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Credit growth to be dampened by 70% LTV upper cap: Analysts

16 September 2015 05:14 am - 0     - {{hitsCtrl.values.hits}}

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By Shabiya Ali Ahlam
The Central Bank’s (CB) directive on setting the maximum loan-to- value (LTV) ratio at 70 percent on vehicles to improve the nation’s Balance of Payment (BOP) situation may augur well for the health of the overall economy, but it is the country’s financial sector that will bear the brunt, analysts said.

Speaking to Mirror Business, senior analysts pointed out that while this measure could help rectify the imbalances in the economy, the credit growth of banking and non-financial banking institutions (NBFIs) will be impacted, with the latter likely to have it worst.

“The directive will greatly impact the NBFIs as the leasing and hire-purchase is a key driver of their businesses. Although commercials banks will be hit as well, their impact will not be as high as what would be for NBFIs as only 8 percent of their loan book consists of leasing and hire-purchase. Besides, most of the commercial banks have already been maintaining their LTV ratio at 65-70 levels,” explained Asia Securities Manager Research and banking sector analyst Srimal Liyanage. 

 “However, the credit growth of all entities engaged in leasing and hire purchases will be negatively impacted. The more they have in the leasing basket, the higher the impact will be,” Liyanage said. 

Opining there is a possibility for lending entities to reduce the impact of the directive that came into effect yesterday, Liyanage suggested that as a remedial measure the financial sector should look at redefining their product.

“If the directive is preventing them from granting loans and leases in excess of the 70 percent value of the vehicle, entities should explore the option of partly financing the balance 30 percent as personal loans,” he said.

Sharing similar viewpoints, Softlogic Securities COO and Head of Research Danushka Samarasinghe noted that while the immediate outcome of the directive would be the slowdown in the overall credit given out, the vehicle leasing market will be dampened. 

“This will be a deterrent on vehicle imports, not immediately though. Along with banking and financial entities vehicle traders would experience a drop in their business as a result of this directive. These traders would experience a stock build up in the coming months,” Samarasinghe pointed out.

He added that while the restriction is an action plan to discourage imports due to the current pressure on the rupee, it might not be the solution to the problem.
“This could assist in some way but may not be able to halt the pressure on the BOP situation. The Central Bank might have to take further action in terms of limiting imports,” noted Samarasinghe.
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