The Governing Board of the Central Bank of Sri Lanka (CBSL) has tightened the maximum Loan-to-Value (LTV) ratios applicable to credit facilities granted for motor vehicles while also introducing a maximum LTV ratio for credit facilities secured by gold with effect from tomorrow (25).

These steps were taken by the CBSL in line with its macroprudential authority, in order to promote prudent lending practices, safeguard the resilience of financial institutions, and mitigate the potential build-up of systemic vulnerabilities, the Central Bank said in a statement.

The CBSL noted that in arriving at these decisions, the Governing Board took into consideration the recent significant growth in credit extended on account of facilities secured by gold and motor vehicle financing and the potential impact on the financial system if such trends continue at the current pace.

It added, heightened uncertainties stemming from evolving geopolitical and geoeconomic developments have elevated volatility in asset prices including gold, alongside recent exchange rate fluctuations. 

“The temporary increase in the surcharge on vehicle imports and exchange rate movements could inflate vehicle prices temporarily. Such fluctuations may affect collateral valuations and alter the underlying credit risk profiles, while continued rapid credit expansion warrants an intervention to prevent a potential build-up of excessive risks within the financial system,” the CBSL noted.

Accordingly, a maximum LTV ratio of 70 per cent has been introduced for credit facilities secured by gold collateral granted by Licensed Banks and Licensed Finance Companies, including existing credit facilities when renewed on or after the effective date. 

Moreover, the existing maximum LTV limits applicable on credit facilities granted in respect of motor vehicles have been tightened by 10 percentage points.

Accordingly, the CBSL will impose maximum LTV ratios on vehicle loans from tomorrow (25) for unregistered vehicles and vehicles used in Sri Lanka for less than one year after first registration: 60% for commercial vehicles and 40% for cars, SUVs, vans, three-wheelers and other vehicles.