Increase in loan to value ratio for vehicle leasing:
‘Grave impact on environment’
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
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.