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Sri Lanka Equity Forum » Political and Socio-Economic Analysis » Central Bank finally issues directive on 90% LTV; but only till November 30

Central Bank finally issues directive on 90% LTV; but only till November 30

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Melissa Pereira

Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
After much reluctance, the Central Bank last week issued a directive on the revised vehicle Loan-to-Value (LTV) ratio soon after the Finance Ministry released a formal statement on increasing the LTV up to 90 percent from the earlier 70 percent. 

However, Mirror Business learns that the 90 percent LTV will lapse on November 30 and from December 01 onwards the original directive issued on September 14 imposing the 70 percent LTV on vehicle financing would again come into force. The Central Bank on Thursday (October 29), issued formal instructions on the revision of the LTV to all the commercial banks and finance companies soon after the Finance Ministry issued a statement to the media on the matter. “Banking Act Direction No.02 of 2015 dated September 2015 on the above subject (LTV ratio for loans and advances in respect of motor vehicles) shall come in to force with effect from 01 December 2015,” a directive signed and issued by the Central Bank Governor and the Chairman of Monetary Board, Arjuna Mahendran stated.   

The Central Bank was believed to have come under pressure from the Finance Ministry to enact the higher LTV and thus the monetary authority had been compelled to issue the new directive last week.  However, questions are continuously being raised on the legitimacy of enacting instructions of the Finance Minister by the Central Bank, as the institute falls under Premier Ranil Wickremesinghe, a move which also led to controversy as this marked a departure from the previous practice of listing the Central Bank under the Finance Ministry in line with the ‘Exter Report’.  Since the imposition of the 70 percent LTV from September 15, the Central Bank was believed to have twice defied the Finance Minister’s instructions, though not publicly, on a higher LTV.  Initially when Finance Minister, Ravi Karunanayake on October 3 said the raising of the LTV up to 90 percent, effective October 5, the Central Bank did not corporate and subsequently said the 70 percent LTV was still in force.  Later, on October 19 Karunanayake sent instructions to be effective from the same day but it took nearly two weeks for the Central Bank to comply. 

It appears that the Finance Ministry and the Central Bank is heading into a collision course resulting in mixed signals. But economic clarity is expected on November 5 when Prime Minister Wickremesinghe is expected to make a statement on the national unity government’s economic policy. 

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