Nada urges NRB to review cap on loan-to-value ratioThe Nepal Automobile Dealers’ Association (Nada) on Thursday urged Nepal Rastra Bank (NRB) to review its decision to lower the loan-to-value ratio on auto loans to 50 percent.
The Nepal Automobile Dealers’ Association (Nada) on Thursday urged Nepal Rastra Bank (NRB) to review its decision to lower the loan-to-value ratio on auto loans to 50 percent.
Last Tuesday, the central bank barred banks and financial institutions (BFIs) from extending loans amounting to more than 50 percent of the purchase price of the vehicle in a move aimed at reducing credit flow to unproductive sectors.
This means potential borrowers must pay at least 50 percent of the vehicle’s cost at time of purchase.
However, the provision will not apply to those seeking loans to buy public vehicles and vehicles that will be used for construction or for service delivery purposes.
According to Nada President Anjan Shrestha, more than 90 percent of the four-wheelers on the country’s roads have been financed by BFIs. The apex body of the country’s automobile dealers asked the central bank to allow the BFIs themselves determine the loan-to-value ratio based on customer profile.
“If the decision isn’t reviewed, billions in private sector investment will be in a risk zone which will eventually impact BFIs and government revenue,” said Nada. “Thousands of people have been employed by the automobile sector.”
At a time when the government has not been able to promote mass public transportation, the move will limit vehicle sales, and that is not good for the country’s economy, it said. “The government should make proper use of the revenue for the development and expansion of roads.”
The government earns more than Rs40 billion annually in duties and fees on the import of automobiles and spare parts.
According to Nada, the price of an automobile in Nepal is already very high due to the 250 percent import duty. Cars and motorcycles respectively cost five and two times more than in India. Nada has been saying that only 7 percent of Nepal’s population has access to two-wheelers, while 0.7 percent of the population uses cars.
BFIs had extended Rs142.6 billion in hire purchase loans as of mid-January with a significant chunk of the credit going to the auto sector, the latest NRB report shows. This accounts for 7.5 percent of the total credit portfolio of Rs1,895 billion of all the BFIs in the country.
Of the total hire purchase loans, credit totalling Rs32.5 billion (23 percent) was issued in the first six months of the current fiscal year that ended in mid-January, pointing to high demand for auto loans this year.
After witnessing a slowdown last year following an economic blockade by India, auto sales have taken a significant leap this year.
The government’s customs duty collection surged 101.8 percent to Rs55.5 billion in the first six months of the current fiscal year. Auto imports also make a big contribution to value added tax and excise duty collection.
As per NRB data, imports of vehicles and spare parts account for 10 percent of the country’s total imports. The central bank’s decision is likely to throw the automobile sector into a slump, especially the four-wheeler segment.