CB raises loanable value on registered vehicles by finance companies

The Central Bank last week raised the loanable amount by licensed finance companies in respect of registered vehicles for more than one year after the first registration, as the finance companies are reeling from the tougher business climate compared to their banking counterparts. 

To this end, a licensed finance company can now loan or give leases up to 80 percent of the value of the registered vehicle, from the earlier 70 percent. The ratio is referred in the finance parlance as the ‘Loan-To-Value (LTV) ratio’. 
A higher LTV ratio gives higher space for licensed finance companies to give as loans or leases, and thereby achieve a higher growth in their loans and advances portfolio. 

The LTV is used by the Central Bank to control or relax loanable funds into certain sectors depending on the economic conditions. 

But the risk of a higher LTV is that if the underlying asset drops in value due to exogenous factors, the bank runs the risk of losing out by way of higher loan impairments and defaults. 

This was the case during the 2013/14 gold loan debacle where the banks had lent up to 100 percent of the gold value just to write-off billions in such gold-backed loans when the global gold prices declined, sending the LTV ratios over and above 100 percent—meaning, the loaned amount was higher than the value of the underlying asset. 

However, last week’s rule doesn’t change the existing LTVs applicable on unregistered vehicles and registered vehicles, which have been used in Sri Lanka for less than one year after the first registration.  At present, electric vehicles of all categories enjoy an LTV of 90 percent while commercial vehicles and light trucks with combustion engines also can go up to 90 percent LTV. 

However, motorcars, SUVs and vans, irrespective of their fuel type, have a LTV of 50 percent. But the locally assembled motorcars, SUVs and vans have a 70 percent LTV in a bid to encourage the local auto assembly industry. 

Three wheelers have an LTV of 25 percent to discourage financing to that sector, a sector that is a bane to the roads, and policy wise, must be gradually phased out. 

In any case, last week’s rule change on higher LTV on registered vehicles will come as a consolation to the licensed finance company sector, which has been scrambling for growth for the last few years.