The banking industry has stepped up to promote the development of regulated consumer credit to repel unregulated credit.
Nguyen Hoang Minh, deputy director of the State Bank of Vietnam (SBV)HCM City Branch said, in 2018, outstanding loans of credit institutions in the city increased 14.69 percent compared to the previous year, which was the lowest increase in the last five years. Meanwhile, consumer credit tended to grow rapidly. Credit outstanding in the consumer sector accounted for only 12.73 percent of total outstanding loans in the city in 2015, 18.36 percent in 2017 and had been continuing to increase in the past year.
SBV leaders said that it was necessary to promote consumer credit activities actively, but to ensure risk control, limit arising problems related to interest rates, debt recovery methods, debt management in consumer finance.
According to financial and monetary experts, regulated credit, in which consumer credit grows strongly, will push back unregulated credit and shadow banking. Currently, most banks are pushing for consumer loans not only in urban areas, but also in rural areas. In addition, the continuous growth of financial companies and the fierce competition in the financial and consumer sectors will bring convenience to people in need of consumer capital. The policy of SBV is that, in the near future, commercial banks will boost regulated credit to remote areas to reduce unregulated credit.
Commercial banks have been pushing for consumer loans for a long time, but the market has only really developed and competed in recent years when more financial companies joined. In particular, the market welcomed the participation of 100 percent foreign-owned financial groups or joint ventures with domestic partners when acquiring 49 percent shares of domestic finance companies.
Noticeably, mainly financial corporations from Japan and South Korea are interested in Vietnamese financial companies recently, with the goal of dominating Vietnam’s financial and consumer markets which are considered huge potential, but have not been fully exploited, even though there are many financial companies.
According to SBV, the agricultural and rural areas have an increasing demand for consumer loans; the number of credit institutions expanding to this area has been going up, promptly providing capital for agricultural, forestry and fishery production and for rural development, contributing to pushing back shadow banking.
Financial and banking expert, Can Van Luc said that personal consumption now accounts for 66-67 percent of GDP and plays a very important role for economic growth. In order to serve personal consumption needs, if regulated credit does not develop, shadow banking will have room to flourish. In addition, lending activities with an “exorbitant” interest rate need to be strictly controlled.
Consumer credit is a solution to the financial needs of customers who are not eligible to access bank loans. But this relatively new market still has risks that both lenders and borrowers need to consider. Typically, consumers only look at the utility of the service without carefully considering the ability to repay, or the necessity of the loan, leading to spending beyond the repayment capacity. Until they fall into debt, delay in payment, borrowers just start reviewing the contract, complaining about interest rates, penalty fees instead of actively discussing with counsellors about these factors before deciding to sign.
The interest rate for consumer loans of financial companies is somewhat higher than that of banks also for its reasons. First of all, the cost of capital of a finance company is high because there is no capital mobilisation function. The value of low-cost, short-term loans (about 6-18 months) leads to higher debt recovery, loan management and service costs. Because the consumer finance industry has high risks, the interest rate level will be higher than that of retail or commercial banks.
According to the leaders of finance and consumer companies, when the costs are split, the interest rate is reasonable and the profit from a loan is relatively appropriate to the cost that the company has to pay. Moreover, the interest rate of finance companies is also adjusted for many different customers, depending on the quality of customer files and the risk of unsecured loans. Risk level is determined according to the criteria such as income level, credit history.
Following Dr Le Xuan Nghia, an economist and banker, the fact that financial and commercial banks boost consumer lending will contribute to limiting the growth of the oncoming shadow banking. However, in the context that financial companies are gradually taking over market share, the requirements for loan documents are simple, so many customers do not care much, until the debt is repaid. To help people get closer to consumer capital, financial companies should consider lending rates at a more appropriate level.
