The recent decision by the Central Bank of Sri Lanka to tighten lending limits on vehicle and gold-backed loans is expected to reduce risk exposure among lenders, particularly finance companies, according to Fitch Ratings.
The rating agency noted that the Central Bank has introduced stricter macroprudential regulations by lowering the maximum loan-to-value (LTV) ratios permitted for these lending categories.
Under the new regulations, effective from May 25, 2026:
- The maximum LTV ratio for registered vehicles older than one year has been reduced from 70% to 60%
- For unregistered vehicles or vehicles less than one year old, the limit has been reduced from 60% to 40%
- The maximum lending limit for gold loans has been reduced from 80% to 70%
According to Fitch, these measures are expected to reduce vulnerabilities in sectors that have experienced rapid lending growth in recent years.
The rating agency pointed out that both vehicle loans and gold-backed lending are particularly exposed to market risks due to fluctuations in vehicle prices, changes in taxation policies, and volatility in global gold prices.
The new limits are expected to reduce potential losses in the event borrowers fail to repay loans.
Fitch highlighted that gold loans have expanded rapidly, recording an average annual growth rate of around 30% over the past three years. By the end of 2025, gold-backed loans had reached approximately Rs. 1.5 trillion, accounting for around 11% of total lending.
Among financial institutions, Fitch noted that:
- People’s Bank has the highest exposure to gold loans among banks, with around 20% of its loan portfolio linked to the sector
- Asia Asset Finance has approximately two-thirds of its lending portfolio concentrated in gold loans
Meanwhile, vehicle lending expanded significantly following the resumption of vehicle imports in 2025, with lending growth exceeding 50%.
Fitch further observed that vehicle financing accounts for nearly 65% of total lending portfolios among finance companies, creating higher risks during economic downturns if repayment capacity weakens.
However, the rating agency stated that institutions heavily exposed to vehicle and gold lending are likely to benefit most from these tighter regulations, as they improve financial resilience and strengthen risk management frameworks.
