Sets the maximum loan-to-value ratio at 70%
In a bid to clamp down on the vehicle imports weighing on the country’s Balance of Payment (BOP) the Central Bank yesterday sent directions to all banks and finance companies imposing restrictions on loans and leases to vehicles.
The directive, which comes into effect from today (September 15), the regulator bars the commercial banks and finance companies granting loans and leases in excess of the 70 percent of the value of the vehicle.
This sets the maximum loan-to-value (LTV) ratio on vehicles at not more than 70 percent.
While the directive is by no means welcoming for the financial institutions as it could restrict growth in their leasing and vehicle lending books, which by far the driving force behind many of the financial institutions, this is a much-awaited measure to curb the menace being created by the unsustainable level of vehicle imports.
However, analysts opine the measure by the Central Bank is “too – little, too late” as it has already caused much damage to the economy and caste their doubts if the measure will in fact achieve the intended objectives.
Even at present, in most instances, the LTV for vehicles hovers around 70 to 80 percent level.
Therefore, they believe the government most likely will be compelled to increase the import duty on the vehicles either in the November budget or before.
Under these circumstances, according to currency dealers, the impact of capping the LTV on vehicles could achieve very little in terms of reducing the pressure on the rupee because seasonal imports are about to kick in from next month onwards.
Even today the Central Bank was seen intervening in the foreign currency market through the state banks as the rupee hit an all-time low of Rs.140 per US dollar.
Hence, unless the strong dollar flows by way of foreign direct investments materializes during the remainder of the year, the rupee will continue its slide and the BOP will most likely end in a huge deficit.
Last week the Central Bank decided to float the rupee when it realized it could no longer prop up the rupee by selling the country’s reserves.
Since the decision to float the currency, the rupee has fallen over 4 percent by now.
Sri Lanka’s expenditure on vehicle imports during the first six months of 2015 virtually doubled to US $ 600 million.
Sri Lanka’s vehicle imports had been hitting record highs every month till July 2015.
In July, the number of registrations peaked to 62,221 units before it slowed down in August to 50,555 vehicles, largely due to fall in two-wheeler registrations.
Sri Lanka’s vehicle imports have become a bane socially as everyday road congestion creates mental trauma among the road users while the economic loss has already caused much pain to the country’s external account.
Tax hike on vehicle imports no answer for BOP crises
Contrary to the popular belief that the Balance of Payment (BOP) crises faced by Sri Lanka from time to time are caused by unsustainable level of vehicle imports, the head of a leading local equities brokerage and research outfit argues otherwise saying that it is more to do with the country’s economic fundamentals.
JB Securities Managing Director Murtaza Jafferjee believes that the solution to the BOP crises lies with the sensible handling of the monetary and the fiscal policies rather than meddling with the vehicle taxes.
Sri Lanka’s monetary policy has failed to allow the market forces to determine the value of the currency and to revise the interest rates when the pressure builds up.
On the fiscal side, the government has failed to increase the tax revenues yet and has offered substantial salary increases to public sector employees, not linked to productivity increases.
This policy makes the imports cheaper than what it should be and the interest rates lower than what it should be – the impossible trinity – leading to a vicious cycle, Jafferjee observes.
These nonsensical policies lead to sizeable currency adjustments, monetary and fiscal tightening, causing much pain— deja vu early 2012.
This cycle of ‘stop-go-policies’ have characterized the Sri Lankan economy due to weak economic fundamentals prompting the authorities to put the brakes when the economy gets overheated, often followed by an easing cycle.
Sri Lanka appears to be steadily tilting towards another BOP crisis unless strong foreign inflows materialize and thus it is widely expected that the vehicle taxes are poised to increase in the forthcoming budget as the past evidence shows that the authorities swiftly responding with huge tax increases on vehicles to rein in the pressure on the BOP and the external reserves.
During July and August, the Central Bank has spent as much as US $ 447 million and US $ 352 million from its external reserves in defence of the rupee.
Unable to defend further due to strong importer dollar demand, the Central Bank last week floated the rupee. Since then, the currency fell 4 percent.
Sri Lanka’s vehicle demand was fuelled by the cheaper bank credit because after the gold bubble burst, the only collateralized lending available for the financial institutions was the vehicle financing.
The demand for vehicles skyrocketed when the larger banks started offering leasing solutions at interest rates ranging from 9-10 percent.
“Public servants who benefitted from a Rs.10,000 monthly wage increase coupled with lower fuel prices and food prices created a large segment of first time three-wheeler and small car buyers,” Jafferjee observed.
However, it is also observed that these buyers do not use these vehicles regularly as they view them as assets holding value similar to gold jewellery.
“My guess is they are keeping it at home. When you take the historical experience of car prices holding their value over time in nominal terms I believe most people view their car as a real asset as they view gold jewellery— it will hold its value and also offers the added advantage of usage occasionally.”
Meanwhile, some of the demand is triggered by the households buying a second vehicle.