Sri Lanka’s vehicle, gold loan curbs support lenders’ risk profiles - Fitch Ratings

Sri Lanka’s tighter macroprudential restrictions on vehicle and gold-backed lending will benefit lenders’ risk profiles, particularly those of finance companies, Fitch Ratings stated. 

The Central Bank of Sri Lanka’s  (CBSL), lower loan-to-value (LTV) caps target two products that have expanded rapidly in recent years and represent a substantial share of mainly finance companies’ balance sheets. 

The tighter caps may also weigh on volumes and earnings growth, particularly for lenders with high exposure to these products, it said. 

The LTV cap on motor car financing was lowered on 25 May 2026 to 60% from 70% for vehicles registered for over one year, and to 40% from 60% for unregistered vehicles and those registered for less than one year. 

The central bank also introduced transitional treatment for letters of credit opened before the new direction where financing has not yet been obtained.

LTV limits on gold-backed lending were also reduced to 70% from 80%, applying to both new loans and rolled-over facilities. 

Accordingly, the Fitch Ratings added that, ‘‘We believe the tighter limit should help moderate risk build-up in gold-backed lending, which has expanded rapidly at banks and finance companies, supported by high collateral values, favourable capital treatment and low provisioning.’’

Both products are exposed to collateral value risk. Local vehicle prices are sensitive to changes in import duties and tax policy, while gold prices can be volatile. Lower LTV caps should strengthen lenders’ buffers against declines in collateral values and reduce loss severity in the event of borrower default, it said. 

Gold-backed lending at finance companies and Fitch-rated banks rose at a CAGR of nearly 30% over the past three years, amid limited alternative lending opportunities. It represented about LKR 1.5 trillion or 11% of combined sector loans at end-2025, up from 7% in 2022. The share was around 20% for finance companies, against 17% in 2022, and about 9% for Fitch-rated banks, up from 5%.

People’s Bank (Sri Lanka) (AA-(lka)/Stable) had the highest exposure to gold-backed lending among Fitch-rated banks, at about 20% of loans, while most peers were at 10% or below. Among Fitch-rated finance companies, Asia Asset Finance PLC (A+(lka)/Stable) had about two-thirds of loans in gold-backed lending, against a little over one-third at LB Finance PLC (A-(lka)/Stable) and Mahindra Ideal Finance PLC (AA-(lka)/Stable).

Vehicle financing also rose sharply after motor vehicle imports resumed in early 2025, with both banks and finance companies recording growth of more than 50% in 2025. Exposure is far greater at finance companies, where vehicle financing accounts for about 65% of sector loans, against less than 5% at banks. 

‘‘We believe this rapid growth may pose asset-quality risks, particularly if downside economic risks weaken borrowers’ repayment capacity,’’ it further stated. 

Favourable regulatory capital treatment has also supported growth in gold-backed lending. Vehicle financing carries a risk-weight of at least 100%, whereas gold loans with LTVs of up to 70% carry a zero risk-weight for banks and finance companies. Above 70% LTV, banks apply a 20% risk-weight up to 100% LTV and 100% thereafter, while finance companies apply a 100% risk-weight to all exposure above 70%.

This implies an average risk density of less than 1% and 5%, respectively, for Fitch-rated banks and finance companies on gold-backed lending. Tighter LTV caps on gold loans may reduce, but not eliminate, the regulatory incentive to favour gold-backed lending over other products, as the risk-weighting structure remains unchanged.

The central bank’s prudential measures should benefit finance companies’ risk buffers most, as gold-backed lending and vehicle financing are core products. The positive effect on banks’ risk profiles should be more limited, as these products form part of retail lending rather than core balance-sheet exposures, according to Fitch Ratings.