Fitch Ratings says Sri Lanka’s tighter macroprudential restrictions on vehicle financing and gold-backed lending are expected to strengthen the risk profiles of lenders, particularly finance companies.
The new measures were introduced by the Central Bank of Sri Lanka to curb rapid growth in two lending sectors that now account for a significant share of finance company portfolios.
Under the revised regulations effective from May 25, the loan-to-value (LTV) cap for vehicle financing was reduced from 70% to 60% for vehicles registered for more than one year, while the cap for unregistered or recently registered vehicles was lowered from 60% to 40%.
The Central Bank also reduced LTV limits on gold-backed lending from 80% to 70%, applying the new rule to both fresh loans and rolled-over facilities.
Fitch Ratings noted that the tighter limits would help reduce risks linked to fluctuations in vehicle and gold prices while strengthening lenders’ protection against losses in the event of borrower defaults.
According to the agency, gold-backed lending at banks and finance companies has expanded rapidly in recent years, reaching around Rs. 1.5 trillion or 11% of combined sector loans by the end of 2025.
The report highlighted that finance companies are more heavily exposed to both vehicle financing and gold-backed lending compared to banks, making the Central Bank’s measures particularly important for improving their financial stability.
Fitch Ratings also warned that although the tighter restrictions may strengthen risk buffers, they could negatively affect loan growth and earnings, especially for lenders highly dependent on these lending segments.
The agency further stated that rapid growth in vehicle financing following the resumption of vehicle imports in 2025 could pose future asset-quality risks if economic conditions weaken borrowers’ repayment capacity.
