Improving the auto loan sector’s standards

While car repossessions are expected to increase this year, the situation is not as alarming as appears in the media, according to an industry executive.

The majority of auto lenders can handle the high credit risk of customers and contain bad debt at a satisfactory level this year, Sarun Thongtammachart, president of the Thai Hire-Purchase Association (THPA), said in an exclusive interview with the Bangkok Post.

The THPA has around 100 members nationwide, 40 of which are auto loan providers, while the rest are vehicle-related businesses such as car insurers, car auctioneers and others.

Rise in repossessions

Mr Sarun said around 200,000 cars were repossessed in 2022 and the number is estimated to rise by 20% this year to 240,000.

The worst-case scenario is a 30% uptick as business operators attempt to control non-performing loans (NPLs), he said.

A recent report estimated the number of repossessed cars would soar to 1 million because of an increase in the number of special mention (SM) loans and NPLs.

“However, the worst-case scenario is quite unlikely because auto loan providers are employing measures to control NPLs through several instruments,” said Mr Sarun.

According to the Bank of Thailand, SM loans are loans overdue by more than 30 days but not exceeding 90 days, while loans overdue by more than 90 days are classified as NPLs.

For the first quarter, SM car loans with banks tallied 13.8% of total outstanding loans, compared with 11.4% for non-banking financial companies.

The probability of SM loans becoming NPLs is only 12%, according to the central bank.

He acknowledged auto hire-purchase SM loans have continued to increase in line with economic circumstances.

In particular, rising inflation and interest rates are the two key factors dampening the purchasing power of consumers, said Mr Sarun.

These factors weaken the debt payment ability of borrowers, he said.

Interest rates are rising as the central bank’s debt assistance measures have expired.

Vulnerable low-income borrowers cannot repay debt as usual, classifying them as SM customers.

Normally the SM car loan ratio would be higher than other consumer loans, in line with the nature of the business, said Mr Sarun.

If an SM borrower is unable to repay debt on time, the lender will allow them to fall into the category of an NPL, he said.

NPLs under control

As a result of the high credit risk of borrowers, auto hire-purchase lenders are working to control bad debt through several instruments, even as the central bank’s debt relief measures have expired.

A longer repayment period to reduce the monthly instalment payment is a key method deployed to ease the monthly debt burden, said Mr Sarun.

Auto hire-purchase lenders are focusing on select customers who have high purchasing power to control NPLs, he said.

In addition, some lenders are asking for a high down payment from borrowers that have high-risk profiles, said Mr Sarun.

He said the NPLs in the auto loan industry would increase this year because last year they were at an insignificant level.

Given several methods to secure the asset quality of business operators as well as the nation’s economic recovery, NPLs in the sector should be contained, said Mr Sarun.

In the first quarter this year, auto NPLs with banks tallied 1.9% of their portfolio, compared with 2.1% for non-banking financial institutions, according to Bank of Thailand data.

In addition, he said the country’s economic growth in the second half is expected to expand from the first half, mainly attributed to the rebounding tourism sector, which should support the auto industry and car loan sector.

However, new car sales in the first four months of this year were lower than expected, despite sales posting growth over the past two years. New car sales for 2023 are projected at 900,000 units, rising from 850,000 in 2022 and 760,000 in 2021.

During January to April this year, sales fell below the target year-on-year, dampening auto lending growth. Normally 90% of new car sales employ auto loans.

Mr Sarun said rising inflation and interest rates are pressuring auto loan expansion.

Call for a rate hike

Auto hire-purchase lenders have been affected by rising interest rates, which have increased financial costs, though the ceiling interest rates for the segment are capped.

As a result, the THPA has called on the Office of the Consumer Protection Board (OCPB) to increase the maximum rate.

According to OCPB regulations, the authority set a ceiling rate for new car loans of 10% per year, or an average fixed rate of 5.5% per year. For used car loans the ceiling is 15%, or 8.5% of the fixed rate.

Motorcycle loans have a maximum rate of 23%, or 12.5% of the fixed rate.

“The regulator agrees with the proposal in principle and understands the market situation as interest rates rise. The regulator needs to study the feasibility as the current ceiling rate has only been in effect for around six months,” he said.

The central bank has increased its policy rate seven times since August 2022, rising from 0.5% to 2.25% as part of its monetary policy normalisation in an effort to curb inflation.

Market conduct

Mr Sarun said the enforcement of a draft royal decree on auto hire-purchase businesses is expected to come into effect between the end of this year and the beginning of next year.

Under the decree, auto lending businesses will be entirely under the remit of the Bank of Thailand.

The central bank would oversee the sector in the two core areas: market conduct and macroprudential regulation.

Regarding market conduct, the central bank would supervise with regard to consumer protection, consumer complaints and fair prices including interest rates and other fees.

Under macroprudential regulation, the regulator would monitor household debt, responsible lending, risk-based pricing and debt service ratios.

The central bank conducted a public hearing on the new rules supervising auto lending businesses and plans to hold another meeting with operators to enhance understanding of the details of the new regulations.

Mr Sarun said the THPA continues to communicate and discuss the new rules with its members, particularly small rural operators, to prepare for enforcement.

The new regulations should help to upgrade overall business standards, he said.

“To comply with the new regulations, the operating costs of businesses are likely to increase, particularly for the reporting process. We need to prepare for this,” said Mr Sarun.

In addition, he said the THPA plans to approach more business operators, both members and non-members, about wider coverage in order to upgrade business standards.

Large operators include captive leasing companies, which are members of the association.

Existing members represent a market share of around 85% of auto leasing operators, said Mr Sarun.