Finance & Banking

Last updated: Thursday, February 21, 2019


Consumer Credit Risks

Posted: Wednesday, July 19, 2017

The consumer finance market has boomed over the past three years in Vietnam and seemed to go beyond current regulatory requirements. The rapid outburst of consumer credit in the midst of low deposits is posing latent risks to the monetary system. South Korea used to fall into a credit crunch in 2003 when banks rushed to lend money to consumers in 2000.

According to the 2016 Report on Vietnam consumer finance sector conducted by StoxPlus, the consumer finance market witnessed amazing leaps in recent years. Total outstanding consumer loan to GDP in Vietnam reached US$7.3 billion in 2012 and jumped to US$26.55 billion in 2016. The value was projected to surge to VND1,000 trillion in 2019, representing an average annual growth of 29 per cent.

Super profitable - highly competitive
Currently, the size of the consumer finance market in Vietnam has reached nearly VND600 trillion and may ruse to VND1,000 trillion in 2019. By profitability, consumer credit becomes a big pie that all banks and financial companies struggle to take. This picture can be sketched with data from Vietnam Prosperity Bank (VPBank). In 2016, among nearly VND15,200 billion of net interest income of this bank, the parent bank contributed nearly VND 7,100 billion with a growth of over 6 per cent from a year earlier and the rest mainly came from FE Credit Finance Company.

Net interest margin (NIM) of consumer credit, calculated by Viet Capital Securities (VCSC), is about 20 per cent, compared to the industry average of 2.9 per cent. Simply speaking, the bank will take a net income of VND2.9 for every VND100 it lends in the conventional way while it will take VND20 if the loan comes in the form of consumer credit.

More consumer finance companies have come into being in the past few years as the credit system witnessed many mergers and acquisitions (M&As) of financial companies. At present, the Big Four - FE Credit, Home Credit, HD Saison and Prudential Finance - hold over 80 per cent of consumer financial market shares.

The Big Four is also in a rush to build their point of sale (POS) systems and establish cooperation with retailers, especially with leading systems like FPT Shop, Tran Anh or The Gioi Di Dong.

In addition to rapidly expanding credit scales, finance companies also promote market development and personnel. For example, FE Credit enlarged its business system from 2,000 points of sale with 200,000 customers in 2012 to nearly 8,000 points with 2.7 million accounts after only four years. In 2016, FE Credit employed more than 14,600 employees, nearly double that of VPBank although its total assets valued less than VND30 trillion compared to VND200 trillion of VPBank's total assets.

With a skyrocketing growth of 29 per cent a year, consumer credit, mainly in the form of unsecured lending, is representing greater risks when players are in a rush to expand their market presences.

Authorities follow on
At a conference hosted by the Investment Review, a mouthpiece of the Ministry of Planning and Investment, Mr Nguyen Tu Anh, Deputy Director of Strategic Policy Department of the State Bank of Vietnam (SBV), said that consumer lending contributes to economic growth. Consumer credit to GDP ratio of Vietnam has kept going up, reaching 78.34 per cent in 2016. In Asia, Vietnam is among the countries with the highest consumer credit to GDP ratio. However, the outbreak of consumer lending is posing numerous challenges to State agencies. The credit card crisis in South Korea in 2003 was a clear example of the risk of excessively rapid growth in consumer lending. South Korea fell into credit crunch in 2003 after the banking system rushed to offer consumer lending in 2000.

From 2016, the SBV issued two important circulars: Circular No. 39/2016/TT-NHNN and Circular 43/2016/TT-NHNN to regulate lending activities, including consumer lending. However, there is a need for more tools to protect customers, also a way to protect credit institutions, he said.

The interest rate of consumer loans is three times higher than that conventional lending rate. Mr Pham Xuan Hoe, Deputy Director of the Banking Strategy Institute, said that the interest rates of finance companies are in essence an important response to this segment of customers as well as an official channel managed by the State, subjected to income tax payment.

With a cautious view, Dr Le Xuan Nghia, an economist, said consumer lending has helped reduce black credit. But its ratio of consumer credit to GDP of over 70 per cent is too high relative to smaller deposits, which is higher than many European countries and the US. This is not normal. Therefore, it is necessary to develop consumer credit in a systematic manner.

Meanwhile, borrowers should be careful enough to avoid unwanted outcomes. If they do not read carefully terms and conditions, they may have to pay excessive interest rates. Such terms as interest rate, maturity, conditions and formula should be provided in credit contracts for borrowers to consider.

Le Minh

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