The Central Bank of Sri Lanka (CBSL) has issued a directive to both commercial banks and Non-Bank Financial Institutions (NBFIs) to offer leasing/financing credit facilities on motor vehicles only up to a maximum of 70 percent of the loan-to-value (LTV), officials from the CBSL said today.

The circular sent last night (14) by Sri Lanka’s financial sector regulator is to be effective from today (15) and is intended to prevent customers from purchasing vehicles without making a down payment. NBFIs comprise of finance and leasing companies.

The latest move, along with the recent depreciation of the Rupee which had already shot up vehicle prices, are now set to trigger a drastic reduction in the volume of vehicle imports to the country in the next few months, analysts said. However on a positive note, they said it will also help ease the rising problem of heavy congestion on Sri Lankan roads faced by commuters.

“The flooding of vehicle imports was due to a loose monetary policy stance adopted by the CBSL in the recent past combined with the fact that people had higher disposable income as a result of the salary hikes and reduction in cost of living. However, this decision, though reducing government’s tax revenue would help the island mitigate the pressure on the Balance of Payment,” an analyst commented on the condition of anonymity.

The full statement by the CBSL in respect of its decision, released today, is reproduced below;

The Imposition of a Loan to Value (LTV) Ratio for Loans and Advances in Respect of Motor Vehicles

The Central Bank of Sri Lanka has observed with concern the recent growth of exposure of banks and financial institutions to certain categories of lending, including lending in respect of motor vehicles.

As such, with a view to pre-empt this trend which may develop into a system-wide risk to the financial sector, the Monetary Board of the Central Bank of Sri Lanka decided to impose a maximum Loan to Value (LTV) ratio of 70 per cent in respect of loans and advances granted for the purpose of purchase or utilisation of motor vehicles by banks and financial institutions supervised by the Central Bank in terms of the relevant legal and supervisory provisions.

The imposition of such LTV ratios is a key regulatory practice adopted globally to address such macro-prudential concerns on lending activities of regulated entities as and when such concerns are raised.

Accordingly, with effect from September 15, 2015, loans and advances granted by licensed banks, finance companies and leasing companies for the purpose of purchase or utilisation of motor vehicles should not exceed 70 per cent of the value of such vehicles.

The Central Bank will monitor the developments closely to ensure the timely realisation of the envisaged outcomes of this macro-prudential regulatory measure and make appropriate revisions as and when necessary.