Saturday March 24, 2012
MAA says new rules already impact sales of new vehicles
By EUGENE MAHALINGAM
NEW rules means new consequences and the first industry to raise its displeasure over new funding guidelines was the auto industry.
Their concerns were stoked by a steep drop in sales in January, and was echoed by Malaysian Automotive Association (MAA) president Datuk Aishah Ahmad.
“The sales of motor vehicles, whether new or used, are very dependent on availability of financing. Most people require financing to buy a car. In fact the purchase of a motor vehicle is the second biggest capital expenditure item for most people after property.
“Therefore, MAA is naturally very concerned with any move by financial institutions to impose more stringent financing conditions for hire purchase loans for the purchase of new vehicles,” she tells StarBizWeek.
According to reports, loan applications for the purchase of passenger cars contracted by 15.5% year-on-year in January from 7.8% year-on-year growth in December 2011.
Aishah says while the MAA commends Bank Negara's action in promoting prudent and responsible financing practices among local financial institutions, she however feels that imposing more stringent financing conditions for hire purchase loans under the present economic environment will not help to stimulate the market and instead make it worse.
“MAA recognises that banks will naturally be more apprehensive about lending in the current uncertain economic outlook. However, we feel banks must not be too cautious and stringent in providing loans as this will inadvertently have a negative impact on the overall economy and the automotive sector would be one of the sectors earliest to be affected.”
Aishah says the new lending rules had already had an impact on the sales of new vehicles.
“This will in turn reduce the revenue for the Government as the automotive sector contributes a lot of money in terms of taxes and duties.
“Instead of implementing the stricter guidelines straight away in January 2012, we feel the guidelines should have been implemented in stages so as to allow all stakeholders to familiarise with them and to soften the impact on the auto industry and consumers,” she says.
According to OSK Investment Research, under the new lending guidelines, credit approval will now be determined by calculating the “debt service ratio” based on a purchaser's net income (which is a smaller denominator) instead of gross income previously.
Proper documentation is also needed and any additional income must be backed by supporting documents, while lending to civil servants will be capped at a debt service ratio of 60% versus 70%-75% previously.
Last month, Proton Edar Dealers Association Malaysia (PEDA) president Armin Baniaz Pahamin was reported as saying that dealership sales had been “severely damaged” with only 30% of applicants able to secure financing for new Proton cars in January.
Armin also claimed that the income of more than 4,500 sales advisers employed by the Proton dealers' network had been badly impacted since the implementation of the new lending rules.
Impact on lower segment vehicles
Industry observers and players believe that the central bank's new guidelines will have the biggest impact on lower segment vehicles.
“As forecast in our annual outlook for 2012, the A segment and the used car financing will see the most adverse impact, followed by the B-segment. The impact on higher income buyers will be minimal,” says Frost & Sullivan partner and head for automotive and transportation practice, Asia-Pacific, Kavan Mukhtyar.
Kavan adds that the new lending guidelines need to be looked at in the context of the global economic uncertainty since 2008.
“Globally the core issue has been unmanageable and poor quality of consumer debt. Bank Negara's guidelines are with the intent of managing household debt in Malaysia to reasonable levels.
“However, this has had a significant adverse impact on the automotive industry in the first two months of 2012. The approval rates have gone down dramatically. We believe this could be due to an initial reaction to the guidelines. Over the next few months the approval rate would go up. However, we expect lending institutions to remain conservative in 2012.”
Aishah concurs that the segment most affected will be the lower capacity passenger car segment.
“Customers for this segment are usually from the lower income group and self-employed. Many may have the income including supplementary income derived from part time jobs. But they do not have the proper documentation to substantiate their ability to service hire-purchase loans.
“Going forward, we feel sales of motor vehicles would show some improvement in the coming months,” she says, adding that MAA, together with other auto key players, had met Bank Negara last month to voice their concerns over the new ruling.
“Bank Negara has agreed that all the concerns and issues raised by auto players would be smoothened out with the financial institutions,” she says.
OSK Investment Research analyst Ahmad Maghfur Usman similarly feels that “things should recover,” adding that the dealer to banker lending chain will “adjust eventually” and that everything should be “back to normal.”
In his recent research report, Ahmad said that banks, in complying with the new guidelines, have become stricter on documentation and more stringent in the initial screening stage putting put a dent on vehicle sales.
“On the other hand, this may get more manageable as banks and car dealers adapt to and familiarise themselves with the new submission procedure, which has led to the overall loan application period stretching to a week versus the usual one to two days.
“We understand that the applicants most hit by the new guidelines are civil servants, who are unable to produce supporting documents on their side income,” he says.
Ahmad, however, feels that demand for vehicle sales will be spurred by new model launches, such as Proton's upcoming P3-21A, which is expected to be launched soon.
Drop in vehicle sales
Total vehicle sales fell 25% to 40,948 units in January 2012 from 54,781 units in the same month last year. This was attributed to attributable to tighter hire purchase loan approvals, but also to the shorter working month as a result of the Chinese New Year holidays and impact from Thailand's flood disaster, which had yet to recover fully.
Sales of vehicles, however, rebounded in February to rise 9% to 44,013 units from 40,387 units a year earlier, boosted by a return of consumers' buying interest, a longer working month and improved performance by the commercial vehicles segment.
According to the MAA, sales volume for March is expected to improve further as the local market adjusts to the stricter requirements of hire purchase application process.
“From this meeting we were made to understand that one of the reasons for the decline in sales in January this year was due to various interpretations by the financial institutions, hence the differing stances taken by banks when implementing the new guidelines.
“This has led to the delay in registration for our vehicles especially Viva model, which is our level entry vehicle specifically for first time buyers.”
Aminar admits that the delay did have an impact in sales for Perodua Viva vehicles, especially in the northern, East Coast and east Malaysian regions by as much as 20% in January.
“While our bookings continue to be healthy, registration or the conversion is still relatively low. Our current strategy is to continue our dialogue with the respective stakeholders, namely the financial institutions as well as other automotive players on how best to overcome this issue.
“We are also looking at other viable options and studying its effects. Adjustments will be made accordingly,” he says.
Edaran Tan Chong Motor Sdn Bhd (ETCM) executive director Datuk Dr Ang Bon Beng says the stringent loan conditions for hire purchase of vehicles affects mainly the lower income group. The company distributes Nissan cars.
“Nissan booking and sales are not badly affected attributable to the market positioning of our model line-up.
“However, as financial institutions request for more supporting documents, take a longer loan processing time and impose additional conditions for loan approvals, the whole vehicle sales process may take longer to complete.”
Ang adds that while ETCM understands and supports the objective of Bank Negara's new guideline, he urges that any changes should be done in stages to minimise the impact to the automotive industry's eco-system.
Mitsubishi Motors Malaysia chief executive officer Tetsuya Oda believes the new guidelines will have an impact on all vehicle sales initially.
“There will be a J-curve effect where we will see a dip in sales in the initial stages but it will eventually rise. Consumers and the market will respond accordingly and will eventually adapt to the guidelines.”