Sri Lanka’s automobile market: Subliminal economic bubble?

Banks and finance companies have been throwing money at individuals interested in purchasing new vehicles to profit from the interest rates that stem from loans

• From showrooms to sinking debt; is Sri Lanka repeating a global mistake?

The Lankan trend

Any Sri Lankan commuter with reasonable observation skills will notice the influx of new vehicles in Colombo. The suffocating traffic is a simple indicator. This phenomenon was only bound to happen with the recent relaxation of import restrictions on vehicles. These restrictions were a recovery measure implemented by the Government for the economy to recover from Sri Lanka’s recent financial crisis. However, short lived was the excitement for the removal of such restrictions as the Government in January 2025, announced its exorbitantly high tax rates which were to be placed on imported vehicles. Taxes running as high as 300% slapped the common man into a reality which screamed that affording a new daily driver from their savings alone was impossible.

The parallel

A healthy combination of subprime lending and adjustable rate mortgages (ARM) lent fodder to the 2008 financial crisis in the USA. Subprime lending was the controversial practice of approving loans for people with low creditworthiness, often with little or no income verification. ARMs on the other hand were housing mortgages with ultra-low interest rates which came with the caveat that such interest rates could differ depending on volatile market variables. This marriage was bound to fail when credit default (non-payment) became the only reality for many Americans. 

Hence, a crisis hungry housing bubble was formed subliminally, by an increased supply of ARMS to an expanding pool of unreliable debtors. An accumulation of such practices, lead to inevitable financial ruin. This crisis was well documented, researched and deconstructed over the years by leading economic analysts, with the Federal Reserve referring to this event as ‘The Great Recession’. To gain preliminary understanding of this saga, “The Big Short” is a recommendable movie which explains this in decent detail. 

The plan

The tax hike on automobiles is the Lankan Government’s straightforward plan to earn from tax revenue while simultaneously safeguarding their forex reserves. There was widespread speculation and concern that the tax driven high prices of newly imported vehicles, had deterred purchasers. This juncture, personally, is where things become interesting for me. 

While an increased granting of loans can be good if the funds are used productively to spur economic growth and development, it can be harmful if it leads to unsustainable debt burdens and economic instability. Magnanimous amounts of money being advertised for subprime lending to acquire depreciating assets, is not a pleasant-sounding phenomenon when put together in a sentence. This phenomenon when compared, is very similar to the financial crisis that took place in the USA in 2008, if we replace housing mortgages with vehicle loans. Both are catalysts that look harmless on the surface until the profiles of relevant debtors and debt repayment structures are studied 

The question

As much as the Sri Lankan Government accounted for tax revenue, forex preservation and economic stability, did it for a moment consider the possibility of what could happen if those deterred by unaffordability, pursue the purchasing of automobiles regardless of their financial shortcomings? 

Personally, I fear that the Government has gravely undermined the average Lankan’s longing for validity and thirst to achieve self-perceived financially demanding standards of social status. Vanity outperforms practicability if one’s ego is inflated enough. The non-understanding of Lanka’s ethos may spell disaster, if this article’s conjecture proves to be true.

New buyers, more loans!

By utilising the divine weapon of small talk, over the course of the last few months, ever since the import restrictions were lifted, I spoke to multiple new owners of vehicles and car sales managers. This included friends, mutual friends, random individuals who were in the vicinity of their new car and spontaneous visits to showrooms with interactive sales managers.

I had a hunch and guess what I found? A significant number of purchasers are funding their automotive dreams via loans. Banks and finance companies have been throwing money at individuals interested in purchasing new vehicles to profit from the interest rates that stem from loans. Some debt structures involve floating interest rates that are similar to ARMs as discussed above.

Unlike in the past where financial institutions adhered to strict policies pertaining to their debtor’s financial profile, now certain institutions have ventured to fund a purchasing pool with low credit worthiness. 

This pool consists of minor business owners with volatile incomes, debtors who have borrowed beyond their means almost spending their entire monthly salary to finance their monthly instalment, debtors with multiple other loans and financial obligations (Housing loans/Gold loans/Personal loans/Rent), debtors relying on their EPF/ETFs which can’t be withdrawn any time soon and some relying on the classic system of borrowing minor amounts from loans sharks from time to time, barely keeping themselves afloat from defaulting on their monthly car payment. Some are literally relying on God’s grace and an opportunity to access another loan from a different financial institution to cover such debt when the time comes. Certain debt structures involve a hefty final instalment that is almost 25x their monthly car payment. 

For example, one owner of a BYD agreed to a debt structure that demands a monthly payment slightly upwards of 350,000 for 59 months and on the 60th month he will pay a final instalment which approximately amounts to Rs. 8,750,000. Over the course of 5 years he would have paid close to Rs. 30 million for a depreciating asset that originally costed approximately 22 million. All of this, after having paid a significant initial down payment to obtain the loan facility.

According to Remote People (a global hiring platform), the average Sri Lankan’s salary is Rs. 55,000 ($ 183). Considering this statistic, if you had minimal understanding of our rupees’ depreciation and weak purchasing power, these monthly instalment amounts would sound absurd to you. This absurdity only furthers whenever 100s of newly imported vehicles pass by and one ventures to think of the many such individuals who must be trampled with debt.

Keep in mind, that this financial discussion on funding car payments is yet to include other significant automobile related costs such as fuel, insurance, maintenance, and asset depreciation. Costs rapidly compound while salaries do not, is the status quo that persists in Lanka. 

Financial institutions have opened Letters of Credit (LCs) worth $ 530 million so far this year for the importation of “over 70,000 vehicles”, Deputy Minister of Trade, Commerce, and Food Security R.M. Jayawardana stated while speaking to, ‘The Morning’ in June 2025. It was only in February that the import restrictions were relaxed. A mere four months to pull such staggering numbers. 

The warning!

Does the mix of increased loan lending and non-credit worthy individuals ring a bell? If it doesn’t, run back to the introduction of this article that discusses subprime lending and credit default. 

The Central Bank states: “During 2025 Q3, loan demand is expected to increase across all sectors, driven by the increase in vehicle imports, low interest rates, rising consumer confidence, and favorable business and economic outlook. Due to the expected further reduction in interest rates, increase in vehicle imports, and improved business confidence, the demand for loans is expected to further increase during 2025 Q3”, as reported by Economynext in August this year.

This article envisages that an economic bubble is taking shape as we speak. While an increased granting of loans can be good if the funds are used productively to spur economic growth and development, it can be harmful if it leads to unsustainable debt burdens and economic instability. Magnanimous amounts of money being advertised for subprime lending to acquire depreciating assets, is not a pleasant-sounding phenomenon when put together in a sentence. This phenomenon when compared, is very similar to the financial crisis that took place in the USA in 2008, if we replace housing mortgages with vehicle loans. Both are catalysts that look harmless on the surface until the profiles of relevant debtors and debt repayment structures are studied. 

On 17 July this year, the Central Bank of Sri Lanka (CBSL) published official directions addressing banks and other financial lending institutions, implementing maximum caps on loan to value ratios for credit facilities granted in respect of motor vehicles, which indicates that this article’s fear may not be irrational. A loan-to-value ratio is a metric which as a percentage, compares the loan amount to the value of the property being financed. While this is a policy implementation to mitigate risk, more scrutiny must be practiced by the CBSL in order to assure that lending institutions are not taking advantage of the newly opened car market in order to earn from interest rates via the elevation of debt burdens. 

This article forecasts that the impact of this bubble might be felt over the next few years when the accumulation of such malpractices could possibly lead to credit defaults on the part of many debtors, if such practices aren’t regulated and restricted early. The problem is not the 10 flashy luxury/sport cars you see which were purchased by billionaires but the 10,000s of vehicles that may cost 15-20 million each, that have been purchased by unreliable debtors via unsustainable loans.

The elements behind the 2008 crisis should not be considered far-fetched pertaining to our economy and Sri Lanka is no stranger to a financial crisis. This article is not trying to portray itself as a predestined theory written in stone that is assured to take life but is a mirror that simply foreshadows what may go wrong, if current practices of lending institutions continue unchecked. Hence, all related parties from debtors to creditors to institutions owing oversight, should conduct themselves accordingly, keeping in mind that our economy is toiling to recover and cannot afford to take another bullet to its heart.