Sri Lanka car finance curbs seen reducing bad loans

ECONOMYNEXT – Central bank restrictions on lending to import vehicles could restrain future credit growth of Sri Lankan leasing and finance companies but also reduce bad loans, Asia Securities (Pvt) Ltd. said.

The central bank earlier this week imposed an upper limit of 70 percent on the price of a vehicle that can be financed through loans amid a balance of payments crisis triggered by loose fiscal and monetary policy.

The country has seen a rising flood of vehicles imported in recent months the bulk of them financed through loans from non-bank finance companies.

“The directive will have a material impact on leasing and finance companies with an average LTV of 85-90 percent and will put pressure on future credit growth due to high dependence on vehicle loans and leases,” Asia Securities said.

But commercial banks will have a minimal impact owing to their lower exposure for leasing – of around 8 percent of the total loan book – and their average LTV already remaining near 70 percent.

Asia Securities said that financial institutions may consider re-designing their products, such as financing the balance with a personal loan depending on the credit worthiness and payment capacity of the customer.

“We believe financial institutions who are highly exposed to three-wheeler leasing will have a significant impact in their short term loan growth,” they said.  
 
The stock brokers noted there was a positive side to the restrictions since leasing has an inherently higher non-performing loan ratio when compared to other lending products.

“Thus reducing exposure to leasing will improve the overall NPL ratio of the company which will also be positive on profitability,” Asia Securities said.

Gross NPL ratio of commercial banks averaged at 3.6 percent while that of finance companies that have a higher exposure to motor loans averaged at 7 percent in 2014.  (Colombo/September 18 2015)
 

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