The State Bank of Vietnam (SBV) is seeking opinions on the draft circular to amend the Circular No. 43/2016/TT-NHNN regulating consumer lending activities of financial companies. Notably, provisions on forms of disbursement for consumer loans are added.
Accordingly, the draft circular specifies that a financial company can only disburse directly to a borrower in cash or transfer into customers’ payment accounts if the borrower did and are borrowing at the financial company, has a good payment history according to the internal regulations of the finance company and no bad debt according to the classification of the Vietnam National Credit Information centre at the time of signing the consumer loan contract.
In addition, financial companies must ensure that total amount of outstanding consumer loans disbursed directly to borrowers does not exceed 30 percent of their total consumer credit debt balance.
As explained by the SBV, direct lending to borrowers has high risks and difficulties to control the purpose of using loans. Therefore, to ensure consumer lending for sustainable, healthy and efficient development, consumer loans disbursed directly to borrowers should be limited within customers who have borrowed at financial companies and have good repayment history.
In financial companies, direct disbursement of consumer loans is mainly called ‘cash loan’ product, which is one of the main products besides installment loans and credit cards. Target customers of these product packages are more than 50 percent of the population who do not have a bank account and have an average income from only three to five million, up to the requirements of each company.
Cash lending is different from lending through points of sale, which is granted only when a customer purchases goods to pay part of the price. Without collateral or a mortgage, with simple procedures and without borrowing purpose, cash loan is an easy way to develop credit, but it contains a higher risk, and even higher interest rate to offset the risk.
It is understandable that regulators want to tighten cash loans at financial companies when this lending activity has been getting hot over more than a year. This segment became a very competitive battleground when from big guys like Fe Credit, Home Credit, and HD Saison, to ‘rookies’ like Easy Credit, MCredit, and SHB Finance all launched product packages with a high limit from 70 million to 200 million dong and short approval time from one to three days.
According to StoxPlus, financial companies tend to shift to direct disbursing loans and credit card because installment lending to buy cars and appliances at stores and retail shops have become saturated. Accordingly, cash lending becomes a new, high-growth ‘gold mine’ due to the huge demand for loans from people without bank accounts and low incomes.
Financial companies do not disclose the proportion of the current cash loan segment in the total consumer credit balance but observers believe that it would not be a low number.
For example, in HD Saison, according to VDSC’s calculations, the proportion of cash lending in the portfolio is kept at 32 percent in 2018 (a slight decrease compared to 33 percent in 2017), while motorbike loans account for about 41 percent and loans for durable consumer goods account for about 25 percent.
This rate may be even higher in ‘rookies’ as they boost cash lending products right from their launch instead of jumping into fierce competition in installment lending. For example, right from the launch in October 2018, Easy Credit, a brand of EVN Finance, launched the loan package for customers with income from only 4.5 million dong. SHB Finance, launched in August 2018, also aimed at the cash lending market with a series of products for customers with an average income from three million dong.
The limitation of debt balance of direct disbursement will have a significant impact on financial companies’ business results because this is a potential field and has plenty of room for development. However, this regulation will also restrict financial companies from entering the cash lending sector, which is warned by experts to be profitable but risky.
