Fitch Ratings says the Central Bank of Sri Lanka’s tighter macroprudential limits on vehicle and gold-backed lending will benefit Sri Lankan lenders’ risk profiles, with finance companies — which hold the bulk of the exposure — set to gain the most from the new buffers.
In a commentary issued from Colombo on Thursday, Fitch said CBSL’s lower loan-to-value (LTV) caps target two products that have expanded rapidly in recent years and now account for a substantial share of mainly finance companies’ balance sheets. The tighter caps may also weigh on volumes and earnings growth, particularly for lenders with the highest exposure.
Both products carry collateral value risk, the agency noted. Local vehicle prices are sensitive to import duties and tax policy, while gold prices can be volatile. Lower LTV caps should strengthen lenders’ buffers against falls in collateral values and reduce loss severity in the event of borrower default.
Among Fitch-rated banks, People’s Bank had the highest exposure to gold-backed lending at about 20% of loans, against 10% or below for most peers. Among rated finance companies, Asia Asset Finance carried roughly two-thirds of its loan book in gold-backed lending, compared with a little over a third at LB Finance and Mahindra Ideal Finance.
Vehicle financing also rose sharply after the government lifted the long-running vehicle import ban in early 2025, with both banks and finance companies posting growth of more than 50% in 2025. Exposure is far greater at finance companies, where vehicle financing accounts for around 65% of sector loans against less than 5% at banks. Fitch said the rapid growth may pose asset-quality risks, particularly if downside economic risks weaken borrowers’ repayment capacity.
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 both banks and finance companies. Above 70% LTV, banks apply a 20% risk-weight up to 100% LTV and 100% thereafter. That implies an average risk density of less than 1% for banks and around 5% for finance companies on gold-backed lending.
The commentary follows CBSL’s May macroprudential package, which included a new 70% LTV cap on gold loans and a 60% LTV ceiling on commercial vehicles and 40% on cars. The package was tightened after the rapid Q1 2026 vehicle import surge that drove imports up roughly 900% year-on-year to Rs.195.95 billion and pressured the rupee. Industry voices have already warned that the vehicle LTV cut will lift on-road prices for many buyers.
