Need For Banks To Slow Down On Lending To Auto Dealers

The auto lending industry, which is supposed to be the backbone of the economy of any country, as always have witnessed drastic changes over the years. Typically, now there is a significant slow down noticed by the banks and other financial institutions. There are several reasons for such a downturn such as:

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  • The decrease in demand in the market
  • Change in behavior of the consumer
  • Too much easy access to auto loans that leads to borrowing more than the consumers can afford and
  • Too many delinquent loan accounts that the lending industry can manage to deal with.

As a result, the banks and financial institutions have reduced lending, both in numbers and in amount of each loan account.

Estimation of the experts

According to the industry experts, it is estimated that the total amount of outstanding loans to the auto dealers will be in the range of 7 to 8 hundred billion by the end of 2020. This is huge amount that the auto lending industry is at a risk to lose and the most of the consumers are expected to go bankrupt.

Accordingly, and quite naturally, several commercial banks, large or small, have expressed their concerns over the matter. They are worried about several things such as:

  • The fast accumulation of the amount pending in the market and
  • The build-up of stress in the loans to automobile dealers.

This has compelled them to tread more cautiously now and even decelerating down on their disbursements. This change in their lending policy has eventually resulted in the auto industry now grappling with one of its worst sales slowdowns in over a decade.

Tightening the collateral norms

The governments all over the world as well as the auto finance industry have been looking for ways to reduce the impact of outstanding loans to the auto dealers. Recently, there has been a circular issued by the central bank to all small and large commercial banks as well as all other financial institutions and online money lenders such as https://www.libertylending.com/.  In this circular it is advised that all of them should:

  • Tighten their collateral norms when then lend to the auto dealers and
  • Go slow on lending to dealers.

This circular also directs all non-state lenders to follow the same principle so that the impact of excessive auto loans on the industry as well as too many numbers of loan accounts becoming delinquent is reduced.

The effects of slowdown

This fact that the auto sector is going through a slowdown for the past few years has had diverse effects on the market at large.

  • It has made significantly difficult for the auto dealers to sell off their inventory in the market
  • It has forced the central banks to issue several advisories in this context to all the branches of different banks so that they ensure that none of them takes on any new exposures unnecessarily and

Top auto lenders of the nation in the industry has also issued the circular subsequently due to the pressure from the leading automakers to upsurge funding to its dealers. However, this is just a one-of case after one of the latest models of cars saw solid bookings.

People in the know also said that there has been a significant fall in the sales of automobiles every month for almost a year now. Moreover, the numbers fell flat in a couple of months indicating that the downfall in inevitable and a natural consequence of the changes in the auto lending industry as well as in the behavior of the consumers.

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Need to protect the money

All banks and financial institutions that are into auto lending therefore need to protect their money considering the fact that over the past couple of years the major passenger vehicle manufacturers have reported a decline in sales in doubledigits. This has and should raise concerns by the banks and ring the alarm bells.

As it is, in first quarter of this fiscal year 2019, the volume of auto sales is estimated to drop by 15 to 20%. Since the market is stressed, it has made difficult for several dealers who have newly entered into this specific space to deal effectively and manage their repayment obligations.

  • It is for this reason that every lender in the auto industry is now more cautious
  • The central bank is also following the same policy to ensure prudence and
  • Most of the banks now focus on a regular and more diligent in their reviews and analysis of their positions during their post-earning conferences.

This helps them to know how they are performing as well as protect their money given out in the market.

In addition to that, all key auto dealerships tend to have a more vivid and inside out view about different aspects such as:

  • Their operations and business policy
  • What is going wrong and what is going right and
  • What exactly needs to be done when they feel very clear about that there is a risk of losing money.

All these facts and knowledge will help them to protect their money and make sure that it is used in the most suitable and best possible way.

Avoid recklessness in lending

The first priority of the banks and financial institutions is to protect the money and the first step to take to ensure that is to avoid recklessness in the lending policy. It is also better to actually have a negative situation in their auto dealer finance business. This will have a significant positive effect in terms of the growth of the book.

It is especially found that the new banks and especially the third-party lenders are pretty reckless in their lending policies to automobile dealers which has led to the rise in number of delinquent accounts in the past couple of years.

If and only if this recklessness in the lending policies are avoided it will surely and eventually help the banks to resolve the issues immediateto the sales slowdown in the auto sector as well as have a significant positive effect in the SME loan book.