Finance & Banking

Last updated: Friday, March 22, 2019


Risks to Borrowers

Posted: Friday, May 25, 2018

Consumer financing in Vietnam is making a super profit, while borrowers lack not only money but also financial knowledge and self-defence skills. Meanwhile, borrower protection regulations are lax.

Simplified procedures with shorter loan maturity terms, no collateral required and enthusiastic support from companies at the service pushed up consumer credit growth, albeit with some corollaries.

Consumer credit boom
Consumer loans reached about VND646 trillion as of late 2016, accounting for 11.7 per cent of total outstanding loans in the economy. In 10 years from 2007 to 2017, consumer lending constantly accelerated, rising 20 per cent per year on average, to have 20 million customers across the country. Mr Nguyen Tu Anh, Deputy Director of the Monetary Policy Department of the State Bank of Vietnam (SBV), noted that consumer lending has markedly grown in the past five years, averaging 29 per cent annually. According to experts, with a young population and rising income, the share of personal spending to gross domestic product (GDP) is as high as 67 per cent. Consumer credit is expected to rise 25 - 30 per cent annually in the coming years.

This trend persuades financial investment companies to expand their operations in Vietnam. Banks do not want waste this market either by speeding up consumer lending. According to the National Financial Supervision Commission (NFSC), consumer credit increased sharply from 2015 to 2017.

The share of consumer credit provided by State-owned commercial banks rose from 39 per cent in 2016 to 45.7 per cent in 2017, while the share of joint stock commercial banks fell from 47 per cent to 42.4 per cent, the share of finance companies and finance lease companies dropped from 9.3 per cent to 7.6 per cent, and the rest was held by foreign banks.

Dr Le Xuan Nghia, member of the Advisory Council on National Financial and Monetary Policies, said, “Banks rush to buy finance companies, then restructure them into consumer finance companies, making them their subsidiaries. As a result, banks avoid being criticised for providing looser loans while finance companies are not being subject to barriers to safe-haven standards. This is a big risk gap.”

Risks to generous spenders
To get a credit from finance companies, customers do not need collateral, while borrowing procedures are quick, simple.

However, many customers are entangled in high interest rate debts because they lack knowledge of risk in many cases. According to the Vietnam Competition Authority (VCA) under the Ministry of Industry and Trade, in recent years, consumer complaints have been mainly involved in finance companies.
According to the VCA, which protects consumers, infringements of consumers' rights tend to grow both in size and complexity, which may seriously affect consumer rights and interests.

Exorbitant interest rates of consumer loans are a risk. For example, interest rates of commercial consumer loans are 10 - 25 per cent per annum in commercial banks, compared with 55 - 84 per cent per annum at finance companies.

Financial firms explained that they impose such high interest rates because they are not allowed to raise deposits while they have to borrow money from banks to fund customers’ demands. Unsecure loans force them to apply higher interest rates to offset potentially high risks. Interest rates must also be proportional to risks when borrowing procedures are simple. Consumer lending is gradually expanded to farmers and unskilled workers.

According to a report by VCA, unclear and confusing information about interest rates is the most common complaint. In some cases, staff of finance companies pledges an interest rate of only 1 - 2 per cent per month but the actual rate shown on credit contract is 6 per cent. Or, in some cases, they pretend to be bank staff to gain the trust of borrowers, but they bring contracts with finance companies for them to sign.

Nevertheless, borrowers are still more vulnerable because of their written commitments. When disputes arise, they encounter more difficulty in the process of reporting and working with finance companies.

Authorities recommend clearer regulations because consumer finance companies will be hurt if borrowers become excessively indebted and insolvent.

To protect all parties involved, particularly borrowers, most countries prohibit implicit, confusing and ambiguous information in credit contracts. Dr Le Xuan Nghia, member of the Advisory Council on National Financial and Monetary Policies, said, “There is a phenomenon that banks are racing to purchase into finance companies and then restructure them into consumer finance companies and assign this business to subsidiary/affiliated companies. And, as a result, banks elude the role of providing looser loans and avoid confronting barriers to safety standards.”

Le Minh

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