Vehicle LTV unchanged; FMs assertion holds no water

12 October 2015 03:33 am - 0 - {{hitsCtrl.values.hits}}

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Despite Finance Minister’s (FM) assertion that the vehicle financing loan-to-value (LTV) ratio be brought up to 90 percent, neither the Central Bank (CBSL) nor the country’s financial sector (banks and finance companies) have received the nod to put that into effect from their respective authorities.

According to Central Bank Deputy Governor Ananda Silva, the Monetary Board can only take the final decision, but the matter had not yet been taken up for consideration.

“Therefore, still the earlier directive on 70 percent LTV is in force,” Silva said.

The country’s monetary authority, the Central Bank, on September 15 capped the LTV on vehicle financing at 70 percent to rein in the credit flows to vehicle imports and the resulting pressure on Balance of Payment (BoP), just to see the directive being over-ruled by the country’s Finance Minister a fortnight later. Finance Minister, Ravi Karunanayake during a press conference on October 3 announced the decision to raise the LTV up to 90 percent effective October 5 as it affected the financing of already registered vehicles.

He also said a 100 percent Letter of Credit (LC) margin requirement would be imposed to curtail imports.

However, the Finance Minister’s capacity to over-rule a Central Bank’s directive was later called into question by many as the Central Bank falls under Premier, Ranil Wickremesinghe, a move which also led to controversy as this marked a departure from the previous practice of listing the Central Bank under the Finance Ministry in accordance with the ‘Exter Report’.

“One would presume that the Finance Minister’s statement was more a wish or request to CBSL, as the Central Bank comes under the Prime Minister. To my knowledge, thus far, there has been no revocation of the LTV cap directive and is unlikely to be revoked in the near future,” Murtaza Jafferjee, the Managing Director of Colombo-based equities brokerage JB Securities said.

While affirming the imposition of LTV is nothing extraordinary, Jafferjee however said the enforcement could become a challenge for the regulator.

“… a firm can give the forced sale value especially for registered cars (previously used in Sri Lanka) for they are not a homogenous asset class that permits easy price discovery, i.e. registered resale value would depend on the brand, model, options, year of manufacture, mileage, usage
history, etc.”.

While re-iterating that vehicle imports are a distant cause for BoP issues as this rise has been more than off-set by the drop in oil prices, he said the pressing cause for weakening in rupee and the deteriorating BoP was due to the significant outflows from the government securities
(G-Sec) market.

Year-to-date, the rupee has declined by 7 percent while approximately US $ 1 billion worth of capital outflow has been recorded from the G-Sec market.

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Vehicle LTV unchanged; FMs assertion holds no water

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