Live roundtable talk on consumer finance

"Roundtable on consumer finance: looking for an opportunity in a $26.5 billion market "

This morning (July 12), Vietnam Investment Review hosted a roundtable talk focusing on the amazing developments of the consumer finance market in recent years.

Roundtable talk on the consumer finance market held at the VIR headquarters

VIR to hold roundtable talk on consumer finance market

A $26.55 billion market

Opening the roundtable talk, VIR's editor-in-chief Le Trong Minh affirmed that Vietnam, with a population of 95 million and enormous consumer demand, possesses advantageous conditions and enormous market for the development of consumer finance.

Le Trong Minh, editor-in-chief of VIR

According to StoxPlus’s report on the consumer finance industry in 2016, the market has witnessed amazing leaps in recent years.

Particularly, total outstanding loan of the Vietnamese consumer finance industry went from $7.3 billion in 2012 to $26.55 billion in 2016. While consumer finance sector still only accounts for a small portion of the GDP (9.8 per cent by the end of 2016), the segment is recording incredibly fast growth.

Dr Can Van Luc

According to Dr Can Van Luc’s latest report in 2016, the consumer spending accounts for 78 per cent of the total GDP, tantamount to VND3.8 million billion ($167.1 billion). Therefore, each percent increase in consumption equals to VND38 trillion ($1.67 billion) in the economy-a number that can help Vietnam reach the 6.7 per cent GDP growth target in 2017.

However, there are issues following the quick growth of the consumer finance market. This is the reason why VIR holds the roundtable “Developing Consumer Finance - Opportunities to Foster Consumption and Economic Growth.”

Challenges for state agencies

Representative of state agencies, Nguyen Tu Anh, deputy director of the Monentary Policy Department of the State Bank of Vietnam (SBV), said that consumer finance has largely contributed to economic growth, as its proportion of Vietnam’s GDP is getting bigger (78.34 per cent in 2016). In Asia, Vietnam is one of the countries with the highest portion of consumer finance in the total GDP.

Nguyen Tu Anh, deputy director of the Monetary Policy Department of the State Bank of Vietnam

With more than 95 million people, 70 per cent of whom are aged 15-64, and an economic growth rate of 6 per cent, the Vietnamese consumer goods sector is very attractive. Over the last ten years, a wide range of famous international retailers have entered the Vietnamese market, such as Circle K, Shop & Go, FamilyMart, BigC, Fivimart, and Citimart, and also, numerous domestic retailers are growing strongly, like Vinmart, Coopmart, and Mobile World.

According to Tu Anh, over the last five years, consumer finance in Vietnam has grown outstandingly, and this growth originates from both demand and supply. However, the boom of consumer finance is also a challenge for state agencies. The 2003 credit card crisis in South Korea is a clear example of the risks from rapid growth of consumer finance.

Since 2016, SBV has issued two important circulars, Circular No. 39/2016/TT-NHNN and Circular No. 43/2016/TT-NHNN, to adjust financing activities, including consumer finance. These regulations not only facilitate consumer finance, but they also protect borrowers from high credit risks by strictly regulating transparent interest rates and detailed loan limits.

However, Tu Anh added that Vietnam should have more regulations to protect borrowers, as it means protecting credit institutions. The case of South Korea is an example. South Korea faced a crisis of credit cards in 2003 because its banking system had over-promoted consumer finance in 2000.

“The consumer finance market will strongly develop in Vietnam. Customers of consumer finance will increase, and farmers as well as other people with little knowledge about laws and finance, may be easily hurt by competition in consumer finance. This requires more strict regulations to protect borrowers and their legal benefits,” Nguyen Tu Anh said.

In Singapore, borrowers can resort to a lawsuit if lenders illegally ask for their money back. Borrowers, when in trouble with paying off debts, can negotiate with lenders for other ways to pay.

Bank and consumer finance interest rate disparity

Pham Xuan Hoe, deputy director of Banking Strategy Institute of the State Bank of Vietnam, said that while the interest rate of consumer finance companies seems quite high at first glance, it is important to consider the differences between the nature of consumer finance companies and banks.

Pham Xuan Hoe, deputy director of Banking Strategy Institute of the State Bank of Vietnam, speaking at the roundtable talk

For a start, consumer finance companies have a vastly different clientele from regular banks, consisting mostly of people unqualified for banking loan risk assessment, ranking in a higher risk level.

Second, the higher risk level leads to higher risk premium. Consumer finance companies also frequently offer small loans without collateral for home appliances, motorbike or emergency spending, all the while using quick and convenient procedures.

Third, unlike commercial banks, without the capital from deposits, consumer finance companies have to operate on capital from equity, bond or loans from commercial banks.

Finally, operating costs accompanying each loan is quite high. Since short-term, small-value loans incur the same costs for procedures, such as evaluation and filing, consumer finance companies have to use higher interest rates to make up for the expenses.

Hoe also recommended a number of ways to improve the consumer finance market: promoting a more accurate view of consumer finance, implementing financial education at schools, and using BigData on judicial records to keep accurate credit score.

Warnings against black market consumer finance

Economist Dr Le Xuan Nghia said that the growth of consumer finance has reduced black market borrowings. However, the 70 per cent portion of consumer finance in the total GDP is too high, while the amount of savings is low.

Besides, the fact that consumer finance in Vietnam is proportionally higher than in many European countries and the US is abnormal. Thus, Vietnam should develop consumer finance with strict regulations on registration, accounting, tax, monitoring, and other fields.

Economist Dr Le Xuan Nghia

Dr Le Xuan Nghia said that related agencies should review the achievements of the consumer finance market from last year.

In particular, most borrowings in Vietnam were taken up to finance home and car purchases, but some real estate firms let their employees borrow to purchase their products. This does not really create liquidity for the market. Thus, without close monitoring, consumer finance will be used for the wrong purposes.

Borrowers lack circumspection

Lawyer Truong Thanh Duc, an arbitrator of Vietnam International Arbitration Centre (VIAC) cum chairman of Basico Law Firm, agreed that consumer finance partly reduced black market borrowings.

Truong Thanh Duc, arbitrator of Vietnam International Arbitration Centre and chairman of Basico Law Firm

In particular, there are three main channels for consumer finance: pawnshops and borrowing from the black market, people’s credit funds and commercial banks, and financial institutions. Except for pawnshops and the black market, all these channels are legal.

Borrowing from the black market is a persistent problem, while commercial banks provide consumer finance with strict regulations. Thus, it is necessary to develop financial institutions, especially as the competition among financial institutions is not significant. In Vietnam, there are about five or six financial institution providing consumer finance and only three or four of them have strong operations worldwide.

Duc encourages borrowers to be careful when approaching consumer finance services. Customers who did not read their contracts carefully or did not understand every point may feel cheated when under the pressure of a hefty debt all of a sudden.

Interest rates, maturity, conditions, and calculation formulas are clearly stipulated in the contracts, but many borrowers do not care to read them carefully. As a result, when they find themselves paying higher interest than previously expected, they might feel cheated.

Consumer credit risk management

Nguyen Phuong Thanh, senior manager of Ernst and Young (EY) Vietnam’s Banking and Financial Advisory department, said that there are only a few consumer services available in rural areas.

Nguyen Phuong Thanh, senior manager of Banking and Financial Advisory department, Ernst and Young Vietnam

She also talked about lessons from other countries’ experience to approach rural areas. In particular, some developing countries with high population in rural areas, such as India, Bangladesh, Tanzania, and Brazil, have applied breakthrough ideas and achieved certain successes.

For example, in Tanzania and India, financial institutions utilise their local salesmen cooperatives, groups or organisations of women, who are knowledgeable about customers in rural areas, as well as geographical features in each locality.

Thanh mentioned consumer credit risk management as an important thing in consumer finance. To attract new customers, expand market share in the rural areas, manage credit risk efficiently, and maintain low levels of bad debts at the same time, according to Thanh, financial institutions should have new methods to approach customers, including assessing customers to decide to lend to them or not.

Thanh proposed some possible solutions, such as sorting customers in rural areas into different segments to have appropriate lending policies, or dividing customers into self-help groups, a successful model in Bangladesh. Each group would have five members who all put forward a sum of money. However, if one of them fails to pay off their debts, the others’ proposals for borrowing will be rejected.

“Although this is only a micro-method to approach financial services, it can be applied to consumer finance services. Financial institutions may approve an individual’s loan, but this loan must be guaranteed by a self-help group or an organisation to avoid credit risk for customers,” Thanh said.

Potentials of Vietnamese consumer finance market

Dang Thanh Hung, marketing director of FE Credit, said, “We believe that this market’s growth rate will remain high and as Vietnam has a young population, consumer finance in Vietnam has much room to develop.”

Dang Thanh Hung, marketing director of FE Credit

He added, “FE Credit focuses on working-age customers in the low and middle income segment, most of whom may be workers or small retailers and fly under the radars of commercial banks. Without FE Credit, most of these customers would resort to the black market. With more reasonable regulations, such as the Circular 43, the limits of consumer finance have increased by VND10-100 million ($440-4,400) for each loan and FE Credit offers various kinds of loans, such as loans for cash, loans for mobile phones or car purchases.”

FE Credit has the greatest variety of products among all consumer lenders at present. Besides, it has more than 1,000 salespeople, cooperating with 5,500 partners at many electronics or mobile phone selling points.

“We are confident that we will enhance our position in the coming period,” Hung said.

Need for a common voice

Dam The Thai said that 60-65 per cent of the Vietnamese population are of working age, and 50-60 per cent of them are in the low- and middle-income segment, earning VND10 million ($440) per month. However, over the last ten years, consumer finance served one third or even one fourth of customers borrowing needs. The number of customers did not decline, in the future they many still have need for more consumer finance.

Dam The Thai, general director of HD Saison

He insisted that consumer finance has special meaning to social stability. For example, there have been many borrowers who had borrowed from the black market and were badly hit by falling behind the payment schedule. The existence of financial institutions will help people avoid black market lenders.

Thai said that at present, 60-70 per cent of sales in FPT shops are thanks to HD Saison financing. Consumer finance focuses on mobile phones, electronics, and motorbikes, but people still need financial companies to provide more consumer loans. HD Saison will have more diversified loans, such as loans for weddings and for supporting students, just to name a few.

“When we have enough time, we can reduce the time for appraisal and reduce lending interest rate, because at present, frauds are commonplace, which makes debt collection difficult and raises expenses,” Thai said.

Besides, Thai added that there is a correlation between the development of consumption and the economy, but these matters need to be studied in depth by the SBV and other related agencies.

“Currently, there is no association to represent financial institutions with a common voice. Competition among financial institutions benefit customers, but unfair competition should be eliminated, thus, it is necessary to have an association to arbitrate conflicts,” Thai said.

Later on in the discussion, Dr Can Van Luc stated that Vietnam had much to lose on a potential interest rate ceiling. There is essentially no interest rate ceiling since 1993, and developed countries, such as Japan and the US, have never introduced one because it is anti-market and will result in credit constraints. Banks and finance companies will not want to issue loans when the risk is high, while interest rate is capped at 20 or 30 per cent.

The SBV and other management agencies will take measures to regulate extreme issues, such as payday loans, since it is much like being a loan shark in disguise. Services like Uber, Grab, and Bitcoin will continue to exist for a long time, which is an inevitable trend. It is not wise to ban all these services, the issue lies in how to manage them effectively.

Dr Luc also added a few cautionary words for consumers: First, do not let friends and family arbitrarily borrow your ID or sign credit contracts for others. This is a mistake, and many people, especially in rural areas, have signed credit contracts without knowing it.

Second, read the terms and conditions, interest rate, and payment terms carefully.

Third, do not hesitate to approach banks and finance companies just because of complicated procedures.

Fourth, consider your financial capabilities. It would not be wise for someone with a VND10 million monthly income to take out a loan of 100 million.

Finally, remember to pay on time or you will face very high penalty charges.