Facing an increasing number of automobile loan defaults, China's major commercial banks are revising their lending policies for the potentially lucrative market.

Many are raising down-payment requirements and shortening loan terms, and some bank branches have reportedly even told their loan clerks to suspend granting certain high risk consumer loans for automobiles.

"The credibility of many borrowers was just terrible and the lack of an effective credit system has left us vulnerable," said a senior auto loan manager at one of the nation's four State-owned commercial banks, who declined to be named. "We simply had to raise the threshold."

The down-payment requirement has been raised from a typical 20 percent to 40 percent or 50 percent at some banks, while loan duration has been shortened to three years from an earlier more time period, five years.

Some banks have also introduced stricter guarantee requirements, securing loan against other properties in addition to the car.

Bank of China President Xiao Gang said earlier some 2 percent of his bank's auto consumer loans had gone sour, higher than other consumer loan categories such as those granted to home owners and students.

The Agricultural Bank of China (ABC), one of the four largest state-owned lenders, is planning inspections of its auto loans at all provincial branches after regulators found "nonstandard" lending practices at some branches recently.

The inspection by China Banking Regulatory Commission (CBRC) was announced last month after it ruled that the bank's auto consumer loans rose too fast in recent months.

Yang Kun, vice-president of ABC, stressed at a meeting earlier in July the importance of risk prevention, and ask the branches not to lower borrower qualification requirements in pursuit of a bigger market share.

The ABC's outstanding auto consumer loans stood at 46.3 billion yuan (US$5.6 billion) at the end of May, accounting for 31 percent of all such loans by the four State-owned banks. The non-performing loan ratio of its auto consumer loans was 3.32 percent, it said.

Chinese banks started to grant consumer loans only a few years ago to finance the purchases of autos, housing and even home appliances. Such loans were seen as helpful in improving the banks' traditional loan structures and resulted in rapid growth.

But risk levels rose unexpectedly in auto loans, as many borrowers, seeing their cars depreciating rapidly as competition drove down prices, chose not to repay their loans.

Fierce competition after China's accession into the World Trade Organization continues to drive down automobile prices in the national market.

Banks said widespread price cuts in recent months, some as deep as 15 percent, had contributed to loan defaults.

But an incomplete registration system, as well as a lack of personal credit records, has made it difficult for banks to repossess vehicles.

"Banks lack necessary legal protection," said the auto loan manager.

"Most of the time we are not able to retrieve autos (in the event of a loan default)," she added.

The unexpected high risk has already forced many insurance companies to suspend providing coverage for auto loans last year.

Some analysts said domestic banks may finally surrender the market to foreign auto financing firms that are more experienced in dealing with auto buyers, although others disagreed.

The CBRC last November approved the preparation of auto financing operations in China by Germany's Volkswagen AG, Toyota Motor Corp of Japan and US auto giant General Motors Corp.

(China Daily July 12, 2004)