As financial authorities consider easing regulations on capital companies' car rental operations, industry insiders are expressing concerns about the stability of rental assets. With capital companies already holding nearly half of the domestic car rental market, there are warnings that further expansion could lead to excessive price competition and increased risk of losses.
According to the Korea Rental Car Business Association, as of the end of July this year, financial firms, including capital companies, accounted for 45.32% of the domestic car rental market, surpassing large dedicated rental companies at 43.08%. The remaining share is held by over 1,000 small rental firms.
Capital companies are subject to a regulation known as the 'core business ratio,' which prevents them from exceeding the average balance of their leasing assets with their rental assets. However, their growth has been rapid. The number of registered rental cars under capital companies increased from approximately 27,000 in 2010 to 557,000 last year, more than a 20-fold rise. From the end of 2021 to the end of July this year, the number of registered rental cars by financial firms grew by 37.5%.
In 2005, financial authorities allowed capital companies to engage in rental operations as a secondary business, implementing regulations to limit expansion beyond their core activities. Recently, discussions have emerged in the financial sector about allowing rental operations to exceed the previous 100% limit of the core business ratio. Dedicated rental companies argue that there is no need to further relax this ratio, given the significant presence of capital companies in the market.
The Korea Rental Car Business Association asserts that the core business ratio serves as the last safeguard against the expansion of non-financial activities by financial companies.
The association is concerned that the expansion of rental assets by capital companies could impact their core financial operations. They warn that aggressive price competition could lead to a decline in the residual value of rental vehicles, potentially contracting the overall market. The residual value is the expected price of a vehicle at the end of the rental contract.
For example, if a vehicle's four-year residual value is set at 26 million won but the actual sale price is only 20 million won, a loss of 6 million won occurs. Unlike banks, capital companies do not accept deposits and rely on external borrowing, such as bond issuance, for funding. However, if losses occur, it could adversely affect the profitability and capital stability of their existing operations.
The association has called for a review of the trends in residual value rates for each capital company, actual disposal prices of returned vehicles, gains and losses from vehicle sales, and the impact of declining used car prices on capital adequacy before any regulatory relaxation.
A representative from the association stated, "The reduction in rental fees created by increasing competition should not return as a financial burden on consumers in a few years. The focus should be on the health of competition before expanding it."
* This article has been translated by AI.
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