KATHMANDU, Nov 7: Banks and financial institutions (BFIs) will now be allowed to provide only 50 percent loans for the purchase of automobiles for personal use. Issuing a new circular on Tuesday, Nepal Rastra Bank lowered the limit of the loan-to-value ratio in the purchase of autos to 50 percent from the existing 65 percent.
This means anyone who wants to buy a car with bank financing must now make a 50 percent down payment. A bank or financial institution can provide loans to cover the remaining 50 percent of the value of the purchase.
The new rule aimed at tightening the flow of credit to the auto sector comes in the wake of a shortage of lend-able funds in the banking system.
NRB officials, however, say the lowering of the LTV ratio was brought in to discourage automobile imports.
“If you see the data, the import of automobiles has gone up significantly in recent months. This has been one commodity which has contributed significantly to the widening trade deficit and the current account deficit,” Narayan Prasad Paudel, the NRB spokesman said. “The tightening of auto loans was needed as a corrective measure to maintain external sector stability for the country,” said Paudel, who is also chief of the BFIs Regulation Department at NRB.
According to the Department of Transportation Management, the number of automobiles (cars, jeeps, vans) registered rose to 24,338 in the last fiscal year of 2017/18 from 21,292 units in the previous fiscal year.
Amid the rising demand for cars, BFIs were wooing aspiring buyers with cheaper interest rates on loans of up to 65 percent of the value of the purchase. Some commercial banks were charging just 9 percent interest on car loans while their interest rates on other types of loans reached up to 14 percent.
Though loans for other purposes including business startups were often hard to come by due to a shortage of lend-able funds, BFIs used to be magnanimous in extending loans for cars.
According to NRB, BFI loans to cars, referred to as hire purchase loans, rose by 14.5 percent in the last fiscal year 2017/18 to Rs 171 billion from Rs 149 billion in the previous year. Out of the total outstanding loan for hire purchase, nearly 40 percent is for personal purposes.
Car dealers, however, are dismayed over the central bank’s decision as it is expected to depress the demand for new vehicles.
“We are surprised at the sudden decision. It worries us all the more as it comes on the eve of the Tihar festival when we had imported vehicles on the assumption of a certain market demand,” said Shambhu Prasad Dahal, chairperson of Nepal Automobiles Dealers Association (NADA). “This is going to cause a loss to us. But, the tightening of the loan will also hurt consumers as well as the revenue of the government,” he added.
Dahal estimates that there are 2,500 new units of automobiles to be sold in the market. However, many who are for measures to check unnecessary imports say the restriction on car financing has come late as many purchase deals were completed during the NADA Auto Show in mid-September.