Fitch Ratings, based in Colombo, reported on May 28, 2026, that Sri Lanka’s newly implemented stricter macroprudential regulations concerning vehicle and gold-backed lending are expected to enhance the risk profiles of lenders, especially finance companies.
The Central Bank of Sri Lanka has revised its loan-to-value (LTV) ratios, focusing on two specific lending products that have seen significant growth in recent years and constitute a large portion of the balance sheets of finance companies. These more stringent LTV ratios may result in reduced lending volumes and slower earnings growth for institutions heavily reliant on these financial products.
As of May 25, 2026, the LTV cap for car financing has been adjusted from 70% to 60% for vehicles that have been registered for more than a year, and from 60% to 40% for unregistered vehicles or those registered for less than a year. Additionally, the central bank introduced transitional provisions for letters of credit established prior to this regulation where financing has not yet been secured.
Furthermore, the LTV limit for gold-backed lending has been decreased from 80% to 70%, affecting both new loans and those that are rolled over. This adjustment is anticipated to help mitigate the risks associated with gold-backed lending, which has grown rapidly among banks and finance companies, driven by high collateral values, favorable capital treatment, and low provisioning requirements.
Both lending categories are vulnerable to fluctuations in collateral values. Vehicle prices are particularly influenced by changes in import duties and taxation policies, while gold prices tend to be volatile. The reduced LTV caps are expected to bolster lenders’ defenses against potential declines in collateral values and lessen the severity of losses in the case of borrower defaults.
Over the past three years, gold-backed lending at finance companies and banks rated by Fitch has increased at a compound annual growth rate of nearly 30%. By the end of 2025, it accounted for approximately LKR 1.5 trillion, or 11% of total loans in the sector, up from 7% in 2022. For finance companies, this share reached about 20%, compared to 17% in 2022, while Fitch-rated banks saw their share rise to nearly 9% from 5%.
People’s Bank of Sri Lanka (AA-(lka)/Stable) had the highest level of exposure to gold-backed lending among Fitch-rated banks, with around 20% of its loans in this category, while most other banks reported exposures of 10% or less. Within the finance sector, Asia Asset Finance PLC (A+(lka)/Stable) allocated approximately two-thirds of its loans to gold-backed lending, whereas LB Finance PLC (A-(lka)/Stable) and Mahindra Ideal Finance PLC (AA-(lka)/Stable) had around one-third and two-thirds, respectively.
The resumption of motor vehicle imports in early 2025 resulted in a sharp increase in vehicle financing, with both banks and finance companies experiencing growth exceeding 50% in 2025. Finance companies are significantly more exposed, with vehicle financing representing about 65% of their total loans compared to less than 5% for banks. This rapid expansion raises concerns regarding asset quality, especially if economic downturns negatively impact borrowers’ ability to repay.
The favorable regulatory capital treatment has also contributed to the growth of gold-backed lending. Vehicle financing carries a risk weight of at least 100%, whereas gold loans with LTVs up to 70% are assigned a zero risk weight for banks and finance companies. For LTVs exceeding 70%, banks apply a 20% risk weight up to 100% LTV and 100% beyond that, while finance companies assign a 100% risk weight to all exposures above 70%.
This structure results in an average risk density of less than 1% for Fitch-rated banks and about 5% for finance companies concerning gold-backed lending. Although the new LTV caps on gold loans may reduce, they are unlikely to eliminate, the regulatory incentive to prioritize gold-backed lending over other financial products, as the risk-weighting framework remains unchanged.
Nonetheless, the Central Bank’s prudential measures are likely to enhance the risk buffers of finance companies the most, as gold-backed lending and vehicle financing are fundamental to their operations. The positive impact on banks’ risk profiles is expected to be more limited since these lending categories are part of retail loans rather than core balance-sheet assets.
