Default Risk in Automobile Financing

Structural increase in bankruptcies, disintermediation, more competitive margins, declining and volatile values of collateral, the growth of off-balance-sheet derivatives, technology and the Bank for International Settlements (BIS) risk-based capital requirements are the key reasons that boost the significance of understanding and effective employment of credit risk (default risk). In other words, due to lax credit policy including insufficient collateral on part of the banks, banks face severe problems in recovering the loans. As a result, the number of nonperforming loans (NPLs) mounts and the ratio of NPLs to total loans rise. Thus banks need to become more careful in extending consumer credit especially in automobile loans as some banks are forced to even suspend automobile financing.