COLOMBO, May 28 (Xinhua) -- Sri Lanka's tighter rules on vehicle and gold-backed lending will improve lenders' risk profiles, especially those of finance companies, Fitch Ratings said in a statement on Thursday.
The Central Bank of Sri Lanka lowered loan-to-value (LTV) caps on motor vehicle financing on Monday. The cap for vehicles registered for more than one year was cut to 60 percent from 70 percent. The cap for unregistered vehicles and vehicles registered for less than one year was reduced to 40 percent from 60 percent.
The central bank also cut the LTV limit on gold-backed lending to 70 percent from 80 percent. The new rule applies to both new loans and rolled-over facilities.
Fitch said the tighter limits target two lending products that have grown rapidly in recent years and account for a large share of finance companies' balance sheets.
Gold-backed lending at finance companies and Fitch-rated banks rose at a compound annual growth rate of nearly 30 percent over the past three years. It reached about 1.5 trillion rupees (about 5 billion U.S. dollars), or 11 percent of combined sector loans, by the end of 2025, up from 7 percent in 2022.
Vehicle financing also rose sharply after Sri Lanka resumed motor vehicle imports in early 2025. Banks and finance companies recorded growth of more than 50 percent in 2025. Vehicle financing accounts for about 65 percent of finance company loans, compared with less than 5 percent at banks, Fitch said.
It said both products carry collateral value risks. Vehicle prices can change with import duties and tax policy, while gold prices can be volatile. Lower LTV caps should give lenders stronger buffers against falling collateral values and reduce losses if borrowers default.
However, Fitch said the tighter rules could also slow loan growth and earnings, especially for lenders with heavy exposure to vehicle and gold-backed lending. ■