CB sets maximum loan-to-value ratio on vehicles at 70%

15 September 2015 05:58 am

In a bid to clamp down on the vehicle imports weighing on the country’s Balance of Payment (BOP) the Central Bank  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.