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Insisting on Jidong Mode and No Plan on Establishing Automobile Financing Company by Pang Qinghua

Source: From 21st Century Economic Report Author£ºadmin Hits£º9784 Time£º2009/11/25 11:24:48
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The essence of Jidong Mode, which has been operated for 10 years, is that the dealers guarantee for the consumers to make loan from the bank while the risk of dealers is to be avoided or solved through a series of prevention measures. But with the expansion of this business, the largest dealer of China is also facing the financial problem.

The government hopes to further expand automobile consumption credit, while many dealers are still trapped by financial chain. It is common that the dealers are short of financial guaranty, so how can automobile consumption credit go through the plight? President Pang Qinghua of Power Group, the largest automobile dealer in China, has been doing the experiment since 10 years ago.

On September the 10th, Power Group and the Bank of China held the 10th anniversary of automobile consumption credit to celebrate the 10-year operation of Jidong Mode by both parties. The essence of Jidong Mode is that the dealers guarantee for the consumers to make loan from the bank while the risk of dealers is to be avoided or solved through a series of prevention measures.

With this Mode, the total loan of automobile consumption credit guaranteed by Power Group reached £¤35 billion, offering consumption credit for altogether more than 300 thousand consumers, which made considerable profit for both the bank and the dealers. In the year of 2004, the Group experience the challenge due to the sudden increase of risks of automobile consumption credit in China and the decrease of the marketing. The 10-year operation of Jidong Mode is viewed as a unexpected success by the industry. 

The rate of non-performing loan is below 0.06%

In 1995, Jidong, predecessor of Power Group, started the business of car purchase in installment through its own fund. The proportion was 50% down payment and the loan period is one year. Owing to the limitation of fund, this business was continued by intervals. In September,1999, Power Group achieved cooperation with the Bank of China Branch in Tangshan, using bank funds to provide car loans to constomers.

The essence of Jidong Mode is that the dealers control the credit risks of vehicle buyers, help customers apply for a loan, select vehicles and apply for a license, help the bank collect loan principal and interest, and fully warrant customers. Under this mode, Pang Qinghua have to pay the Bank of China about 5%loan loss provision. if any one of the loan exceeds the time limit, the Bank of China will deduct from the loan loss provision, while Power Group is responsible for urging the customers with delinquent accounts to pay the loan. If the time limit is exceeded a certain period, Power Group will take back the vehicle, which will be auctioned as a second-hand vehicle to get back some of the cost.

He Ming, director of Personal finance headquarter of China Bank, recalled that over 70% of the automobile consumption credit provided by the Bank of China at the beginning was provided under Jidong Mode. Under this mode, the Bank of China has got no doubtful account or risk.

To control the risks of its own, Power Group built up a set of risk prevention and control measures. Before applying for loan for the vehicle buyer, the Group will carefully investigate and check the income and credit of the borrower according to the requirements of the bank. In addition, Power Group spent over £¤70 million installing GPS in the credit vehicles to monitor the position of the vehicles at actual time. Once malicious arrears arises, Power Group will first pay the loan to the bank and then get back some of the cost by clearing up defaults and auctioning the second-hand vehicle

With this mode, Pang Qinghua decreased the non-performing loan rate of automobile consumption credit from 0.13% in 2004 to less than 0.06%. Pang Qinghua said that Power Group was becoming stronger, which enhanced the dealers` influence when cooperating with the bank. In 2008, Power Group sold about 230 thousand vehicles, and the number will reach 300 thousand this year.

Pang Qinghua also has capital dilemma.

Pang Qinghua is still continuously seeking more targets to cooperate with. Besides the Bank of China, Power Group began to cooperate with the Communications Bank of China£¬the Agricultural Bank of China and Beijing Rural Commercial Bank. Last year, the automobile consumption credit by the cooperation with Beijing Rural Commercial Bank reached £¤1.4 billion. Moreover, under Jidong Mode, Power Group cooperated with Finance FAW, Dongfeng Finance, Fiat Finance and Daimler Finance on automobile consumption credit to adapt itself to the gradually rising trend of the marketing share of automobile financing companies.

However, with the development of the business, the requirement of the amount of guarantee funds is also increasing, which adds up to the risks of Power Group

Now, the rate of loan loss provision paid to the Bank of China by Power Group is 5% of the loan. Owing to years` of smooth operation, in Tangshan, where Power Group grew up, the Group need to pay only 3% of the loan loss provision to the Bank of China Branch in Tangshan

The area that Jidong Mode covers is being expanded. On May the 7th, Power Group, the Bank of China and BOC Insurance signed an agreement of cooperation, which spread their cooperation on automobile consumption credit to 8 provinces and cities, such as Hebei province, Inner Mongolia, etc (Shandong province, Shanxi province, Northeastern of China, noted by editor). The expansion of the cooperation area brings new challenges to the task of clearing up and the dealing with the second-hand vehicles, which need to cooperate closely with local public security organs sector¡£The second-hand vehicles cannot be handled in one area as before but be distributed to several areas.

“As to Jidong Mode itself, the dealers bear too much risk. They should take the measures by professional bonding companies as reference to improve their ability to evaluate and prevent risks, decreasing their own risk effectively”, judged Jiang Chonglong, the president and manager of Ritter Management Consultants Ltd. As to the future trend of development, automobile financing companies will still possess the main marketing share of automobile consumption credit. The share possessed by banks is now over 70%.

The domestic automobile financing companies is still of single financing channel and high cost. Several main source of fund include capital, shareholders equity injection, loans from financial institutions, issuing bonds, etc, among which the fund from the first two is limited while loans from financial institutions are of high cost.

As to bonds, even if the Central Bank and Banking Supervision Commission announced that the automobile financing companies would be allowed to issue financial bonds, there are only a few companies qualified. It is estimated by Jiang Chonglong that only two or three of the 10 domestic automobile financing companies are qualified. Some of the companies was opened just one or two years ago.

Experts suggested that Power Group could open his own automobile financing company to run the business of automobile consumption credit, but Pang Qinghua said,” We have no such plan at present. ”

As was found out by journalists, the establishment of automobile financing company by car dealers is not clearly prohibited by the laws and regulations of China, but no dealer was involved in this field. It is considered that even if the dealers were allowed to establish automobile financing companies the finance would be a problem and the practical way is that dealers and the banks jointly establish automobile financing companies.

by 21st Century Economic Report on September the 16th, 2009