CBSL imposes stricter lending curbs over gold, vehicle credit growth

• Measures, effective from May 25, were introduced under its macroprudential mandate “to promote prudent lending practices, safeguard resilience of financial institutions and mitigate potential build-up of systemic vulnerabilities”
• Under new rules, CBSL has introduced a maximum LTV ratio of 70% for gold-backed credit facilities, including existing facilities renewed after effective date
• CBSL also tightens existing LTV limits applicable to motor vehicle financing by 10 percentage points

The Central Bank of Sri Lanka (CBSL) moved to curb the rising risk exposure in the financial system this week by capping lending against gold and tightening the financing limits on motor vehicles, as the authorities flagged concerns over the rapid credit growth, amid the volatile asset prices and exchange rate pressures.
The CBSL said the measures, effective from May 25, were introduced under its macroprudential mandate “to promote prudent lending practices, safeguard the resilience of financial institutions and mitigate the potential build-up of systemic vulnerabilities”.
The move comes as gold-backed lending and vehicle financing have accelerated sharply in the recent months, aided by the elevated gold prices, exchange rate fluctuations and a surge in vehicle demand, following the recent policy changes on imports.
“In arriving at these decisions, the Governing Board took into consideration the recent significant growth in credit extended on account of the facilities secured by gold and motor vehicle financing and the potential impact on the financial system if such trends continue at the current pace,” the CBSL said.
Under the new rules, the CBSL introduced a maximum loan-to-value (LTV) ratio of 70 percent for gold-backed credit facilities granted by the licensed banks and finance companies, including the existing facilities renewed after the effective date.
The regulator also tightened the existing LTV limits applicable to motor vehicle financing by 10 percentage points.
The latest intervention indicates the growing regulatory unease over the pace of credit expansion into the collateral-backed lending segments, particularly at a time when the global geopolitical tensions and currency volatility are driving sharp swings in asset values.
“Heightened uncertainties stemming from the evolving geopolitical and geoeconomic developments have elevated the volatility in asset prices, including gold, alongside the recent exchange rate fluctuations,” the CBSL said. It warned that the temporary surcharge increase on the vehicle imports and currency movements could artificially inflate the vehicle prices and distort the collateral valuations.
The measures also come as Sri Lanka’s financial system faces renewed external pressures from the rising global commodity prices and currency volatility, conditions that could heighten the risks from the rapidly expanding collateral-backed lending, if the asset prices reverse sharply.
The analysts said the tighter LTV ratios are likely aimed at slowing the speculative borrowing while preserving the balance sheet quality across he banks and finance companies, particularly in segments where the collateral prices remain highly sensitive to the external shocks.