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)