(China's central bank) is reportedly investigating the auto finance
business of the Yafei Group. This is one of the leading auto
dealers in China. The company has over 500 outlets nationwide and
270 of these have links with local banks and insurance companies to
provide loans for auto purchase.
Industry insiders have been predicting that the central bank would
intervene in the auto finance market following its recent move to
curb overheating in the real estate industry.
In
recent years, auto loans have become part of the core business of
the credit providers, coming second in importance only to real
estate.
By
the end of 2002, loans to individuals for auto purchase had reached
94.5 billion yuan (US$11.4 billion). In the first quarter of this
year, auto loans amounted to 20 billion yuan (US$2.4 billion). This
represented an increase of 11.3 billion yuan (US$1.36 billion)
compared with the same period last year.
However, driven by competition in the market, the banks and auto
dealers have been progressively lowering both down payments and
interest rates. They have also relaxed credit checks and extended
lending periods. These measures have significantly increased their
exposure to the risk of bad debts.
Central Bank Investigation
"As early as last May, we had organized a special team to
investigate the credit risks in Beijing's auto finance market. We
also warned banks of the potential risks," said an official with
the Beijing Operations Office of the central bank.
Meanwhile, the office has also been checking up on auto lending by
the banks in Guangzhou and Zhengzhou.
Last May's investigation showed that the non-performing rate for
auto loans had reached 15 percent. This was higher than for
mortgage loans. What's more, insurance companies' loss ratios were
much higher than the preceding year with some actually over 300
percent.
"Should non-performing rates exceed 20 percent, the banks will
suffer dreadfully", the central bank official said.
"The potential risks of auto loans should not be underestimated,
although their impact is far less than that of real estate loans",
said Zhao, another official.
Previous central bank statistics released last year and reporting
on the previous year, show a non-performing rate of only 1 percent.
Experts attribute this result to the strict control being exercised
at that time by both commercial banks and auto dealers.
However, banks started lowering their lending thresholds in late
2002. The down payments required were reduced or even cancelled.
Loans were being arranged with repayment over 5-8 years rather than
the 3 years that had previously been the norm. Interest rates
dropped. Credit checks were less rigorous. Loan guarantees were no
longer required. Loans became more and more accessible to a wider
band of the population.
Impact on Auto Finance Market
The investigation by the central bank is widely expected to come as
a wake-up call for the auto finance industry and to have a
considerable impact on the market. It will inform the task of
regulating consumption in the auto credit market and facilitate
promulgation of the necessary legislation.
An
official with the newly established China Banking Regulatory
Commission gave an indication of what might be expected in the
amended regulations. The investigation of personal credit
worthiness could be placed in the hands of intermediaries like
credit guarantee companies. The banks could be required to share
information on individuals' credit ratings. The auto distributors,
banks and insurance companies could all be involved in taking a
share of the credit risk.
The central bank investigation will also facilitate the
promulgation of measures for the regulation of the auto finance
companies. Nowadays, auto loans are mainly provided by commercial
banks, with auto finance companies yet to enter the market.
Zhao Xijun is vice director of the Finance and Securities Research
Institute at Renmin University of China. He sees a number of
problems currently affecting the auto market. There is a lack of
regulation for checks carried out into personal credit worthiness.
The current method of loan guarantee, mainly by the auto dealers
and insurance companies, increases exposure to credit risk and
raises the cost of borrowing. The banks are motivated by profit and
fail to cooperate properly with the auto dealers. There is
presently a lack of rigor in credit checks on borrowers.
"One third of private cars have been bought with the help of auto
loans in recent years. The majority of buyers are young people.
Thus, the establishment of a personal credit system is both
necessary and urgent", said Zhao.
(China.org.cn by Tang Fuchun, July 7, 2003)