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25 Aug 2008

Financial Markets

Auto Financing, 2H08: Lifting Interest Rates & Down Payments to Ensure Stability (Business Brief No.2267)

During 1H08, the total outstanding balance on auto financing in the financial institution system grew 29.83 percent over-year to THB350 billion. This increase is attributed to 9.9 percent higher car sales to around 320,000 units. Amid the prevailing unfavorable economy, new car sales in 2H08 are expected to shrink 3 percent, putting the average growth likely to finish the year at 3 percent, totaling around 650,000 units.
The overall outstanding balance on auto financing in the system in 2H08 is likely to decline in line with lower new car sales. KASIKORN RESEARCH CENTER (KResearch) has revised downward our minimum growth projection on the total outstanding balance to a range of 23-26 percent, lower than the 30-35 percent projected earlier this year, to total THB380-390 billion. The decrease is due partly from the shift in car buyers' preferences to smaller cars coupled with increases in minimum down payment requirements demanded by car dealers to minimize business risk; this might also result in lower demand for auto financing.
In KResearch's view, the slowing growth in demand for auto financing may not be a cause for worry. With the annual demand for auto financing totaling as high as THB600-THB700 billion (half of which goes to new cars and the rest to pre-owned cars, motorcycles, etc.), the auto financing market still offers promising prospects over the long-term. Still, auto financing providers should pursue balanced and careful management of their costs of funding along with moves toward more prudent market expansion, especially during this unfavorable economy, to prevent deterioration in debt quality.
KResearch takes the view that auto financiers should place greater emphasis on effective management of the existing and new customer portfolios to avoid setbacks in asset quality as well as to maintain their profitability and ensure long-term financial stability. However, loan extension over the short-term may be affected somewhat. Among the guidelines that we recommend are:
- For new customers: Borrowers who place down payments less than 15-20 percent of the vehicle cost should be categorized as high risk. Other evidence showing their assets may be required beside evidence of their monthly income, such as home ownership. If possible, the minimum down payment should be set at 15-20 percent of the vehicle cost to minimize the possibility of NPL if customers can no longer service their debt during the first twelve months of their installment loan term. Lending rates should also be hiked to levels consistent with the rising cost of funding to maintain auto financing providers' stability over the long-term.
- For existing loan customers: Customers' credit histories should be monitored with the setting up of an alert system that requires inquiries into borrowers who default on their loan installments even as little as 1-2 weeks. This approach will ensure effective debt monitoring, leading to jointly agreed resolutions with borrowers before the debt becomes an NPL. Leniency should be given to borrowers who are facing financial problems, especially through debt rescheduling to help them obtain lower monthly installment payment plans, or additional loans to modify their vehicle engines for alternative fuel use – thus helping them to lessen their expenses and increase their debt servicing ability.

Amid intensifying competition, SME auto financiers with higher costs of funding may avoid competing head-on with their rivals, especially in the new car market. They may instead turn to second-hand cars, motorcycles or other products or even branch out into personal loans with autos as collateral where they have expertise. These will not only ensure higher margins but also bolster their long-term financial stability amid the intense rivalry with larger competitors in the market. Even so, these approaches must be pursued along with more prudent risk management, particularly in the market for second-hand cars or other products.

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