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Sri Lanka Equity Forum » Stock Market News » CB’s vehicle import directive to have ripple effect on economy

CB’s vehicle import directive to have ripple effect on economy

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Melissa Pereira

Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
The Leasing Asso-ciation of Sri Lanka (LASL) cautioned that the directive enforced by the Central Bank to have maximum loan-to-value (LTV) at 70% on vehicle imports with effect from yesterday would have a ripple effect on the economy.

The Central Bank yesterday directed finance companies not to provide any vehicle loans amounting to more than 70% of (the loan to value ratio) of the price of a vehicle.
 LASL President Nishaman Karunapala told the Daily FT that the effect of the directive would flow into all segments of the economy.  

He further stated that the impact would be felt when the industry limits to finance the SME sector and their contribution to the economy declined.   

“This is definitely going to affect the entire industry, especially the SME sector which cannot afford to obtain a leasing or a loan facility to purchase vehicles. It will also curtail the leasing and vehicle lending book growth, long-term industry growth and the economy as well,” he added.

When asked if the LASL was informed of the directive prior to it being made public, he said that they were taken aback by the sudden decision. 
“The Central Bank would have done their studies in this regard, but we are still puzzled as to why they implemented it,” he noted. 

However, explaining that they had no option left other than to adhere to the regulator’s decision, Karunapala said that after meeting the association members on 17 September and reviewing the members’ comments they would certainly make a representation.
“We will definitely ask for some concessions. Non-bank finance companies are the key financiers of vehicles and this was the driving force behind many financial institutions,” he revealed.

Noting the positive aspect of the directive made by the Central Bank, the LASL President asserted that the NPL ratio would decline. 
“With customers compelled to pay an upfront payment of 30% when obtaining a facility, it will create some financial discipline in the leasing and finance industry. This way their commitment is greater and it also helps to safeguard the depositors’ money at the end of the day,” Karunapala added.

Vehicle Importers Association of Lanka (VIAL) President Indika Sampath said that they would support the policy direction the Government had taken to curb vehicle imports as it was the need of the hour from a macroeconomic perspective.
“Although there is a direct impact to our business from this directive, we feel that this is important for the country to have a balance in the economy. In that light we would adjust to the situation,” he added.

However, he pointed out that it was not fair to enforce the directive for vehicles that were already registered. 

Noting that there would be a significant drop in vehicles that were imported from Japan, Sampath said that there would also be a drastic drop in vehicle imports from India, especially in vehicle brands such as Maruti and in three-wheelers.

Senior economist Deshal de Mel asserted that the Central Bank’s directive to tighten credit growth was necessary to curb the unsustainable level of vehicle importation. 
“There has been significant growth in vehicle imports during the first six months of the year which was largely driven by credit. This has put pressure on the trade deficit, which expanded by 15%, despite a 42% drop in expenditure on fuel during the first half of the year (January to June) causing rupee depreciation pressure as well. Therefore, it was necessary to tighten credit growth to address imbalances developing in the external sector,” he explained.

According to the Central Bank’s External Sector Performance review in June, expenditure on imports increased by 13.5% y-o-y to $ 1,633 million. This growth was led by vehicle imports for personal usage categorised under consumer goods, which increased by 110.1% due to higher importation of motorcars and motorcycles, and vehicles imported for business purposes categorised under investment goods, which increased by 238.6% due to higher importation of auto trishaws and other motor vehicles. 
Courtesy: Daily Financial Times 16 September 2015

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