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Sri Lanka curbs vehicle finance amid BOP pressure

ECONOMYNEXT – Sri Lanka has slapped an upper limit of 70 percent on the price of a vehicle that can be financed by lenders amid a balance of payments crisis triggered by loose fiscal and monetary policy.

Non-bank finance companies are the key financiers of vehicles.

Sri Lanka’s credit finance car purchases rose sharply as the government gave a 10,000 rupee salary increment to state workers and the Central Bank accommodated the deficit by releasing temporarily sterilized liquidity up to June and outright money printing after that.

The Central Bank directed finance companies not to give any vehicle loan amounting to more than 70 percent of (Loan to value ratio) of the price of a vehicle from September 15.

After triggering balance of payments crises by money printing in the past Central Bank has also restricted car imports, in a ‘shoot the messenger’ type of knee-jerk reaction analysts say.

Cars are a favourite whipping boy of the monetary authority, in a country where Mercantilism is rife and ‘imports’ and ‘trade deficits’ are routinely blamed for balance of payments trouble, instead of a soft-pegged money printing central bank that has hurt the currency since it was set up in 1951.

Analysts however say higher loan to value ratios have a prudential value. When interest rates rise to eventually fix the BOP crisis, the economy goes in to a ‘hard landing’ and higher loan to value ratios can protect lenders when defaults go up. Defaults go up when rate normalize because mal-investments take place during the period of excessive money printing.

Such mal-investment may be financed by mortages as it happened in the US in the most recent collapsed bubble, gold backed loans or margin trading for stocks .  (Colombo/Sept15/2015).

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