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23 Aug 2024

Econ Digest

Auto hire-purchase loans are projected to contract by 5.5% in 2024, marking a decline for the second consecutive year

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  • Auto hire-purchase loans in the Thai banking system contracted by 6.2% YoY in the first half of 2024. Several factors, including pressure on purchasing power, borrowers’ debt repayment abilities, income issues, household debt burdens, and stricter loan disbursement measures, have contributed to this decline. As a result, KResearch projects that auto hire-purchase loans in 2024 will shrink by 5.5%, which is a downward revision from the earlier estimate of 1.0-2.0% growth.
  • The proportion of Stage 2 loans and NPLs to total auto hire-purchase loans is expected to rise to 18% in 2024, up from 17.35% in Q2 2024. Consequently, auto hire-purchase lenders are likely to focus on potential customers in the middle- and upper-income segments and auto-for-cash loans, particularly those involving the transfer of vehicle ownership. At the same time, they are expected to exercise greater caution with used car loans.
In the first half of 2024, auto hire-purchase loans contracted by 6.2% YoY.
        According to data from commercial banks registered in Thailand, based on the Bank of Thailand (BoT) database, which accounts for approximately 65% or about two-thirds of the overall hire-purchase market, auto hire-purchase loans at the end of Q2 2024 contracted by 6.2% YoY. This marks a steeper  contraction as compared to the 3.0% YoY decline in Q1. During the first six months of this year, outstanding auto hire-purchase loans decreased by approximately THB57.7 billion compared to the end of 2023.
        The primary reason is the faster repayment rate of existing loans when compared to the issuance of new loans, which is expected to decline in line with the 24.2% YoY drop in new car sales during the first half of the year. Additional pressure is likely to come from income and purchasing power issues, coupled with the cautious credit policies of lenders overall. This occurs amid a challenging environment where loan quality issues are reflected in the double-digit growth of Stage 2 auto hire-purchase loans, which are higher than those of other types of retail loans such as mortgages, credit cards, or personal loans.

        The outlook for auto hire-purchase loans for the remainder of 2024 is expected to continue, showing a contraction trend
KResearch projects that auto hire-purchase loans will contract by 5.5% by the end of 2024, marking the second consecutive year of contraction, following a 0.4% decline in 2023. This represents a significant downward revision from the earlier estimate of 1.0-2.0% growth. The revised forecast aligns with the expected decline in new car sales this year, which are projected to fall from the original assumption to no more than 600,000 units (Figure 1).
Three key pressure points on auto hire-purchase loans are unlikely to ease anytime soon
  1. The positive impact of BEV sales on auto hire-purchase loans this year remains limited. While BEV sales in 2024 are expected to play a significant role in boosting overall car sales, with their market share projected to rise to 11.7% as compared to 9.5% in 2023, the aggressive pricing strategies of foreign BEV manufacturers temper this situation. Lower prices have led some buyers to postpone their decision to purchase new cars, resulting in auto hire-purchase loans not benefiting as much from BEV sales as they might have.
  2. High household debt and loan quality issues remain key factors driving the slowdown in both car demand and lenders’ willingness to issue loans. As of the end of Q2 2024, the proportion of Stage 2 loans and NPLs to total auto hire-purchase loans rose to 17.35%, with increases in both Stage 2 loans, which climbed to 15.09%, and NPLs, which rose to 2.26%. These figures were up from 14.49% and 2.14%, respectively, in Q1. KResearch estimates that the proportion of Stage 2 loans and NPLs to total auto hire-purchase loans could approach 18% by the end of 2024, compared to 17.35% at the end of Q2 2024 (Figure 2). This projection reflects the ongoing challenges in borrowers’ overall income levels, which are unlikely to improve, in contrast to the persistently high burden of expenses and debt repayments.
  3. An additional observation is that auto loans are not the only type of debt that borrowers currently have. As a result, borrowers are more vulnerable to unforeseen events that could impact their ability to repay debts and potentially lead to a continued high level of car repossessions. According to a survey conducted by KResearch between June and July 2024, most respondents with auto hire-purchase loans had debts across more than one type of loan. On average, they had around 2.66 types of debt. Additionally, about 19.0% of respondents with auto hire-purchase loans reported having past debt repayment issues, as they had previously undergone debt restructuring (Figure 3).
  4. Loan disbursement measures, such as responsible and fair lending practices, require that for new loans, lenders—especially financial institutions regulated by the Bank of Thailand—must ensure that the borrower’s residual income after debt repayment is sufficient for their livelihood. In cases where borrowers show signs of potential repayment problems and have never undergone debt restructuring, lenders must offer a debt restructuring plan twice, adhering to the specified guidelines. While this benefits borrowers, it adds complexity to the process for lenders. Furthermore, the increasing number of auto hire-purchase loans undergoing the debt restructuring process serves as a warning signal for financial institutions, urging them to exercise greater caution, regarding potential loan quality issues in the future.

The outlook for the auto hire-purchase loans market from now on: What direction will it take?
        The target market for potential customers is limited to the middle- to upper-income segments, which generally have a lower debt-to-income ratio and the capacity to take on additional loans for new vehicles. Service providers are likely to place greater emphasis on customers with monthly incomes of 30,000 to 50,000 THB or more, as this group tends to have an average savings-to-income ratio that is similar to or higher than their average debt-to-income ratio. However, these customers may opt for longer repayment terms to manage monthly installment amounts effectively over the contract’s duration. Additionally, customers of Battery Electric Vehicles (BEVs) remain an attractive target group. These customers are often urban residents and tend to purchase BEVs as their second or third vehicle to support more cost-effective alternative energy solutions for transportation.    
        The used car market remains high-risk, leading credit providers to focus on the auto-for-cash loans segment. Although the second-hand passenger car price index has shown signs of improvement since its lowest point at the end of 2023, the overall market remains sluggish. This higher risk associated with second-hand car customers, compared to new car buyers, contributes to the caution exercised by auto hire-purchase loan providers, particularly commercial banks. Consequently, the used car market has increasingly relied on players from non-bank hire purchase and leasing companies in recent times.
        Furthermore, given the persistent high-risk profile of customers, we can expect to see continued tightening of financing terms. This includes lower loan-to-value (LTV) ratios, increased down payments, and car dealerships encouraging more cash purchases. Consequently, lenders may seek to enhance overall portfolio returns by focusing on the auto-for-cash loans market, particularly those involving the transfer of vehicle ownership (car title transfer). These loans are generally considered lower risk. In contrast, personal loans secured by vehicle registration (non-title transfer) (Retail Loans under Regulatory Supervision Secured by Vehicle Registration) will require closer monitoring due to the potential for increased credit quality risks. This trend is evident in the slower growth of these loans. As of Q2 2023, loans secured by vehicle registration (across both banks and non-banks) expanded by 25.3% year-on-year, which is down from 36.2% year-on-year at the end of 2022.

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