Increase in loan to value ratio for vehicle leasing:

‘Grave impact on environment’

by Rohana Jayalal

The increase in the loan to value ratio for vehicle purchase is a good move as it would boost sales and revenue to finance companies, Assistant General Manager (Operations), Commercial Credit Finance PLC, Ayesh Pitigala told Sunday Observer Business.

However, the impact on the environment will be grave as the number of vehicles imported will rise and cause congestion in cities.

At present all finance companies provide leasing facilities up to 70 percent for new or used vehicles.

Minister of Finance Ravi Karunanayake said recently that the leasing facility could cover 90 percent of value of the vehicle.

“This means that if the value of a vehicle is Rs. 5 lakhs, 90 percent of which amounts to Rs. 450,000, it could be covered by leasing facilities while the remaining 10 percent is borne by the buyer.

This is of course beneficial to finance companies as it enables even people with a modest income to realize their dream of owning a vehicle,” Pitigala said.“The dark side of the picture is that most people would buy vehicles not for utility purposes but for status as his neighbour too had bought a vehicle.

This leads to more vehicles on the roads which in turn causes serious traffic congestion and worsening environmental pollution,” he said.

In this context the government should introduce a leasing system to facilitate the import of vehicles for economic development as the government has launched a new development drive.

A leasing scheme which helps people to pay the instalments without much difficulty would also be desirable while the finance companies too could contribute to development, he said. President, Vehicle Importers Association of Sri Lanka, Mahinda Sarathchandra said as a result of inefficient management of the economy during the past few years, buyers of motor vehicles and importers had to face immense difficulties, especially in obtaining financial assistance from banks and finance companies which got them into debt traps that led to losing property and hard-earned money.

Buying a vehicle is the greatest achievement for a person in his lifetime while the main income of many financial institutions is lending for the purchase of vehicles.

It had been the practice of lending institutions for quite some time to offer 100% of the value of the vehicle as loans to vehicle buyers.

This practice endangers the consumer and the lending institutions most of the time. As per the standard lease agreements if a customer is unable to settle the monthly lease installment on time, financial institutions have the right to charge a penalty on interest.

If the buyer fails to pay three instalments consecutively the vehicles could be seized by the financial institution.

Most of the time, the financial institutions recover the loan amounts against such seized vehicles by disposing of them at public auctions, and in the event the total amount could not be recovered, they go for litigation, as per the vested powers by the government, and recover their dues, sometimes, by selling the properties of the debtor.

“Most of the present laws of our country suits a society that existed 60 years ago, and if someone now introduces rules and regulations suitable for the present day we should wholeheartedly give our blessings and also extend our fullest support,” Sarathchandra said.

“A loan should be granted not only to earn an income from that and recover the capital, but as an extension of support for that person’s livelihood or existence,” he said.

As a consequence of undisciplined practices adopted by many financial institutions in the past, especially in providing financial assistance for the purchase of vehicles funding up to 100%, they have ended up incurring huge losses.

Introducing a 70% limit on leasing is prudent and timely. It would protect the lender and the borrower.

“I have seen so many victims suffer from stress and anxiety as a result of not being able to service debts and losing properties. There were cases that ended in tragedies. The government should definitely intervene in the processes where people get in to trouble due to too much of freedom,” Sarathchandra said.