Sri Lanka’s post-crisis appetite for vehicles is surging again and so is the country’s dependence on leasing and hire-purchase facilities. But as more buyers rush to finance their dream cars and commercial fleets through banks and finance companies, an old problem is resurfacing: a ballooning pile of debt that could soon burden the financial sector with another wave of non-performing loans (NPLs).
Rising imports show consumer optimism — and credit dependency
Between January and May 2025, Sri Lanka imported around US $312 million worth of vehicles, with April alone accounting for US $107 million, according to Central Bank data. The value of import letters of credit opened for vehicles has also skyrocketed to US $1.2 billion, signaling the reopening of a once-frozen market. But while these numbers highlight consumer optimism, they also reveal a dangerous overreliance on credit in a fragile economy still recovering from the 2022 financial collapse.
Finance firms heavily exposed to vehicle loans
Finance and leasing companies, which remain the main gateway for vehicle ownership, are now carrying significant exposure to this lending segment. Past studies show that more than half of all lending by finance firms is tied to vehicle loans, and the NPL ratio in the non-bank financial sector has already risen to 17.5 percent, up from 13.9 percent just two years earlier. Analysts warn that unless the trend is controlled, finance companies could face major challenges in collecting dues as incomes remain under pressure and the rupee continues to fluctuate.
To address these emerging risks, the Central Bank of Sri Lanka (CBSL) has tightened its Loan-to-Value (LTV) regulations, reducing the amount customers can borrow against a vehicle. Effective from November 8, 2025, loans for commercial vehicles have been capped at 70 percent of the vehicle’s value, down from 80 percent. For motor cars, vans, and SUVs, the limit has been cut to 50 percent from 60 percent, while three-wheelers remain at 50 percent. The cap for all other vehicles has also been reduced from 70 percent to 50 percent.
According to CBSL officials, these new restrictions are meant to strengthen financial discipline, prevent overexposure to risky vehicle loans, and help manage the balance of payments. By forcing buyers to contribute a higher down payment, regulators hope to create a more stable lending environment and reduce the likelihood of mass defaults. The move could also discourage unnecessary imports and reduce pressure on the rupee.
Possible Negative Impact on Market Demand
However, the tighter credit rules come with their own drawbacks. The new limits are likely to dampen vehicle demand, especially among small businesses and middle-income buyers who depend heavily on leasing. Finance companies could see reduced growth in their loan portfolios and lower profits, while consumers may turn to informal lenders or multiple small loans to bridge the funding gap a shift that could actually heighten financial risk rather than contain it.
Experts Call for Additional Safeguards
Economists caution that while the Central Bank’s LTV policy is a step in the right direction, it must be complemented by stronger borrower assessments, realistic vehicle valuations, and improved recovery mechanisms. Without such safeguards, Sri Lanka’s leasing boom could quickly turn into another debt trap, burdening finance companies with bad loans and threatening broader financial stability.
For now, the message from the regulator is clear: drive responsibly financially and otherwise.
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