The Central Bank has released a new set of regulations amending the maximum ‘loan-to-value ratio’ (LTV) applicable to vehicle leasing facilities. It is noteworthy that the new rules have reduced the maximum leasing percentage under two main categories instead of the previous four LTV categories.
The revised LTV limits are divided according to the vehicle type as follows.
Commercial Vehicles: 70%
Private Vehicles: 50% (This includes cars, vans, three-wheelers and other private vehicles)
Prior to this latest amendment, i.e. last July, the Central Bank had announced four separate LTV categories. The new rules have significantly simplified the categories.
When comparing the previous limits with the new limits, the LTV ratio has been reduced as follows.
The LTV ratio for commercial vehicles has been reduced from 80% to 70%.
The LTV ratio for personal vehicles (cars/vans) has been reduced from 60% to 50%.
The LTV ratio for three-wheelers and other private vehicles, which was previously 50% and 70%, has now been reduced to 50%.
Through this measure, the Central Bank expects to ensure more organized and prudent lending standards in granting loans for vehicles by financial institutions.
Potential Impacts on the Market
- Dampened Demand for Vehicles
Increase in Down Payments: A reduction in the LTV ratio means that buyers will have to pay a higher down payment to lease or borrow a vehicle.
Example: When the LTV ratio is reduced from 60% to 50%, a vehicle worth Rs. 10 million will now have to pay Rs. 5 million (50%) instead of Rs. 4 million (40%) previously.