Motor trade shrinks further on LC payment issue
View(s):Sri Lanka’s motor trade is expected to shrink further due to the impact of introducing upfront payment for letters of credit (LCs) and tax hike, depreciation of the rupee and the restriction on vehicle leases.
The government has imposed a new directive in the opening of LCs in commercial banks for vehicle importers making compulsory an upfront payment initially without giving a grace period pushing them from the frying pan into the fire.
Normally vehicle importers get four months credit from foreign automobile manufacturing companies to settle their payments and what they used to do is to settle money they owe to banks after selling vehicles imported by them.
But under the present directive motor traders will have to pay up front when opening LCs as the government has imposed the 100 per cent margin deposit requirement as the rupee came under pressure in forex markets. This will affect motor traders badly especially small scale traders. They have to pay upfront the value of the vehicle which was a huge burden to them as they are being already battered with the currency depreciation.
The high import bill was the main monetary concern of the Central Bank (CB) with declining currency other than fuel cost (though it is low in the current market) and exceeding traffic congestion.
Vehicle importers will have to block a large amount of their money for LCs till the landing of vehicles. Earlier they had the facility of opening the LC with a part payment and the balance could be settled after the arrival of the vehicle.
The government should not impose this 100 per cent cash margin for LCs as it will drain the country’s much needed foreign exchange.
LCs is one of the most secure instruments available to traders. An LC is a commitment by a bank on behalf of the buyer that payment will be made to the exporter, provided that the terms and conditions stated in the LC have been met, as verified through the presentation of all required documents.
The buyer pays his or her bank to render this service. An LC is useful when reliable credit information about a foreign buyer is difficult to obtain, but the exporter is satisfied with the creditworthiness of the buyer’s foreign bank.
An LC also protects the buyer because no payment obligation arises until the goods have been shipped or delivered as promised.
But the government’s directive has done away with this concession for motor traders without giving any reasons. Under the new directive importers are not allowed to get credit from banks to meet the margin requirements.
In a bid to clamp down on the vehicle imports the CB sent directions to all banks and finance companies imposing restrictions on loans and leases to vehicles not allowing the facility in excess of 50 per cent of the value of the vehicle.
Leasing and hire purchase loans of motor vehicles have been one of the biggest product portfolios for the finance industry, therefore in terms of business activity there will be an immediate impact until the market adjusts to the change.
Finance companies have limited product lines when it comes to facilities secured against tangible security.
The CB should consider assisting the industry to promote other product lines which will be secured though tangible security, such as giving parate execution rights to the finance companies in order to promote mortgage loans which could have a positive impact on the industry, as well as for consumers.
The Loan to Value Ratio has been revised and the finance facilities could be provided by banks up to 50 per cent of the value – for petrol and diesel motor cars, 70 per cent of the value – for hybrid cars and 90 per cent of the value – for electric cars. Duty on locally assembled vehicles will remain as 30 per cent.
The tax concession announced in the 2018 budget for brand new imported electric cars has been extended to cover used electric cars, which are not more than one year old.
The duty of the used electric cars that are not more than one year old will be reduced by around Rs. 1 million.
Under this set up new vehicle sales contracted considerably making the local vehicle market sluggish and pushing motor traders into troubled waters.
All motor car companies in the country are facing cash flow problems owing to the severe drop in sales and have had to cut down all overhead expenditure and retrench staff to survive in the business.
While many companies are running at a loss the bigger firms were also going through tough times, recording a sharp drop in sales during the past three months.
Some businesses are unable to sell even five vehicles per month since people are not willing to buy vehicles at higher prices.
(The writer is a former chairman of the Ceylon Motor Traders Association)