Consumer finance spreads its wings

Illegal lenders pass themselves off as legitimate consumer finance firms, giving the country an unwanted reputation

In Vietnam, formal financial services remain a luxury to much of the population. Informal providers, such as loan sharks or pawn shops, still thrive in rural areas and down small city alleyways. According to the World Bank, only 30 per cent of the Vietnamese population has a bank account, compared to more than 60 per cent in other developing countries in the Asia Pacific region. Moreover, only 37 per cent of Vietnam’s citizens borrow money from a formal lender, compared to more than 71 per cent in neighbouring Thailand.

However, downsides remain about informal financial services. Not only do loan sharks charge exorbitant rates, they also resort to harassment and violence when the borrower defaults. Assaults, kidnappings and even murder are possible, causing great disruption to the borrower’s daily lives. Last week, police officers arrested a loan shark in the central province of Thanh Hoa who charged his borrowers at 328 per cent, and another group in the central province of Ha Tinh who kidnapped and harassed a borrower.

“Financial institutions should develop consumer financial products to serve legitimate needs of borrowers, and help them gain access to formal financial services. We shouldn’t let people borrow from loan sharks,” said Dao Minh Tu, Deputy Governor of the State Bank of Vietnam, at a recent meeting on financial inclusion.

One possible answer is the use of consumer finance firms, who offer unsecured loans for small purchases such as electronics and motorbikes. Since their inception, these businesses have grown at a dramatic rate. The National Financial Supervisory Commission noted that credit from Vietnam’s consumer finance firms grew by 65 per cent in 2017, which is 3.5 times higher than the average growth of 19 per cent for all credit types.

According to experts, the market for consumer finance is high in potential as half of the Vietnamese population is under 40 years old, the middle class is burgeoning, and domestic consumption is booming. These consumers want easy access to banking services and loans, which is where the consumer finance firms come in.

In fact, over the past three years, scores of foreign and domestic banks have conducted mergers and acquisitions (M&A) in order to seize this opportunity. HDBank has been co-operating with Japan’s Saison to run HD Saison, Military Bank partners with Shinsei, and Techcombank sold Techcom Finance to South Korea’s Lotte Card. Prudential also parted ways with its consumer finance business, which was then taken over by Shinhan Bank. With their international know-how and local networks, these partners hope that their financial offers can steer Vietnamese consumers away from loan sharks.

“Shadow banking and loan sharks, which can reach millions of US dollars in size, are a burden to the Vietnamese economy. We should facilitate the growth of consumer finance firms and regulate them closely, so that consumers can benefit from transparent and legal financial services,” said economist Le Xuan Nghia.

According to some consumer finance firms, one particular challenge is to differentiate themselves from the loan sharks. For example, in Thanh Hoa alone, there are 130 loan shark groups who call themselves consumer finance businesses, together with 790 pawn shops with shadow banking services.

Nguyen Mai Long, CEO of Easy Credit, acknowledged that illegal money lenders disguise themselves as consumer finance firms. Consumers may find this confusing, especially due to low awareness and financial literacy. He believed Vietnam’s legal framework should be improved to protect both consumers and the official lending businesses.

“Some borrowers have fallen prey to loan sharks who pose as legal finance firms. This gives Vietnam’s consumer finance industry a very bad reputation,” said Long.

Another headache for consumer finance firms is competition, which means they must constantly innovate and set themselves apart from a rising number of rivals. One option is venturing into the credit card segment, which helps these firms retain customers and promote frequent borrowings.

For example, earlier this year, Lotte Finance announced that it would launch a credit card programme in Vietnam. This will become the first credit card issued by a South Korean consumer finance firm in Vietnam, and certainly not the last.

In 2018, Home Credit introduced a VISA credit card that it claimed is “superior to credit cards by banks” thanks to a range of waivered fees. The cash withdrawal fee is 3 per cent, which Home Credit said is much more reasonable than other cards in the market. Similarly, FE Credit said that consumers can borrow up to VND60 million ($2,600) via its Mastercard, whose annual charge and withdrawal monthly rates are said to be lower than commercial banks.

Other competitors, such as Japan’s JACCS, are also luring credit card users with promises of a 30-minute approval process, high withdrawal limits, low fees and other benefits. Perks include cashback, gifts, and discounts at various stores.

“The outstanding balance of each credit card in Vietnam is between $60 and $200. They allow consumers to make an immediate purchase, and consumer finance firms give access to Vietnam’s low-income and unbanked population,” said Dung Vu, researcher at StoxPlus Corporation, adding there is room for firms to issue credit cards here. In particular, credit cards ­accounted for only 2.8 per cent of all consumer debts in the country in 2017.

Kalidas Ghose - Vice chairman and CEO FE Credit Vietnam is an exciting market for consumer finance on ­account of two factors. One of them is that it has a very large population with those living in urban and semi-urban areas having their income levels rising rapidly. And the second comes down to the fact that the Vietnamese economy has been growing very strongly. Therefore the penetration levels are increasing. Having said that, the debt servicing ratio of the whole population has been maintained at a fairly conservative level and the risk in the portfolio and in the market have been ­contained very well. We do understand that over a period of time, as penetration increases, the growth rate of the industry would come down to more moderate and stable levels. Our five-year plans and our future plans in general are built on the 18-20 per cent growth rate. Dam The Thai - CEO, HD Saison The demand for consumer ­finance services in Vietnam is huge, especially in rural areas where banks don’t have much presence. Opportunities are plenty, given that only 20 or 25 per cent of purchases are financed by instalment loans. Moreover, Vietnamese consumers have an increasing need to buy or upgrade their electronics, motorbikes or home furniture, which is a good sign for us. I believe that the key to success for any consumer ­finance firm is innovation and risk management. ­Investments in human ­resources and technology are a must. We must also strengthen our relationship with retailers, because many of them still have yet to see the benefits of consumer ­finance in their business. Lastly, awareness is also very important, because ­consumers should be given accurate information about what consumer finance is and how we can help them. Can Van Luc - Economist Loan sharks are prevalent in Vietnam because official banking services have not reached all Vietnamese citizens, and most consumers want a quick loan without thinking about the risks associated with them. Moreover, these groups are very cunning and persuasive. Consumer finance is one good solution to this problem. They give financial access to the unbanked population, small businesses and those ­living in remote areas who would otherwise use loan shark services. I think consumer finance firms should develop a wider variety of products to meet ­different needs of individuals and businesses. They should also invest in risk and credit management, as well as ­working with banks or insurers to create an ecosystem of legal financial services.