Information asymmetry and lack of knowledge hampers consumer finance

Consumer finance remains unsafe for many people

FE Credit has caused a huge stir recently

Recent news that FE Credit will be inspected for disturbing consumers and its relation to the cosmetic brand DeAura which swindled customers into taking up sizeable loans, have dented people’s faith in the safety of consumer finance.

Newswire vnexpress.vn reported that many people received calls and messages from FE Credit to recover debts despite not having taken up loans. Some people even received 10 calls a day in the past six months. In addition, the threatening behaviour of FE Credit staff while attempting to collect debts was tantamount to harassment.

“This harassment is causing trouble, affecting people’s daily lives and business,” said a representative of the Department of Competition and Consumer Protection.

At May 22 roundtable discussion titled “Consumer Finance: Safety Management for Investors and Consumers” organised by VIR, Nguyen Thanh Phuc, head of Capital Raising at FE Credit, shared that with the huge number of employees (16,000), the risk of some affecting the company’s image while trying to reach sales targets is unavoidable.

“Communications help us learn from past issues to glean the right direction,” Phuc added.

Lack of financial knowledge and tracking debtors are obstructing consumer finance security

Economic expert Can Van Luc

Consumer credit is still a novelty in Vietnam and the majority of Vietnamese people do not have much financial knowledge. Economist Can Van Luc at the discussion said that many consumers do not understand their credit contracts, so they often feel cheated by finance companies.

“This lack of financial knowledge leads to widespread violations of the terms of credit contracts, which causes high penalties and forces financial firms to repeatedly call on debtors to collect. This has given financial firms a bad name and led to the recent scandal of FE Credit,” Luc added.

The Vietnamese consumer finance market is dominated by four major finance firms - FE Credit (50 per cent market share), Home Credit (17 per cent), HD Saison (13 per cent), and Prudential Finance (8 per cent). The dominance of the four financial firms restricts consumers’ choices and raises the risk of market manipulation.

Do Hoang Phong, CEO of the Credit Information Centre

When it comes to tracking debtors, asymmetric information between lenders and borrowers is the main reason of this issue.

According to Do Hoang Phong, CEO of the Credit Information Centre (CIC), finance firms have insufficient information of their consumers despite the strong efforts to identify customers.

At the same time, during consumer lending, finance firms commonly simplify lending procedures. For instance, with only a few identification papers, including ID cards, driver’s licences, and family record books, people can borrow money.

“With reduced lending procedures, information becomes even more asymmetric, making it increasingly difficult to track debtors or determine the actual purpose of the loans. Therefore, the loans may not be paid on time, increasing bad debts,” Phong emphasised.

At the discussion, Phong also advised financial firms to carefully study consumer information, including credit history which would help determine credit-worthiness.