Facing an increasing number of automobile loan defaults, China's
major commercial banks are revising their lending policies for what
has been a lucrative market.
Many are raising down payment requirements and shortening loan
terms, and some bank branches have reportedly told their loan
clerks to suspend approvals on certain high-risk consumer loans for
automobiles.
"The creditworthiness of many borrowers is just terrible and the
lack of an effective credit system has left us vulnerable," said a
senior auto loan manager at one of the nation's "Big Four"
state-owned commercial banks. "We simply had to raise the
threshold."
The down payment requirement has been raised from a typical 20
percent to 40 or even 50 percent at some banks. Loan duration has
been shortened from five years to three.
Some banks have also introduced stricter collateral
requirements, securing loans with other properties in addition to
the car.
Bank of China President Xiao Gang has said that about 2 percent
of his bank's consumer auto loans had gone sour, higher than other
consumer loan categories such as homeowners and students.
The Agricultural Bank of China (ABC), another of the Big Four,
is planning inspections of its auto loans at all provincial
branches since regulators found "nonstandard" lending practices at
some branches recently.
The inspection by the China Banking Regulatory Commission (CBRC)
was announced last month after it ruled that the bank's auto
consumer loans had risen too fast in recent months.
Earlier this month, ABC Vice President Yang Kun talked about the
importance of risk management, and told the branches not to lower
qualification standards in pursuit of a bigger market share.
ABC's outstanding consumer auto loans were 46.3 billion yuan
(US$5.6 billion) at the end of May, accounting for 31 percent of
all such loans by the Big Four. The ratio of non-performing loans
to total consumer auto loans was 3.3 percent.
Chinese banks started to grant consumer loans only a few years
ago to finance the purchases of vehicles, housing and even home
appliances. Such loans were seen as helpful in improving the banks'
traditional loan structures and resulted in rapid growth.
But risk levels rose unexpectedly in auto loans. Many borrowers,
seeing their cars depreciating rapidly as competition drove down
prices, chose not to repay their loans.
Fierce competition following China's accession to the World
Trade Organization continues to drive down automobile prices in the
domestic market. Banks said widespread price cuts in recent months,
some as deep as 15 percent, have contributed to loan defaults.
But an incomplete registration system, as well as a lack of
personal credit records, has made it difficult for banks to
repossess vehicles.
"Banks lack necessary legal protection," said the auto loan
manager. "Most of the time we are not able to retrieve the
cars."
The unexpectedly high risk forced many insurance companies to
suspend coverage for auto loans last year.
Some analysts said domestic banks may finally surrender the
market to foreign auto financing firms that are more experienced in
dealing with auto buyers.
The CBRC last November approved the preparation of auto
financing operations in China by Germany's Volkswagen AG, Toyota of
Japan and US giant General Motors.
(China Daily July 12, 2004)