FINANCIAL CHRONICLE – The Central Bank of Sri Lanka has set a new maximum loan-to-value (LTV) ratio of 70 percent for loans backed by gold, while also tightening the LTV ratios for motor vehicle financing by 10 percentage points, effective from May 25.
This new LTV limit applies to credit facilities secured by gold collateral issued by Licensed Banks and Licensed Finance Companies, affecting both new loans and existing ones that are renewed after the effective date.
The Central Bank has imposed this adjustment on motor vehicle financing, increasing the maximum LTV limits by 10 percentage points.
According to the Central Bank of Sri Lanka (CBSL), these measures are part of its macroprudential oversight aimed at encouraging responsible lending, enhancing the stability of financial institutions, and reducing the risk of systemic vulnerabilities.
This decision was prompted by a notable increase in credit related to gold-backed loans and motor vehicle financing, alongside concerns about the potential implications for the financial system if these trends persist at the current rate.
The CBSL noted that growing uncertainties from changing geopolitical and economic landscapes have led to increased volatility in asset prices, including gold, as well as fluctuations in exchange rates. It pointed out that the recent rise in surcharges on vehicle imports and currency exchange rate shifts could lead to a temporary spike in vehicle prices.
Such price changes may impact collateral valuations and modify the underlying credit risk profiles. The rapid expansion of credit necessitates action to avert the accumulation of excessive risks within the financial sector.
Detailed guidelines issued to Licensed Banks, Licensed Finance Companies, and Registered Finance Leasing Establishments can be found at the following links:
