Since the end of 2017, many auto loan platforms have started to close down, a movement that has since picked up momentum. A year ago, there were 1,741 P2P loan platforms in the market. Now there are only 859 left.
Banks began to call in loans and small platforms struggled to find capital to keep operational. The interest rates and high pressure caused the first casualties. The Ministry of Public Security was forced to intervene and the whole industry found itself in shaky ground. The difficulty to attract new customers and high operational costs were among the factors that caused this collapse.
Last year, auto finance which comprised of cash loans, was an extremely promising field. Optimistic predictions, large investments and the entry of new players drove the golden era of the industry. At its peak, 1,741 companies were offering these services. Now, more than half of them have closed down and some of them have only kept their loan collection department operational.
The decline started when banks started to call in their loans. At first, banks and financial institutions were happy to participate. Auto loan platforms worked as co-ordinators between the bank and the customer. Banks just had to sit back and wait for the money, as the task of recovery was undertaken by the auto loan company. That was the main reason that many of them got into the business and provided large sums of capital. But after the Chinese government encouraged de-leveraging in the beginning of 2018, capital stopped flowing into the auto loan market. Some platforms resorted to P2P capital, but the cost was too high.
On April 26, the National Internet Finance Association of China released a draft of standards on “Safety Regulations for Internet Finance Contracts”, banning violent and inappropriate loan collecting techniques. Loan recovery is the industry’s bane. Customers typically put up the car as collateral for the loan. But frequently the same car is used as collateral for several different loans. In this economic relation, the car is key. Whoever owns the car, has the power. That is why most agencies fight over collection of cars. Violent cases of debt collection have taken place all around China in the last month, which has been a cause of alarm to the Chinese government. The authorities want to stop this and have arrested some employees of these agencies in Guangdong province and Zhengzhou. Platforms now have to decide between continuing their activities and face the shortage of capital or retreating from the market without being able to collect their debt.
Other companies are actively withdrawing from the market, due to the profit squeeze. Most players in the industry are not Internet industries; they have an offline approach and establish physical stores in many different locations, mainly because it is necessary to check the status of the cars. This increases operating costs significantly. Although the auto loan industry is potentially huge, its penetration rate remains very low, at around 7%.
Strangely enough, volume of business is growing, which means that the industry is not yet doomed; it is just experiencing a market concentration after half the players bowed out. Since November last year, the four largest platforms control almost 60 percent of the market. These platforms enjoy a comfortable position, but the small national agencies might be forced to shut shop. However, there is still hope for the small firms that focus on local markets, where they have a relatively high penetration.
Although the new regulation makes it harder for banks to cooperate with other financial institutions that give high risk loans, people within the industry are confident that banks will find ways to resume the capital flow. If this happens and the auto loan industry finds more efficient ways to assess the borrower’s ability to repay, the industry will be able to overcome this crisis, which might be relegated to memory as a simple re-adjustment period.