The Central Bank of Sri Lanka has introduced sweeping new restrictions on vehicle financing in what analysts view as a broader attempt to prevent another foreign exchange crisis driven by excessive import demand and credit expansion.
Under the newly issued “Central Bank of Sri Lanka Act Directions No. 01 of 2026,” the banking regulator has sharply reduced Loan-to-Value (LTV) ratios applicable to vehicle purchases financed through banks, finance companies, and leasing institutions. The new rules take effect from 25 May 2026.
The directions require financial institutions to significantly increase the upfront payments required from vehicle buyers. According to the directive, financing for most motor cars, SUVs, vans, three-wheelers and similar vehicles will now be capped at 40% of the vehicle’s value, effectively requiring buyers to fund the remaining 60% themselves. Commercial vehicles will be eligible for a maximum financing ratio of 60%.
The move marks one of the strongest macroprudential interventions introduced since Sri Lanka emerged from its economic collapse and external debt default period.
Economists say the policy reflects growing concern within the Central Bank that a rapid reopening of vehicle imports could once again destabilise the Rupee by accelerating demand for Dollars. Sri Lanka’s previous economic crisis was heavily aggravated by import dependency, reserve depletion, and unsustainable foreign currency outflows.
Vehicle imports historically represented one of the country’s largest sources of pressure on foreign reserves. Prior to the crisis, easy leasing facilities and aggressive vehicle financing contributed to surging import bills, worsening the balance of payments deficit and increasing demand for scarce foreign exchange.
The new regulations appear designed to slow speculative and consumption-driven vehicle demand while directing available credit toward more economically productive sectors.
Financial sector analysts believe the Central Bank is attempting to avoid repeating mistakes made before the 2022 collapse, when excessive liquidity, artificially low interest rates, and relaxed credit conditions fuelled unsustainable import growth.
The directions apply not only to Licensed Commercial Banks and Licensed Specialised Banks, but also to Licensed Finance Companies and Registered Finance Leasing Establishments. The directive further states that financial institutions are prohibited from granting vehicle-related credit outside the newly prescribed limits.
The regulations also introduce stricter valuation rules. Brand-new vehicles must be valued based on confirmation from authorised agents, while used vehicles require professional valuation assessments. Reconditioned vehicles may be valued based on customs clearance values or dealer invoice prices.
Although the policy is expected to strengthen external sector stability, the immediate economic impact may be significant for Sri Lanka’s automobile market, leasing sector, and middle-income consumers. Industry participants expect vehicle demand to weaken sharply due to the larger cash deposits now required from buyers.
Leasing and finance companies could also face slower portfolio growth after years of relying heavily on vehicle financing as a major revenue stream.
However, some economists argue that the measures may ultimately help protect Sri Lanka from another cycle of currency instability and reserve depletion. They note that countries emerging from financial crises often impose temporary macroprudential controls to prevent excessive credit growth and speculative import surges during fragile recovery periods.
The directive also includes transitional provisions for Letters of Credit opened before the new rules come into operation, allowing slightly higher financing ratios depending on the period during which the import arrangements were initiated.
The new rules were issued under Section 105(1) of the Central Bank of Sri Lanka Act No. 16 of 2023 and signed by CBSL Governor Dr. P. Nandalal Weerasinghe.
