Landscape shift in consumer finance

Can Van Luc - Senior financial expert

The country’s regulatory system for the consumer finance market has been constantly improved with increasingly concrete regulations about the operation of financial firms, from Decree No.79/2002/ND-CP back in 2002 on the organisation and operation of financial firms, to 2018’s Decree No.116/2018/ND-CP on credit policies for agriculture and rural development, among others.

On that basis, the State Bank of Vietnam (SBV) has enacted concrete regulations to monitor operation of non-banking credit institutions starting with 2008’s Decision No.01/2008/QD-NHNN on opening and terminating operation of representative offices of non-banking credit institutions, and followed by various circulars on lending activities, consumer loans, regulating consumer lending of financial firms, and more. Hence, consumer lending activities of financial firms have become increasingly transparent.

Vietnam’s consumer credit has been galloping in the past decade. The total of consumer credit outstanding balance amounted to about VND1.8 quadrillion ($78.3 billion) by the end of 2020, accounting for 20 per cent of total outstanding balance of the economy, signifying 2.5-fold compared to 2012 (about 8 per cent).

Property-oriented credit came to VND1 quadrillion ($43.47 billion), accounting for 55.5 per cent of the total. In the past five years, consumer credit (including housing-oriented credit) grew an average 20 per cent annually, deemed as fairly positive over the whole sector’s credit picture.

Growing involvement

If the housing-oriented credit was excluded, consumer credit in the country approximated VND0.8 quadrillion ($34.78 billion), making up 8.7 per cent of total outstanding balance of the economy, much lower compared that in regional countries like Malaysia, China, Thailand, Indonesia, and South Korea where consumer credit (excluding housing-oriented credit) represents 15-35 per cent of total outstanding balance. This attests to the huge potential for development of Vietnam’s consumer credit segment.

Of which, the share of financial companies in total outstanding balance of the economy has grown significantly from less than 1 per cent in 2011 to 16.3 per cent in 2020 equal to about VND130 trillion ($5.65 billion). The remainder is the hands of commercial banks and credit funds (holding about 75 per cent), and other financial institutions (about 8.7 per cent).

Based on information on the websites of leading players FE Credit, Home Credit, and HD Saison, their total customer count is about 30 million with 37,000 service points.

Financial firms have developed a network of loyal customers who have often used their services, indicating a remarkable change in consumers’ behaviour.

Simultaneously, the market scale is highlighted by growing involvement of foreign investors into local financial firms. Foreign financial firms have received large capital injections from parent companies or new setups have been on the rise, with eminent cases being Prudential Vietnam Finance Co., Ltd., which was bought by Shinhan Card to form up an inclusive finance ecosystem together with Shinhan Securities and Shinhan Life; or Lotte Finance, which is a subsidiary of Lotte Card, South Korea’s leading credit card issuer possessing the biggest retail and service network in that country.

Consumer finance’s products and services have become increasingly diversified in the past decade, attracting different customer segments in diverse areas. Most typical items are cash borrowings, or lending to buy household utensils, electronic items, handsets, computers, and transport vehicles, among others. The consumer list also covers a group of trendy products akin to some developed nations like beauty care and healthcare packages.

Significantly, consumer lending has been pivoting from usage of traditional methods to best avail of technology benefits in seeking customers or doing marketing. For instance, FE Credit has availed of its modern IT system to provide online lending service to more than 230,000 loans, averaging 350 loan items per day via the $NAP app.

According to the SBV’s figures, by the end of 2020, Vietnam was home to 16 operating financial firms with total charter capital of about VND22 trillion ($956.5 million). And fintech firm FiinGroup says the global consumer finance market sank significantly last year due to COVID-19 impacts with revenue receding 25 per cent, bad debts almost doubling, leading to profits taking a 200 per cent nosedive.

In Vietnam, COVID-19 impacts have been less significant partly due to the fact that Circular No.01/NHNN dated March 2020 allowed credit entities to keep their debt groups unchanged, not having to make provisioning for the loans set for business support during the pandemic.

Development orientations

Vietnam’s consumer finance market has seen significant improvements in both quality and quantity over the past decade, helping to complement the economy with efficient capital sources, boosting consumption, pushing up production, diversifying products and services, while playing part in repelling black credit and stabilising social life.

Simultaneously, the consumer finance segment contributes to spurring Vietnam’s financial system development towards reaching the goals for cashless payment and financial inclusion.

Vietnam’s financial system and consumer finance particularly has been clearly developed and defined in important decisions and strategies of the banking sector.

Decision No.986/QD-TTg dated 2018 on the banking sector’s development strategy to 2025 with an orientation to 2030, and last year’s Decision No.149/QD-TTg on the national financial inclusion strategy to 2024 with an orientation to 2030, have set forth the target for the financial system to meet ever-burgeoning requirements for finance-banking services of the economy.

They strive to have in place a more comprehensive financial system by 2030 when most people and businesses will be able to access a full suite of finance-banking services at assured quality and reasonable costs. Black credit would be driven down significantly.

Meanwhile, consumer finance shall play a significant role in augmenting access to financial services to still unbanked population groups or those with little access to traditional banking services in rural and remote areas and areas with difficult conditions for socioeconomic development.

Along with this, consumer finance would contribute to economic rebound and development in three facets: helping to boost purchasing power; working towards reaching Vietnam’s financial inclusion goals; and creating more employment opportunities in society.