The Central Bank of Sri Lanka has tightened vehicle loans in Sri Lanka by lowering the loan-to-value (LTV) ratio for vehicle financing. The new rules, effective from November 8, 2025, aim to reduce credit exposure among banks and stabilize financial markets amid ongoing currency pressure.
Sri Lanka Central Bank slashes vehicle LTV ratio to curb excessive credit growth
The Central Bank of Sri Lanka has announced a new directive reducing the LTV ratio for vehicle loans in Sri Lanka, a move that tightens access to credit for vehicle buyers. With effect from November 8, 2025, the loan-to-value ratio for commercial vehicles has been reduced to 70 percent from the previous 80 percent, signaling the bank’s cautious approach toward managing credit growth.
For motor cars, vans, and SUVs, the ratio now stands at 50 percent, down from 60 percent, while three-wheelers continue to have an LTV ratio of 50 percent. Other vehicle categories have also seen their ratios drop to 50 percent from 70 percent. Vehicles for which letters of credit were opened between July 18 and November 8 will continue to follow the old ratios, offering some relief to those already in the process of purchasing.
Previously, electric vehicles could be financed up to 90 percent of their value for LCs opened before July 18. That transition provision will still apply, ensuring a smoother adjustment for buyers who began transactions earlier.
The Central Bank of Sri Lanka often employs such measures to prevent overexposure of banks to specific credit segments, especially when credit growth accelerates beyond sustainable levels. This tightening of vehicle loans in Sri Lanka aligns with prudential reasons and is also seen as part of broader efforts to stabilize the economy.
Economists have described these measures as a response to what are known as “mal-investments,” situations that arise when artificially low interest rates encourage excessive borrowing. Credit restrictions are also instrumental in maintaining balance of payments stability, particularly for imports such as vehicles that exert pressure on foreign reserves.
Throughout 2025, the Sri Lankan rupee has faced continuous depreciation despite periods of current account surpluses. Although the central bank has stopped money printing after suspending inflationary open market operations, analysts believe flaws in its exchange rate policy have contributed to the currency’s weakness. In September, the central bank was a net dollar buyer, indicating there was no balance of payments deficit, but the rupee’s depreciation suggested policy imbalances.
Critics have long argued that the so-called “flexible exchange rate” system has undermined investor confidence, causing volatility in the bond market. In response, the bank’s decision to restrict vehicle loans in Sri Lanka can be viewed as part of its broader effort to maintain economic discipline and reduce unnecessary foreign currency outflows.
Sri Lanka’s vehicle imports have historically been controlled through high LC margins and taxes, especially on passenger vans and three-wheelers. These taxes have made vehicle ownership expensive, contributing to higher transport costs and reduced export competitiveness. The latest tightening of vehicle loans in Sri Lanka reinforces the central bank’s cautious stance, reflecting its dual objectives of preserving financial stability and managing the nation’s external sector more sustainably.