ABSTRACT OF HKMA ANNUAL REPORT 2004 - Taxi loans and public light bus loans
The HKMA continued to monitor the market situation and asset quality of AIs’ taxi loan portfolios. With the recovery of the economy, the taxi licence value increased considerably in 2004 and was close to the 1997 level towards the end of the year. The operating income of taxi operators also recorded a mild increase in the year. As a result, the overdue and rescheduled loan ratio of the taxi loan portfolio (covering both urban and New Territories taxis) of the institutions surveyed by the HKMA improved significantly to 0.28% at the end of 2004 (2003: 3.18%2).
In 2004 the HKMA completed the review of the Guidance Note on Taxi Financing, which had been in place since December 2000. After consultation with the industry, and taking into account developments in the taxi finance market, the HKMA issued a circular in March 2004 to map out a new set of arrangements for the monitoring of taxi financing, which also covers public light bus financing business. Under the new arrangements, individual AIs are required to put in place their own internal policies for taxi and public light bus financing. The internal policies should set out, at a minimum, the maximum permissible loan-to-value ratio, which should normally not exceed 85%, and the debt servicing ratio, the maximum loan tenor, the limit on the portfolio size, and the cash rebate arrangements. The regular survey on taxi loans was revised to facilitate the HKMA’s monitoring of AIs’ compliance with the new arrangements.
Taxi Financing - HKMA - March 2004
The HKMA consulted the industry associations in July and September 2003 on the proposed way forward regarding the Guidance Note on Taxi Financing ("GN"). We have since given further consideration to the matter, in the light, in particular, of recent developments in the taxi financing market. It is our experience that the risk management culture and systems of authorized institutions ("AIs") in respect of this line of business have developed substantially since the promulgation of the GN in December 2000. In the light of the foregoing, we have decided to adopt a new set of arrangements with effect from 1 April 2004.
Under the new arrangements, we will monitor the taxi and public light bus financing business of individual AIs through our ongoing supervisory process. Individual AIs engaging in taxi and public light bus financing are expected to put in place internal policies for such businesses which should cover, at a minimum, the following areas :
- the maximum permissible loan-to-value ratio - as a general principle, we would expect the ratio not to exceed 85% normally;
- maximum loan tenor;
- limit on the portfolio size of this line of business; - the maximum permissible debt servicing ratio of potential borrowers, having regard to their income level and on-going expenses;
- interest rates to be charged; and
cash rebates arrangements as well as amortisation period and methodology - as a general principle, we would expect cash rebates to be amortised over a period of no longer than three years from the day of loan draw-down normally.
ABSTRACT OF HKMA ANNUAL REPORT 2003 - Taxi loans and public light bus loans
The HKMA continued to monitor closely the market situation for taxi financing and the asset quality of AIs’ taxi loan portfolio. In accordance with the arrangement set out in the Guidance Note on Taxi Financing issued in December 2000, the HKMA conducted quarterly surveys covering a group of active lenders and two taxi associations regarding the taxi licence value, the income level of taxi operators and the problem loan level of taxi financing. It was noted that the operating income of taxi operators and the taxi licence value were adversely affected by SARS during the second quarter of the year. However, the situation stabilised quickly after the outbreak subsided and the market rebounded to the pre-SARS level in the third and fourth quarters. The overdue and rescheduled loan ratio of the taxi loan portfolio (for both urban and New Territories taxis) of the surveyed lenders followed a similar pattern: the ratio deteriorated during the SARS outbreak, but started to ease from the third quarter of the year. At the end of December 2003, the ratio stood at 3.30%, which was higher than the level at the end of 2002 (1.68%).
Using the experience gained during the SARS period, the HKMA commenced a review of the operation of the Guidance Note. The major problem was that any adjustments to the cap on taxi licence loan amounts, based on the income of taxi operators, would be procyclical in terms of its impact on the taxi licence value. The HKMA therefore consulted the banking industry on proposals to improve the situation, including the removal of the Note or the replacement of the loan cap with a maximum loan-to-value ratio requirement. The industry, however, failed to reach a consensus and the HKMA decided to maintain the status quo for the time being.
During the year, the HKMA also conducted special on-site visits to AIs that were active in public light bus financing to ascertain whether the market continued to adopt prudent lending practices. The outcome showed that the AIs concerned had established appropriate internal lending policies and procedures for this line of business.
Letter on Guidance Note on Taxi Financing - June 2003
The data collected from members of the Panel established under paragraph (g) of the GN suggests that the income of taxi operators recorded a decline in Q2/2003 compared with the previous quarter. The lower income level reflected the worsened business environment of taxi operators, which we believe was largely a result of the SARS outbreak.
As Hong Kong has just been taken off the WHO's list of SARS-infected areas and the business of taxi operators is showing signs of recovery, the HKMA has decided to maintain the Maximum Finance Amount (i.e. the loan cap) per taxi licence, as specified in paragraph (a) of the GN, unchanged at HK$2.25 million until the end of September 2003 to allow more time for assessing developments in market condition. The other provisions of the GN will also remain unchanged. Meanwhile, authorized institutions are expected to continue to ensure that their taxi financing businesses are conducted in a prudent manner taking into account the latest market situation.
ABSTRACT OF HKMA ANNUAL REPORT 2002 - TAXI LOANS
During 2002 the HKMA continued to monitor closely the quality of AIs' taxi loan portfolio. Quarterly surveys were conducted of a group of active lenders and two taxi associations regarding the licence value, income level of taxi operators, and problem loan level. Although the operating income of taxi operators edged down by about 10% during the year, the licence value remained stable and the servicing capability of the operators held up quite well, owing to the low interest rate level. The proportion of overdue and rescheduled taxi loans (for both urban and New Territories taxis) improved from 2.88% to 1.68% during the year. The HKMA will continue to keep a close eye on the situation, since the income level of taxi operators is likely to remain low in the current economic conditions.
ABSTRACT OF HKMA ANNUAL REPORT 2001 - TAXI LOANS
The HKMA is concerned about the fall in the income of taxi owners in the light of the economic slowdown and has been monitoring the quality of the taxi loan portfolio closely. Because of lower interest costs and an improvement in licence value, the quality of the portfolio has so far held up quite well. The proportion of overdue and rescheduled taxi loans (for both urban and New Territories taxis) declined from 9.04% to 2.88% during the year. Despite this improvement, the HKMA is concerned that the ratio may go up in 2002 if the income of the taxi owners remains low and interest rate trends reverse. It will therefore continue to monitor the situation closely.
In competing for taxi loans, many institutions have adopted the practice of offering cash rebates to borrowers. At one point, such cash rebates reached 18% of the loan amount in some cases. The usual practice of institutions is to amortise the cash rebates over a long period of time. The HKMA was concerned about the high level of cash rebates, which was not sustainable in the long run, and the impact of the unamortised cash rebates on the financial position of individual institutions if they were required to write off such cash rebates in the event of increased delinquencies. The HKMA therefore discussed this issue with the AIs concerned and requested them to review their policies on the issue of cash rebates. The AIs responded to the HKMA's concerns by reducing the level of cash rebates to 12% of the loan amount or below and by setting an internal limit on the maximum amount of unamortised cash rebates to limit the impact on their profitability should there be a need to write off the unamortised cash rebates. The HKMA considers that cash rebates at 12% are still high. It is therefore monitoring closely the position of individual AIs to ensure that the internal limit on unamortised cash rebates agreed with the HKMA is observed.
Letter on Guidance Note on Taxi Financing - March 2001
I refer to my letter of 29 December 2000 enclosing the Guidance Note on Taxi Financing. Pursuant to paragraph (g) of the Guidance Note, we have reviewed the data on the cash-flow position of taxi operators and value of taxi licence submitted by the panel established under that paragraph and decided to revise the Maximum Finance Amount (i.e. the loan cap) per taxi licence, as specified in paragraph (a) of the Guidance Note, from HK$2.125 million to HK$2.25 million. The revised loan cap will be effective from 2 April 2001 and the next review of the Guidance Note will be made at the end of June 2001.
Other provisions of the Guidance Note remain unchanged.
HKMA - Letter on Guidance Note On Taxi Financing - December 2000
Following consultations with the Hong Kong Association of Banks, the DTC Association and the Finance Houses Association of Hong Kong Limited ("FHA"), the HKMA has recently revised the Taxi Financing Guideline (enclosed in my letter of 19 September 2000) to take into account the improved cashflow position of taxi operators after changing to LPG taxis. The revised guideline is now issued as a "Guidance Note on Taxi Financing" (the "Guidance Note") for all authorized institutions. A copy of the Guidance Note is enclosed with this letter. Whilst the recommendations in the Guidance Note are not statutory, they nonetheless represent best practices for the taxi financing business. We therefore expect all authorized institutions engaging in such business to follow the Guidance Note. Any institution which wishes to depart from the Guidance Note is also expected to have prior consultation with the HKMA.
The Guidance Note retains the concept of a loan cap for each taxi licence but the loan cap has been increased from $2 million (as previously stipulated in the FHA guideline) to $2.125 million to take account of the improved cashflow position of taxi operators. Also, the Guidance Note has introduced a maximum top-up loan limit of $200,000 against additional tangible security (such as in the form of cash deposits put up by a taxi dealer). However, such tangible security must be retained by the lending institution at least until the full amount of the top-up loan has been repaid. Furthermore, before releasing the tangible security, lending institutions should re-assess whether they are comfortable with the loan-to-value ratio at the time of release as supported by the remaining collateral (i.e. the taxi licence and car body).
To ensure that the recommendations in the Guidance Note reflect the latest repayment ability of taxi operators, the Guidance Note will be reviewed on a quarterly basis. To facilitate such a review, a panel comprising 10 institutions that are active in taxi financing and the two taxi dealers associations (the Hong Kong Taxi and Public Light Bus Association and the Taxi Dealers and Owners Association) will be established to provide data on the cashflow position of taxi operators and value of taxi licence to the HKMA on a quarterly basis. Based on the data provided, the HKMA will calculate the average cashflow positions of taxi operators and revise the Guidance Note if appropriate. As far as the taxi licence is concerned, the loan cap will be set in the light of the latest cashflow data provided by the panel but it will be subject to the limit of not exceeding 85% of the value of the taxi licence.
The loan cap set out in the Guidance Note will be applicable to all loans granted in the first quarter of 2001 and the next review of the Guidance Note will be made at the end of the first quarter. Authorized institutions will be notified in writing of any changes to the Guidance Note arising from the review in due course.
HKMA Guidance Note On Taxi Financing - December 2000
a. Maximum Finance Amount
Lenders may lend up to $2.125 million against the value of a taxi licence*. In addition, authorized institutions may lend up to 90% against a new car body or up to 80% against a used car body and the possibility of lending up to 100% (less the value of any grant by the government) against the cost of replacing a diesel vehicle with an LPG vehicle.
* The loan cap per taxi licence will be reviewed on a quarterly basis (see paragraph (g) below). It will be set at the lower of 85% of the value of a taxi licence and the maximum loan amount affordable by the borrower taking into account the latest average income of a taxi operator.
b. Top-up Loans
Lenders may also grant top-up loans up to $200,000 per taxi licence against additional tangible security at least of equivalent value provided either by the borrower or a third party. The security must be locked-in with the lending institution until the top-up loan has been completely repaid. Before releasing such tangible security, the lending institution should re-assess whether it is comfortable with the loan-to-value ratio of the loan as supported by the remaining collateral (i.e. the taxi licence and car body).
c. Restructured Loan Account Arrangement
This arrangement is applicable to the provision of a taxi loan by an institution to a customer to finance his purchase of a taxi licence and the car body, if any, from an existing taxi loan borrower, whose taxi loan with the institution is in a work-out situation. In this case, the institution may lend to the buyer an amount in excess of the maximum finance amount and the top-up loans as mentioned above. However, the loan amount should not, in any event, exceed the lower of the purchase price or the loan balance and the accrued interest of the existing loan.
d. Maximum Loan Tenor
Maximum loan tenor on new taxi loan will be 20 years except for loans made under the restructured loan account arrangement mentioned above.
e. Effective date
This Guidance Note shall take effect from 1 January 2001 and supersede all previous guidelines on taxi financing.
f. Applicability of Guidance Note
This Guidance Note was formulated after consultation with the Hong Kong Association of Banks, the Deposit-taking Companies Association and the Finance Houses Association. It is non-statutory and represent best practices which members of the three Associations are expected to follow.
g. Review of the Guidance Note
To ensure that the recommendations in the Guidance Note reflect the latest repayment ability of taxi operators, the Guidance Note will be reviewed on a quarterly basis. A panel comprising 10 institutions which are active in taxi financing, and the two taxi associations will be established to provide the HKMA with relevant statistics to facilitate such review. Based on the data provided, the HKMA will determine whether the Guidance Note should be revised.
ABSTRACT OF HKMA ANNUAL REPORT 2000 - TAXI LOANS
Economic recovery and lower operating costs through conversion to Liquid Petroleum Gas taxis helped raise the licence value of taxis in 2000. As a result, the overall quality of taxi loans improved during the year, although the non-performing ratio was still generally higher than for other types of loans. Overdue and re-scheduled urban taxi loans remained high, at 7.6% at the end of 2000, although this was well below the 15% recorded at the end of 1999.
In December, following consultation with the Hong Kong Association of Banks (HKAB), DTC Association (DTCA) and Finance Houses Association of Hong Kong Limited, the HKMA issued a Guidance Note on Taxi Financing to all authorized institutions. The Guidance Note is non-statutory. It nevertheless sets out prudent lending practices to be followed by authorized institutions in their taxi loan business. The Guidance Note recommends, among other things, that the maximum amount of a loan against the value of a taxi licence should not exceed $2.15 million and that the lending against the car body should not exceed 80% of the value of a used car or 90% for a new car. The Guidance Note is subject to quarterly review. For this purpose, the HKMA has established a panel comprising ten lending institutions and two taxi dealers' associations. Panel members will provide the HKMA with the income level of the taxi operators and the value of taxi licences on a quarterly basis.
ABSTRACT OF HKMA ANNUAL REPORT 1997 - TAXI LOANS
The value of taxi licences has risen sharply in recent years, reaching a peak of about $3.5 mn in the first half of 1997. Later in the year the value, like that of shares and property, fell sharply, ending the year at a level of $2.6 mn.
The HKMA’s supervisory policy has been to ensure that those authorized institutions engaging in taxi financing - a relatively small number - have a prudent lending policy in place, including limits on their aggregate exposure and prudent loan to value ratios. The HKMA conducted a review in the latter part of the year when the value of taxi licence dropped to assess the impact on individual institutions. The results were broadly satisfactory, but the HKMA will continue to monitor how the situation develops.