Indian car companies seem headed toward a roadblock in Sri Lanka as its central bank imposed a 100 per cent margin on banks for Letters of Credit (LC) issued to car importers.

The Central Bank of Sri Lanka said the move was in response to the sharp depreciation in the currency value of several trading partner-countries which was likely to accelerate car imports.

The new rule is applicable to motor vehicles, other than buses, ambulances, lorries, and trucks, according to a release from the central bank.

The decision comes at a time when importers are already grappling with a 110 per cent import duty, and more recently-imposed heavy excise that make even the more affordable vehicles quite expensive to the Sri Lankan buyer.

As per the current exchange rates, the Indian rupee is hovering around Sri Lanka Rupee (LKR) 2.

Considering that Indian cars (including brands such as Tata, and Maruti Suzuki) form a major chunk of the imports — the Vehicle Importers’ Association of Lanka estimates that it is at least 75 per cent — the move might hurt India the most.

The Nano’s journey

The Tata Nano is a case in point. An unmistakable Indian presence on Sri Lankan roads, the Nano could soon be on its way out. At the time of its launch in Sri Lanka in May, 2011, the Nano cost LKR 925,000 (about Indian rupee (INR) 4.50 lakh).

In January, 2013, the government imposed an excise of LKR 750,000 for cars below 1000-CC, pushing the price further up, almost to LKR 2 million, according to A. Ranjith Pandithage, Chairman and Managing Director of DIMO, which distributes Tata vehicles in Sri Lanka.

Vijitha Bandara, general manager, Tata Commercial Vehicles, DIMO, said: “When we started off, we were selling some 400 cars every month — to the extent that there was a supply constraint.

“But now selling even 20 cars a month is proving challenging after the sharp increase in its price. We positioned it as a self-employment tool. It did pick up well as a taxi service.”

In Sri Lanka, the Nano has the image of a “budget taxi service”, with most of the popular private taxi service providers also operating in the ‘Nano segment’.

Though individual importers, whom The Hindu contacted, said the move would hit their business, the Vehicle Importers Association of Lanka voiced another view.

“Companies here which import cars from India are very sound financially. They will not have a problem,” said Mahinda Sarathchandra, President of the Association.

Justifying the January imposition of LKR 7.5 lakh excise tax, he said: “Earlier, there was a tax subsidy between 2010 and 2012, when nearly 6 lakh cars were imported into the country. So the government imposed the additional tax to reduce congestion on Sri Lankan roads. The government will review that in 2014.”

The central bank has said it would review the imposition of the margin in six months.