KATHMANDU: Nepal Rastra Bank Director Satyendra Subedi said he does not see a major risk of a credit bubble from auto loans at present.
Speaking at the “Mobilizing Mobility Through Finance and Insurance” program organized by the Nepal Automobile Importers and Manufacturers Association (NAIMA) on Thursday, Subedi said the loan-to-value (LTV) ratio was introduced after the global financial crisis of 2007/08.
He said banks cannot rely only on their capital to manage lending risks. The LTV ratio is also an important safeguard.
“Basel standards also include this provision. That is why we introduced the loan-to-value ratio,” he said.
According to Subedi, the LTV ratio for hire purchase loans was initially set at 50%. It is now 80% for EVs and 60% for internal combustion engine (ICE) vehicles.
He said the LTV ratio also protects borrowers when interest rates rise. If loan defaults increase, vehicle importers, borrowers and lenders could all face problems.
Subedi said changes to the LTV ratio depend on government policy and could be revised in the future.
He added that the LTV ratio for EVs has been made more flexible as EV financing comes under green financing.
Subedi also said hire purchase loans and auto loans should not be considered the same. Hire purchase financing is also used to purchase products such as mobile phones and household goods.
He said hire purchase companies were established to make smaller loans easier to access. Customers can obtain financing from these companies under simpler regulatory requirements compared to banks, where more documentation may be required.
According to Subedi, total outstanding credit in Nepal stands at around Rs. 60 trillion, of which Rs. 142 billion is hire purchase lending. Hire purchase lending has grown by around 10% compared to the previous year.
He said the sector has a relatively low level of bad loans. Banks are also willing to lend by keeping a small margin, which indicates that the overall risk remains limited.
“I do not think auto loans are heading towards a credit bubble or pose a major risk,” Subedi said. However, he added that the central bank remains alert because problems in one sector can eventually affect other sectors as well.
