Tighter financing spreads to auto sector

KUALA LUMPUR: Car buyers may soon find it more difficult to secure loans as banks move to clamp down on auto financing.
While requirements are still being finalised, luxury car buyers may be required to take out as much as 50% up front payment.
Buyers may be limited to a maximum of two car loans in their names at any one time.
It is learnt that the private sector and financial institutions are spearheading the move.
Malaysian Automotive Association (MAA) president Datuk Aishah Ahmad told The Edge Financial Daily that she knows the
banks are in discussion to tighten lending but is unaware of any details.
“I cannot comment on something when I do not have the details, but this will be bad for the industry if the banks tighten too
much,” she said.
“If you want to check the credit of borrowers, that is fine. However, strong measures will affect sales of cars. This will in turn
reduce the money for the government as this sector contributes a lot of tax,” Aishah said yesterday.
A source said the banks are still considering several proposals to control lending to the automotive sector. One of the
proposals is a 50% up front payment for the purchase of exotic makes, such as two-door sports cars and brands like
Bentley, Ferrari and Maserati.
“The banks will stop lending to people who want to take third car loans in their names as it is found that borrowers with more
than two car loans pose the highest risk of non-performing loans. Buyers taking first car loans will still be able to secure 90%
financing but for a second loan a down payment of 30% to 35% is required, depending on the credit worthiness of the
borrower,” added the source.
Another proposal is standardising lending rates against specific models, said the source.
At the outset, these measures are likely to impact auto sales adversely.
“Of course, the move will not be good for the automotive sector. However, banks spend a lot of time chasing car payments
and a lot of money is used for the recovery of vehicles. You have to tow the car, store the car and furthermore, it is a
depreciating asset. And that is if you can find the car.
“Unlike a house, which the bank knows its location, it is hard to keep track of a car. Sometimes the car just disappears or it
takes a long time to track it down. The banks will have to bear the cost of transporting the vehicle back.
“In some cases, it will take about 15 good car loans to recover the costs and losses incurred by a single bad loan. If the
banks can improve the quality of the loans, this will bolster their profits,” the source said.
Many in the auto industry are fearful that the situation may spiral out of control, worrying about dwindling sales volume.
Federation of Motor and Credit Companies Association of Malaysia president Datuk Tony Khor was wary when contacted by
The Edge Financial Daily.
While declining to comment extensively on the matter, Khor said: “When loans are difficult to secure, the prices of
second-hand cars will start to fall. Sales of new cars will also be weaker and sellers will offer discounts which will further
depress the value of second-hand cars.
“There are people who want to swap their cars for cheaper models when their incomes are affected. Since they can no
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longer trade in their cars for cheaper makes to clear the loans, they will default.”
While Khor denied having any knowledge of the talks among the bankers, he noted that the automotive sector was badly hit
by the credit restrictions recently implemented by the government. Banks were told to look at net income instead of gross
income for loans. These restrictions came into force late last year.
“About 70% of car loan applications have been rejected since the new ruling came into place. This makes it very difficult to
sell cars and many dealers have voiced their unhappiness,” said Khor, who said second-hand car prices have started to drop.
Khor noted that low-income and middle-income buyers are the most severely affected while mid-range Japanese and Korean
makes are the hardest hit.
“Increasing the down payment for luxury cars should not have too much impact as buyers of these vehicles have the means to
pay,” he added.
“Chinese New Year sales have been bad. We hope for something to be done, there has to be a balance,” Khor said.
According to sources, the rationale for raising the required down payment for high-end cars is to prevent abuse.
“We are talking about cars from half a million to several million ringgit. Most of these cars are bought and sold on a willing
buyer-willing seller basis. As such, the value of the car is often difficult to determine. Some buyers have been abusing the
system by over-declaring the value of the cars and ending up with exorbitant loans that exceed the value of the vehicle. Again,
the car is a depreciating asset. When the loan defaults, the banks lose a lot of money,” said an industry player.
Checks with dealers and industry observers show that the abuse has been a long-running problem which the banks have been
looking to end. Borrowers are effectively taking 100% loans against a relatively high-risk asset, and it is not unheard of for
some extra money to be pocketed.