Though higher down payments have already started to yield the policy expectation of slowing down vehicle imports, an economist cautioned such restrictions could become a blow on inclusive development, which the government wants to promote. 

This is because the poor, who could then afford a small vehicle, which gave them economic opportunities through improved mobility, are now deprived of access to mobility due to the higher Loan-To-Value (LTV) ratio.

“…one may have to rethink this rule in the medium term due to its impact on the lower income groups. 

Inclusive development happens when poor people have access to the same infrastructure that the rich people have access to—water, electricity, telecom connectivity, mobility, etc. 

But the problem is that infrastructure has very high fixed cost that is unaffordable to lower income groups,” said, Murtaza Jafferjee, the head of a Colombo-based brokerage and research house. 

The LTV rule came into effect on December 1, 2015 as the Central Bank directed the banks and finance companies to cap the financing to 70 percent of the value of the vehicle. 

As a result, vehicle imports which reached an all time high of 61,864 in November declined to 54,316 in December, before crashing to 31, 854 in January 2016.  

Along with the LTV restrictions, expensive credit and significant increase in tariffs also contributed to this plunge. Jafferjee said the lower-middle income class was buying two-wheelers and three-wheelers even when the interest rates were over 30 percent because of the staggering payments over a period of time made the purchase affordable. He noted that such vehicles gave them greater functional purpose of mobility, thus the marginal returns from acquiring a vehicle was higher. 

However, now the biggest barrier on the purchase of a vehicle is the initial down payment— the fixed cost resulted by the lower LTV. 

“A three-wheeler’s pre budget cost was around Rs. 500,000. Some players offered 90 percent LTV so the initial down payment was Rs. 50,000. Tariff increases and depreciation of the currency increased the price to Rs.600, 000 and based on a LTV of 70 percent the initial down payment has increased to Rs. 180,000.  This is a hurdle too high for many low income groups,” he added. 

Sri Lanka’s mobile communication which overcame the fixed cost barrier, making it an inclusive infrastructure facility is a case in point. 

The increased mobile penetration resulted in not just the people to be in touch but also improved productivity through increased economic opportunities, uplifting many livelihoods. “A similar phenomenon happened in improving mobility over the last decade. Inclusive policies followed by successive governments through programmes like Maga Neguma ensured that we have the highest rural road density in South Asia, albeit further investment is needed in better maintaining them. 

Better rural roads ensure that isolated communities have access to employment and speedier access to market,” Jaffergee highlighted. Therefore, he queried if the LTV rule would lead to the unintended consequence of depriving economic opportunities to lower income groups due to lack of mobility.