on motor car leases and loans to 50 percent and to a low of 25 percent on three-wheelers to rein in consumption credit, which is deemed unproductive. 

Lower LTVs lead to higher down payments being paid by buyers effectively discouraging them making a vehicle purchase. 

Lower LTVs are also aimed at curbing vehicle imports flooding the Sri Lankan roads, which are already jam-packed. 

But the move had little impact as still over 30,000 vehicles are being imported to the country every month— unsustainable for a country where the expansion of the road network hasn’t been able keep up with the massive increase in vehicles. “FHASL continues to make submissions to the CBSL and the Ministry of Finance seeking an increase in the LTV ratios applicable to motor cars, vans, SUVs and three-wheelers”, said Kithsiri Wanigasekara, the Chairman of the Finance Houses Association of Sri Lanka (FHASL) representing 43 registered finance companies. 

However, it is an open secret that both banks and finance companies have since been circumventing the Central Bank direction on LTVs by structuring different financing arrangements to bridge the gap required for the lessee, allowing the customer to enjoy a 100 percent lease. 

There are instances where these banks and finance companies have given personal loans to either the lessee or his spouse to cover up the balance.  The Central Bank Governor, Dr. Indrajit Coomaraswamy last week said he wouldn’t hesitate to tighten the monetary policy further should the private sector credit lead to an unsustainable level, something the International Monetary Fund had also advocated.

Wanigasekara in his review in the FHASL 2017 annual report said the industry is observing a strong shift towards two-wheeler leases from four-wheeler and three-wheeler leases after the LTV restrictions came into effect.   In fact, his claims are proven by the monthly vehicle registration numbers, which demonstrate around 5,000 to 6,000 incremental two-wheeler registrations being recorded.  Out of the total motor vehicle registrations, over 90 percent comprises of two-wheelers and a recent survey has found that a majority of road accidents involve two and three-wheelers.  “The market for finance leases on four-wheelers has contracted as a result of fiscal and regulatory action and has become competitive”, Wanigasekara added.  In his review he argued that higher LTVs on four-wheelers lead to more secured lending but the argument appears holding no water. 

The analysts argue that the opposite is true because lower LTVs ensure that a lease is more than adequately backed by an asset, hence the finance company could recover the loan by way of re-possessing the vehicle. 

According to FHASL data, finance company assets have grown by a healthy 15 percent during the year ended in March 31, 2017, albeit a slowdown from a year earlier where the people were in a vehicle buying binge. 

Sri Lanka’s finance companies have total assets worth Rs.1, 239.1 billion accounting for 7.8 percent of the financial system assets. 

The sector asset quality has improved as the gross non-performing loan ratio has come down to 4.9 percent from 5.1 percent a year earlier. 

The sector enjoys a hefty interest margin of 7.8 percent, albeit down from a year ago, but more than two folds what the banking sector enjoys. 

The sector has a return on assets of 3.5 percent, again virtually double the banking sector RoA.