to PBOC data, at the end of 2003 Chinese banks were sitting on some Rmb 94.5
billion of non-performing loans (NPL 不良贷款), out of a total volume of auto loans of some Rmb 180 billion. For the four big state banks, ICBC,
ABC, BOC, and CCB, the share of auto loans that have become NPLs is an
astonishing 81%! For a
business—auto financing--that is only a few years old, this situation is
obviously a disaster for the banks.
At present, many banks have completely stopped making auto loans. According to industry sources,
this year only 5% of auto purchases were financing by auto loans, compared with
20% in the past two years. For the
auto industry, the question is now:
is auto financing in China so risky that financing will become a
long-term obstacle to sales and market development?
when PBOC first began to allow car loans, a widely reported fraud occurred in
Foshan, in Guangdong province. Some persons used false documentation to obtain auto loans
from banks in Foshan. After buying
the cars in Foshan, they immediately drove the cars to Guangzhou and sold
them. Then the criminals
just one incident, but it shows that fraud has been a feature of auto loans
since the beginning. In the years
that followed, banks did little to avoid fraud and losses. Two types of scams 骗局have been
common. One has involved small
dealers 经销商 who would take fraudulent documentation appearing to represent real
buyers of several expensive cars to several different banks, and receive a
large aggregate amount of loans (against the same fraudulent transaction) from
each of the banks. Once the banks
haves made the loans, the dealer disappears. A second type of scam is simply individuals with fraudulent
intent taking advantage of the desire to bank staff to make supposedly “safe”
course, in very cases, bank staff have conspired with the criminals, receiving
kickbacks and bribes for their cooperation. When transactions involve fraudulent documentation, it is
particularly easy for bank staff to cooperate in the scam. When the loan goes bad, they can always
claim to have been deceived.
big reason for the NPLs is that during 2002 and 2003, Chinese insurance
companies began writing “risk insurance” policies covering the up to 90% of the
default risk on auto loans. Banks
were very happy to make loans to anyone who could present such policies. Insurance companies began tying up the
banks to “package” these transactions.
However, a big problem was that the insurance companies (often also due
to internal corruption and collusion) had no idea how to manage default risk in
these cases. As instances of
default jumped, the China Insurance Regulatory Commission issued orders
prohibiting the insurance companies from issuing new default risk policies, and
also prohibiting them from paying out again claims from the banks. This was a case of regulatory risk in
which the banks have been the big losers.
the huge NPL mess is also to a large extent the result of lack of debt
collection efforts and capabilities by Chinese banks. Compared with banks in any mature market, Chinese banks are
not aggressive at collecting bad debts, and their collection record is
poor. This surely reflects a
sensitivity within the bank to the scandalous origin (i.e., kickbacks and
corruption) of many the loans. It
also reflects the dearth (due largely to regulatory restrictions) of effective
professional collection agencies in the market. Difficulties in getting and enforcing legal judgments
through the police and court system is also a big contributor to the problem.
Start by Auto Finance Companies
banks have found auto lending perilous, will specialized auto finance companies
owned by foreign auto makers be more successful? It is too early to answer this question. After a short starting period, the
companies established by GM, Volkswagen, and Toyota are finding business
manager of VW’s company, 大众汽车金融（中国）有限公司, told the local press that foreign auto companies are optimistic
about the market. He noted that
currently only about 10% of auto sales are financed by loans. It is expected that within 10 years the
volume will increase to 40-50% of sales.
at present, the auto finance companies are encountering real obstacles,
including regulatory obstacles, to developing business and making profits. The regulatory obstacles stems of
provisions of the <汽车金融公司管理办法>, which became effective October 1. These provisions include high capital requirements to set up
a business, a prohibition on establishing branches, and a requirement that the
rate of interest on loans be set 1% over the rate on bank loans.
there are what might be called “environmental” problems. As China still lacks a reliable credit
checking system, the companies have been incurring high costs for credit
checking and risk management. Add
to this a (temporarily?) weak sales market, and the result has been operating
it is reasonable to expect the sales market to improve. But what about the regulatory
constraints imposed by the <汽车金融公司管理办法>? It is these
constraints that the companies are finding most vexing.
same time that consumers have grown cautious and are deferring auto purchases,
new monetary policies of the Central Bank are likely to negatively influence the
auto companies business. The PBOC’s
decision to raise deposit and loan interest rates by 0.27 % will mean higher
costs of funds for the auto finance companies, which they will have to pass on
to dealers through their dealer loan rates. This will raise costs for the dealers who are already facing
a weak consumer market and lower profitability.
vs. Auto Finance Companies: Who
has the Advantage?
the poor record of the auto financing by banks, are they likely to withdraw
from this business and cede the market in the auto finance companies? Certainly, this is unlikely.
the bank have a terrible record, the problems are certainly understandable and
solvable through better management.
At present, the banks have by far the dominant position in providing
auto loans. In Shanghai, some 90%
of auto loans have come from banks.
The banks are likely to try to maintain this dominant position, so auto
finance companies will have to work hard to create competitive advantage, as
well as to overcome the disadvantages placed upon them by the protectionist
The author is president of S.M. Harner and Company, a financial services
consultancy, and a ten year resident of Shanghai.