Government to impose upper cap on bank leasing for vehicles
Commercial banks will continue to enjoy the leasing facility for vehicles, overturning a ban in the 2016 Budget, but would be restricted to accommodate requests for Rs. 5 million and above . The Treasury will be withdrawing the 2016 budget proposal of completely halting banks from engaging in leasing business on the directions of Finance Minister Ravi Karunanayake, a senior government official said. The budget proposal to prohibit banks from leasing vehicles was scheduled to become effective from June 1. Under the new proposal, finance companies would be allowed to offer leasing of vehicles of below Rs. 5 million, he added.
This interventionist measure will provide a solution to dealing with the solvency challenges of around 15 finance companies which are under financial stress, he pointed out. According to latest official statistics, growth in the leasing portfolio of banks was up sharply by 50 per cent last year compared to 2014 while finance companies also recorded strong growth of 23.9 per cent. But since the latter was growing from a larger base the growth was smaller.
Both banks and finance companies conduct a majority of their vehicle financing business under the Finance Leasing Act No 56 of 2000 which creates a level playing field in terms of recovery – in a lease the asset belongs to the lessor aiding recovery in case of default. Banks aggressively getting into the leasing business is good for the consumer – they have more choice, cheaper rates due to competition and one provider for all their financial needs, and restricting competition from banks would benefit larger finance companies. Motor traders however told the Business Times that they have heard about this new proposal but no circular has been released as yet.