Consumer finance is being boosted by a number of banks with the goal of gaining market shares and growing profits under loose management.
The State Bank of Vietnam (SBV) has recently issued Official Letter 563 requesting credit institutions (CIs) and foreign bank branches to restrict the concentration of credit on real estate and construction; balance the capital source, use capital for medium and long-term lending, and ensure liquidity. Notably, the document also requires good control of the quality of consumer credit.
Previously, in the Directive 01/CT-NHNN issued in the early year by SBV, in addition to familiar guidelines such as concentrating capital on production and business and give priority areas and tight control of lending to risky areas such as real estate, securities and transport build-operate-transfer (BOT) and Build-Transfer (BT), etc., SBV required CIs to be cautious in developing consumer lending.
Overly hot growth
With continuous official documents and directives on consumer lending issued recently, it seems that the operator has started to be concerned about the consumer credit quality of banks, after its hot increase in the recent time. Specifically, after rising by up to 50.2 percent in 2016, consumer lending continued to sharply go up by 65 percent in 2017. The proportion of consumer loans in the total outstanding loans also increased by 12.3 percent to 18 percent per annum, equivalent to the current 1.170 trillion dong of total outstanding value of consumer loans.
The stable development of income per capita recently has helped improve the living standards of the population, and increase the number of the rich in general and middle-class in particular. This trend has encouraged people to spend more, thereby boosting consumer loans.
With very high consumer lending interest rate margin and large contribution to profit results, many banks have focused on lending to this segment in recent time, including wholesale banks, etc. Numerous new consumer finance companies under banks’ management have been established. In addition, there have also been acquisitions of consumer finance companies.
Currently, lending rates are gradually falling. Specifically, the lending rates to enterprises in general and priority areas in particular are sharply declining under the direction of the government and SBV. To maintain the expected profitability, banks have had to increase lending to the areas which apply high lending rates such as consumer credit. This is considered a solution to more or less balance and offset.
After a period of limited network expansion, SBV has recently allowed banks to expand their networks more rapidly, particularly to increase their presence in rural areas, ensuring the financial development goal repeatedly mentioned in the recent time. People in rural areas, thus, have the chance to access more small loans and consumer loans.
High risk
The cautious manageemnt of SBV in consumer lending is not only due to the overly hot growth but also from a fact that banks have recently classified home loans and home construction loans as consumer loans, in order to go around the rule of the real estate lending restriction. According to statistics of the NFSC, home loans and home repair loans accounted for 52.9 percent of total consumer loans, higher than the 49.5 percent ratio recorded in late 2016.
Thus, the new document of SBV also requires CIs not to only improve the efficiency of application review but also strictly monitor the use of capital for consumer lending fund (to avoid cases where the loans are for real estate investment and enterprises and securities).
The sharp rise of real estate market, securities market and high profitability in the recent time may attract all funds to this asset channel, thereby pumping up the asset bubble. This is very dangerous and it causes harm to the economy in general and the goal of macro stability in particular.
In addition, a reality should be acknowledgedthe strong development of consumer lending activities in countries such as the United State is due to the risk management carried out by financial organisations, and the very good management of personal information profile. Meanwhile, recent statistics showed that only 51 percent of Vietnamese have a credit profile. Thus, the data of customers is in short, particularly the non-financial information which is also very important to grade and rank customers’ credit rating.
Currently, when lending, banks often look up customers’ credit history from the Credit Information centre (CIC). According to statistics, by the end of 2017, CIC’s data warehouse has updated over 34.3 million customers, including 700,000 corporate customers and 33.6 million individual customers. Nevertheless, under competitive pressure, Vietnamese banks are still willing to lure customers and offer loans exceeding limits without paying much attention to the loans of individual customers at other banks. These banks only lend base on income of customers, although this amount many not be sufficient to pay for many loans at different banks.
Therefore, consumer lending is considered having high risk level, especially when the loans are mainly unsecured, and people are not yet aware of the importance of their own credit history, particularly when the unofficial lending market is still having much room to grow. There are even cases when individual information is stolen to make borrowing applications.
Category: Finance
