In the Philippines, “auto lending remains the shining star of the overall lending industry,” according to Euromonitor International. More than a quarter of a million new vehicles were registered in 2015, “owing to aggressive promotions/campaigns from retail banks.” From March to September 2016, a period of six months, auto loans increased by 8 percent from P323 billion to P364 billion, representing 5 percent of the banks’ total loan portfolio.
Consumer lending in the Philippines is at a very low level, accounting for only 10 percent of total bank lending and about 5 percent of GDP. In Thailand and Malaysia, household lending is at around 70-80 percent of GDP.
That the Philippine economy depends very heavily on consumption fuelled by remittances from overseas Filipinos is a real truism. The Philippines is also beset by a higher-than-usual ratio of non-performing loans [which the banks use to justify their 30 percent mark-up over interbank charges on credit card interest rates].
Philippine banks are very liquid, they have lots of cash, and being banks, they are supposed to lend that cash out in order to make money. At least that was the original theory, until they learned, along with their international colleagues, how to make money out of nothing and to play with derivatives and other difficult to understand financial “products”. Banks in the western world are having a harder time, interest rates on borrowing are low, which depresses savings interest payments that are a prime source of cash for bank lending. They are also mired in tedious regulatory procedures following the crash of 2008 and the paranoia over money laundering.
But I’m straying. What this is really meant to be about is the banks’ fondness for lending people money to buy cars in a nation in which by any measure the traffic is well screwed up and there are just not enough roads. In Beijing you have to enter a lottery to be allowed to buy a car because that city is getting clogged up with traffic – what a good idea!
There are quite a few people around the higher end subdivisions here who have seven, eight, nine or even 10 cars. Clearly it is difficult to use them all at the same time and this indicates a difference between the number of cars there are and the number on the road at any one time. But the sort of people who have 10 cars at the house probably don’t need to take bank loans in order to buy them.
Lending people money to buy cars is seen as a lower risk area by Philippine banks, collateral is held in the car itself, and if it all goes wrong they can just repossess and sell the vehicle. And lots of people would really like to have a car. Aside from there being apparently no limit on the number of cars that can be put onto the roads of the Philippines, there are a couple of other angles worthy of comment: the Philippines does not have much of a car industry so the great majority of new cars must be imported, which affects negatively the balance of trade with the countries from which the cars are sourced; government taxes the imports, which inflates the retail price and a big chunk of money just goes into the government’s pocket and the poor old buyer needs to borrow money at high interest to pay the import tax on the car. Worse than this, though, is that making cars creates jobs—in Japan, Korea, Europe and America, even China, so the banks’ aggressive marketing of car loans and the consequent acceleration of the rate of new car purchases provides employment elsewhere, unless and until the Philippines develops its own substantial car manufacturing, as opposed to a vehicle assembly sector, which is what it has now.
The Bangko Sentral ng Pilipinas [BSP] seems quite sanguine about the level of car loans that the retail banks are making, and amongst banking people, the expansion of the car loan portfolio is viewed as something of an achievement. But the BSP, in common with other nation’s central banks, also has a role in controlling the economy. Wouldn’t you think that rather than just allowing retail banks to throw money at car buyers, that they would realise that doing that is not good for the Philippine economy? The BSP could more usefully guide the funds of the retail banks into job-creating type loans, for business expansion, even industrial development, which would create jobs for Filipinos at home, rather than financing things like car purchases, which at the moment create jobs for Koreans, Japanese and other car manufacturing nations?
The roads would also be less clogged. Whilst competent traffic management is desperately needed, just allowing uncontrolled and even much vaunted increases in vehicle sales whilst serving some people’s ways of demonstrating economic development, does, in fact, have the opposite effect.
Mike can be contacted at email@example.com