‘Govt should immediately review cap on loan-to-value ratio on auto loan’

‘Govt should immediately review cap on loan-to-value ratio on auto loan’— Anjan Shrestha

In the last one month, domestic transportation and automobile industry were hit with two major announcements from the government — central bank putting a cap on the loan-to-value ratio on auto loan and the ban on 20-year-old vehicles from plying the roads. Enforcement of these decisions of the government has raised concerns among many, especially that of automobile entrepreneurs. Sujan Dhungana of The Himalayan Times caught up with Anjan Shrestha, President of Nepal Automobile Dealers’ Association and Tokraj Pandey, Spokesperson for the Department of Transport Management, to discuss the aforementioned decisions of the government and their implication on domestic transportation and automobile sector. Excerpts:

Nepal Rastra Bank recently fixed loan-to-value ratio on auto loans at 50 per cent. What is your take on this decision?

Nepal Rastra Bank’s decision to put a cap on auto loan will impede the growth of the country’s automobile industry. The government believes that automobiles are an unproductive sector and banks and financial institutions (BFIs) have to control lending to this sector. In doing so, the government believes that it can control the ongoing crisis of lack of loanable funds among BFIs. However, this perspective of the government is wrong and will adversely affect the country’s economy. A majority of the vehicles plying on the roads are financed by BFIs as the price of vehicles in Nepal is very high due to the high taxation rate. So, the government should immediately review its decision and safeguard the investment worth billions of the private sector in the automobile industry, which is currently at risk. The government should either allow BFIs themselves to determine the cap on the loan-to-value ratio on auto loan or should fix such ratio at above 70 per cent. This will increase people’s access to automobiles and help the industry’s growth momentum.

What is the other impact that this decision could have?

The decision will not only hinder the growth of the automobile industry but will directly have a major impact on the country’s economy in the long run. As the automobile industry has been one of the largest contributors to the government’s coffer, such decision will significantly reduce the revenue that government has been earning from the automobile sector. Fewer sales of vehicles mean lower contribution to government revenue. This decision will also make it difficult for the government to achieve the economic growth target of 6.5 per cent in the ongoing fiscal year as development of different other sectors is based on the development of automobile and transportation sector. Our major concern is the perspective of the government towards automobile industry. Despite being the largest revenue generator for the government, generating employment for thousands of people and providing momentum to the entire economy, the government still believes that the automobile sector is unproductive. This is not fair. The government should properly define the notion of ‘unproductive sector’ and clarify why the automobile industry is unproductive for BFIs to lend money. Technically we are selling automobiles, but in the real sense we are selling ‘mobility’ in the country without which we cannot even imagine a single day. BFIs are keen on auto financing because cases of loan defaults are very rare in this sector. On fixing the cap on the loan-to-value ratio on auto loan, the government is forcing BFIs to disburse lending to more risky sectors. The government will not achieve any development goal in the future by stifling the growth of the automobile and transportation industry in this way.

However, there is also an opinion that this decision of the government will gradually contribute to reducing the extensive flow of vehicles on the roads, which has been creating numerous traffic problems. What do you have to say on this?

I completely disagree with the claim that the number of vehicles in the country is too high and it has been creating traffic problems. In case of Kathmandu Valley, the number of vehicles is actually limited but the population in the region has gone up drastically. The problem has arisen following inability of government to increase road network in tandem with the increasing number of automobiles. Government should not hinder easy access to automobiles by any means as public transportation system in the country is really bad. On one hand the government does nothing to make public transportation effective and introduce means of mass transportation and on the other it tries to make it difficult for people to purchase private vehicles by fixing loan-to-value ratio on auto loan. The auto penetration rate in Nepal is very low as compared to other countries. While penetration rate of four-wheelers in Nepal is merely 0.6 per cent, penetration of two-wheelers is around six per cent.

‘It is due to easy financing that number of vehicles is increasing’ — Tokraj Pandey

What is your view on the current decision by the government to fix the loan-to-value ratio on auto loans at 50 per cent?

I do not exactly know the objective behind the government plan to fix the loan-to-value ratio on auto loans at 50 per cent, but it will certainly help reduce the number of vehicles on the roads in the long run. As the major reason behind the increasing number of vehicles in the country is the easy financing on auto loans by banks and financial institutions, the central bank’s decision will discourage people to buy new vehicles at least for the time being. Lowering the number of vehicles across major cities will somehow ease traffic management in the country.

Do you mean to say that increasing number of vehicles in the country is the main factor behind the ongoing traffic problems in city areas?

It is true to some extent. Traffic management requires limited population and limited number of vehicles. Almost 1.1 million vehicles — half of the total number of vehicles in the country — are plying the roads of Kathmandu Valley and the population in the Valley is also going up rapidly. Along with the increasing number of vehicles and rising population, our inability to introduce automation in traffic management is also equally responsible for unmanaged traffic in the Valley and other city areas. It is the responsibility of the government and agencies like the Department of Transport Management (DoTM) to manage the entire transportation system in the country.

DoTM has recently banned 20-year-old public vehicles from Kathmandu Valley. Will it ensure that the traffic congestion in the Capital will be addressed any time soon?

There are only about 2,500 such vehicles in operation in Kathmandu Valley and putting a ban on these vehicles will not bring any significant change in the current traffic situation. However, the decision will bring about gradual changes as other vehicles currently plying the roads in the Valley will not be allowed to operate as soon as they cross the 20-year mark. Within some years, we will be able to rid the Valley of hundreds of such vehicles thereby easing traffic congestion. The government will also ban such vehicles in other parts of the country soon. Besides this, we have also stopped issuing new route permits to vehicles that have seating capacity for less than 14 people to ply inside the Ring Road in the Valley. Similarly, we will also not issue new route permits in Kathmandu to those vehicles that are more than five years old. The government is also working to implement automation system in managing traffic system in Kathmandu Valley.

The state of public transportation system in the country is miserable. Are there any efforts being made by DoTM to manage public transportation system in the Valley?

The DoTM is trying to first gradually reduce the number of vehicles with low seating capacity in Kathmandu Valley. Along with discouraging such small vehicles, we will also give space to larger vehicles with higher seating capacity. The budget for fiscal year 2016-17 has already announced to give 90 per cent customs duty waiver facility to public vehicles with seating capacity of more than 40. This makes it clear that the government is promoting larger public vehicles to manage public transportation. Similarly, DoTM is also running a project in coordination with Asian Development Bank to manage public transportation system in the Valley. Under this project, we plan to displace all tempos and micro buses plying in Gongabu-Sinamangal route in the first phase. We will then encourage transport entrepreneurs to purchase public vehicles with capacity of more than 40 seats by giving them 15 per cent seed money to purchase new vehicles and providing them up to 80 per cent soft loan.