Sri Lanka’s implementation of stricter regulations on vehicle financing and gold-backed loans is expected to strengthen the risk profiles of local financial institutions, particularly non-bank finance companies, according to a report by Fitch Ratings. In an analysis released on May 28, 2026, the credit rating agency noted that these tighter thresholds will help curb risk accumulation within the gold-backed loan segment—a sector that had been expanding swiftly across both commercial banks and finance companies due to elevated asset values, advantageous capital requirements, and minimal provisioning rules.
The regulatory changes, which took effect on May 25, lowered the loan-to-value (LTV) ceiling on motor car loans to 60% (down from 70%) for vehicles registered for over twelve months, and slashed the limit to 40% (down from 60%) for brand-new or recently registered vehicles. To manage the transition smoothly, the Central Bank of Sri Lanka introduced temporary guidelines for outstanding letters of credit that were initiated prior to the mandate but had not yet secured final funding. Concurrently, the LTV caps for gold-backed credit facilities were dialed back from 80% to 70%, a restriction that applies uniformly to all newly issued loans and rolled-over agreements.
Fitch emphasized that these conservative valuation caps will fortify institutional safety margins against potential drops in underlying asset values and minimize losses if borrowers default. The central bank’s proactive stance is projected to yield the greatest benefit for finance companies, as auto loans and gold-backed advances serve as their primary revenue drivers. Conversely, the credit agency noted that the positive impact on commercial banks will be less pronounced, given that these retail credit products represent peripheral lines of business rather than central balance-sheet exposures.
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