Breakthrough Year for Consumer Loans

According to experts, the development potential of consumer finance in Vietnam is enormous and predicted to surpass 10 per cent of gross domestic product (GDP) by 2020.

 

Dr Tran Hoang Ngan, Member of the Economic Committee of the National Assembly and Rector of the Ho Chi Minh City Finance - Marketing University, said outstanding consumer credits in the United States exceeded US$3 trillion or about 20 per cent of its GDP at the end of 2013, exclusive of home-mortgage loans. This figure in the United Kingdom was nearly 14 per cent of GDP and over 7 per cent of GDP in Germany and France. Similarly, in Asia, Malaysia reported its consumer credits equalled 24 per cent of GDP (excluding residential mortgages). Consumer loans thrive in developed countries because they meet the needs of many, many people with very quick and simple procedures.

 

Indeed, consumer loans are popularly and diversely offered in developed countries in the world with many combined forms like between commercial banks and financial companies with companies (real estate, equipment and asset trading like automobile, motorcycle and other assets) to sell financial products to borrowers. Lenders provide loans with reasonable interest rates and borrowers pay principals and interests born. “As banks do not meet credit demands for purchasing motorcycles, cell phones or utensils for daily life, consumers can go to finance companies. Meanwhile, consumption plays a big role in economic development; thus, consumer credit is of special significance,” said financial specialist Nguyen Tri Hieu.

 

In Vietnam, despite being a new form, consumer lending has gradually asserted its role in the economy. According to the Vietnam Competition Authority (VCA) under the Ministry of Industry and Trade, consumer credit demand is now very high, particularly low-valued loans and loans on instalment to buy consumer electronics, laptops and telephones. According to statistics, by the end of 2014, total consumer loans in the credit institution system in Vietnam valued over VND200 trillion, equivalent to 5.3 per cent of GDP.

 

Vietnam needs a regulatory framework for consumer lending to harmoniously protect consumers and regulate credit institutions according to international practices.

To be fair, consumer lending in Vietnam has recently helped improve livelihoods of many people, but there are still different views on this form of credit. For example, it is said that high interest rates and unclear information are obstacles to consumer loan development. There are a lot of reasons for this reality, including responsibility of consumer finance companies. However, there are also reasons from consumers. To quickly complete borrowing procedures, many skip inspection steps and information reference or carelessly sign contracts which may lead to certain risks. Negative information quickly spreads among the public, resulting in consumer hesitancy to consumer loans.

 

Specialist Le Dang Doanh said, to clear those bottlenecks, the government needs to have clear, open regulations on legal frameworks and close market supervision. Specialist Nguyen Tri Hieu said consumers need to consciously choose prestigious financial companies to avoid falling into “interest rate traps.”

 

Dr. Nguyen Thi Kim Thanh, Former Director of the Strategy Institute of the State Bank of Vietnam (SBV), said a regulatory framework for consumer lending is needed to harmoniously protect consumers and regulate credit institutions according to international practice and fitting with reality in Vietnam, coupled with improved dynamism, accountability and transparency in consumer lending of credit institutions, create more suitable products for Vietnamese people based on their demand and income.