The Finance Ministry yesterday implemented 90% of loan-to-value (LTV) for motor vehicles effective from yesterday, followed by an official directive from the Central Bank.
According to the Ministry statement, the directive will be sent out to all the public and private financial institutions.
Previously, the Central Bank directed finance companies not to provide any vehicle loan amounting to more than 70% of LTV ratio of the price of a vehicle, affecting the lower end of the market particularly.
Thereafter, the Ministry revised the directive made by the financial regulator on 15 September and announced it would be possible for commercial banks and finance companies to provide loans and leases amounting to 90% of the price of a vehicle with effect from 2 October.
However, the Finance Ministry’s directive on the 90% of LTV was not in practice as the Central Bank had not made any official directive on that to the banks and financial institutions.
Justifying the revised LTV, Finance Minister Karunanayake said that the decision was made considering the negative impact it might have on the market.
Meanwhile Central Bank Governor Arjuna Mahendran told the Daily FT the request made by the Finance Ministry on the LTV would be adhered to but stressed the bank would monitor its effects closely.
Responding to why the directive was delayed, Mahendran noted that the Central Bank was an independent body and when they make decisions they have to adhere to the procedures of the bank, especially the Monetary Board, for approval.
“We will send the directive to all the banking and financial institutions today (29) or tomorrow (30),” he said.
Explaining the rationale behind the directive made on 15 September, he asserted that they feared a bubble situation in the market.
“The financial institutions were providing 100% lease facilities against secondhand motor vehicles which was not at all a good situation for the country’s financial system. Secondhand vehicles have high depreciating value against 100% leasing facilities and we had to intervene to correct it,” he added.
Noting that their intention was to curb the unnecessary vehicle imports, he said the Finance Ministry had requested the bank to revise the directive made on 15 September, pointing out that the sudden adjustment on the LTV has caused hardships for both importers as well as leasing institutions.