Protecting investors at head of consumer finance concern

FE CREDIT is among groups in Vietnam embracing digitalisation while keeping consumers safe at the same time

The message was delivered at VIR’s fourth seminar on consumer finance in Hanoi last week on the country’s grand economic reopening, as well as challenges and opportunities for firms jumping onto the bandwagon.

Currently, Vietnam is home to 150 fintech firms which act as the lifeblood of the burgeoning financial technology sector. There are approximately 40 peer-to-peer (P2P) lending companies, including a number of so-called loan sharks with abnormally high lending rates, mostly from China. For example, one payday loan shark ran three companies (Vinfin, Beta, and Dai Phat) which provided cash loans via smartphone apps Vaytocdo, Moreloan, and VD Online. These subprime lenders offer loans to individuals who do not qualify by traditional lenders.

“It is not a well-regulated area, thus Vietnamese authorities should be understandably concerned about potential for fraud and abuse. This P2P lending sector is in urgent need for a well-tailored legal system,” said Nguyen Tu Anh, general director of the Department of General Economics under the Party Central Committee’s Economic Commission.

Market watchdogs also cautioned that dealing with late-paying customers might be a bitter pill to swallow for consumer finance players. Some firms previously had late-payment penalties but rarely enforced them.

“In extreme cases, some clients even initiated physical combat and threats to hurt consumer finance employees working in the field,” noted Tran Thanh Nu Tuong Vy, deputy general director at SHB Finance.

Echoing this view, Pham Xuan Hoe, deputy director of the Banking Strategy Institute under the State Bank of Vietnam (SBV) also said that in fact, protecting legal finance firms is of the utmost importance. “Many still believe there are so-called predatory lenders, but actually some scammers also display predatory behaviours. Relevant authorities should develop a legal system enhancing transparency and enforceability such that providers and participants are aware of obligations.”

Consumer finance companies, particularly from overseas, need a strong legal system to help protect their rights and remedies when the borrowers do not pay back their debts on time. In fact, not too many of them have succeeded. On the other hand, consumer finance companies at their early stage (below three-year-experience threshold) will likely encounter choppy waters due to the economic shock caused by the pandemic.

“If companies wouldn’t brace themselves for a better cushion, ample liquidity resources, or a stable operation structure, their performance would likely come up against a brick wall,” said Vy of SHB Finance.

“It is a daunting task for those newly-entered finance companies, which have not had base and profit accumulation, to find an appropriate customer segment and grow their credit,” Kim Jong-Geuk, LOTTE Finance general director, told VIR.

According to Jong-Geuk, one of the barriers for overseas firms is lack of customer awareness. Customers might have a tough time in choosing a trustworthy firm. In addition, they seem to be hesitant when accessing financial services due to some factors such as lending rates and public trust.

Business models are also likely to undergo meaningful change in light of SBV’s incoming limit on unsecured cash loans - a significant and high-margin lending segment for the consumer finance industry - although a transition period over the next four years provides a reasonable amount of time for businesses to adjust.

Circular No.18/2019/TT-NHNN dated last November limiting unsecured consumer-finance personal loans will also exert more pressure on the business models of more-exposed companies in Vietnam over the next few years. The rules highlight regulatory efforts to temper risks from rising consumer leverage, following aggressive consumer credit growth over the past few years. However, they may also push industry competition towards other product segments as lenders seek to grow.

“Consumer finance firms often have a high exposure to unsecured products and target low-income citizens more vulnerable to economic fluctuations,” said Anh from the Central Economic Commission. “A rally in unemployment caused by COVID-19 will likely hurt the overall debt-servicing-capacity of borrowers.”

The slowdown will weigh on consumer spending and consumer loan growth, affecting volume and profitability. Researchers at Fitch Ratings viewed Vietnam’s unsecured consumer finance companies as being at risk of asset quality deterioration in the current environment, as they are typically exposed to less affluent borrowers with more limited resilience against financial distress.

“Many companies rely heavily on wholesale funding, which in turn can expose them to potential refinancing risk if the disruption to the financial markets drag on. Market gyrations could therefore squeeze liquidity,” noted Hoe of the SBV. “Putting laggard customers on a tighter leash would impede firms’ profitability, but could help shrink unexpected soured debts.”

Le Trong Minh, VIR editor-in-chief, also cited the imperative demand for rudimentary knowledge of personal finance in the educational system. Too many young people fall victim to financial mistakes and learn personal finance the hard way, he said.

Moreover, there is becoming an urgent need for an information overhaul and cutting-edge technology adoption, since the age-old database of creditors is limited.

“The consumer financial services industry is now in the throes of a sea change. The demand for products such as AI-based credit scoring products, and app-based services will exponentially grow,” said economist Vo Tri Thanh.

Experts at Baker McKenzie noted tech-focused consumer finance companies from Singapore, China, Malaysia, and other countries wanting to expand their business to Vietnam. At the moment, the regulatory regime for fintech in Vietnam is still at the seed stage, which creates uncertainty for companies wanting to enter this space.

“Digital transformation will spur innovation across the industry. FE Credit is also in the process of developing a customer-centric culture while we have made a fair amount of progress on embracing digitalisation,” said Basker Rangachari, director of FE Credit Marketing Centre.

Dang Ngoc Duc - Former dean, School of Banking and Finance National Economics University In order to stimulate development of consumer finance, it is necessary to disburse the VND62 trillion ($2.69 billion) financial support package for poor people and businesses affected by COVID-19 in collaboration with the VND16.2 trillion ($704.3 million) package from the Vietnam Bank for Social Policies without interest to help the business community. In addition, local authorities need to simplify procedures for loans. Commercial banks and credit organisations should build small consumer loans with low interest and extend time for paying debt. Furthermore, it is necessary to educate people, especially workers and students, about the benefit of consumer loans. Especially, authorities need to manage the pawn and usury services, and investigate and destroy ghost companies’ applications offering illegal loans. Truong Thanh Duc - Chairman, BASICO law firm Local consumer finance, despite being promising, is still lacking legal frameworks, especially codes related to consumerism. Figuring consumer finance as banks is inappropriate as consumer finance companies are not allowed to mobilise capitals from citizens. That is one of the main reasons behind operating concerns. Lending money at an exorbitant high interest rate is still effective thanks to being able to get around the rules. Indeed, the demand for consumer lending is largely reflected by the evolution of usury in Vietnam (lending money at unreasonably high rates of interest). However, if consumer finance companies can meet the need of customers, this will not be an obstacle for local consumer finance. Handling usury activities is a great burden because usurers are commonly very good at circumvention. For instance, the interest rate outlined in a recent paper does not exceed 20 per cent, but the other kinds of interest are separated under many forms. Tran Thanh Nu Tuong Vy - Deputy general director, SHB Finance New development orientations will be shaped in the upcoming time, providing the opportunities for consumer finance companies to restructure operations are aligned with new models, and as long benefits of digital technology are taken advantage of in order to save costs and match new consumer lending trends. At SHB Finance, right from inception the company built up a solid operation apparatus that operates under direct guidance from parent bank SHB. Currently the Credit Information Centre (CIC) works on collecting, storing, analysing, processing, and forecasting credit information of individuals and organisations serving the operation of banks and credit institutions. The application of big data proves vital for finance firms to have much data for the process of evaluating and approving customer records. If the CIC is updated with the more data showing consumer payment behaviours such as information about social insurance, taxes, or bill payments, it will be very useful for the operation of consumer finance firms, helping them to minimise bad debts on the part of retail customers. Can Van Luc - Senior finance expert The protracted pandemic has put many customers into insolvency, posing growing default threat to the economy which has seen initial signs in China. As consumer finance firms are unable to raise capital from individuals, their finance comes from diverse sources such as through bond issuances or foreign loans. This reliance contains latent risks to refinancing due to uncertainties of the financial system. This kind of risk, however, is insignificant in Vietnam as current ratio of consumer lending on the total outstanding balances is still low at about 12.3 per cent (in 2019) compared to that in other countries. A recent survey by market research firm Nielsen points to a decline in consumer spending in the first quarter this year with nearly 70 per cent of consumer giving priority to saving. The trend of increased spending on food with reductions in other segments is forecast to hold on, even post-pandemic. These factors would strongly affect retail consumer trend in many years to come, reshaping the way consumers choose their products, thus prompting the need for consumer finance companies to revise their operation and business strategy to match the situation. Swaroop Shah - CEO, Validus Vietnam Vietnam’s growing economy is opening up many opportunities for foreign players, particularly in the consumer finance as well as fintech space. Existing gaps in financial inclusion will also pave the way for further potentials. However, foreign enterprises may also likely face many challenges stemming from differences in cultural nuances and lack of familiarity to the local regulatory framework. Our view is that any fintechs or consumer finance firms entering the market should do so responsibly and within a framework of good governance, as this will be key to building and gaining consumers’ trust in digital platforms. We look forward to a clearer regulatory framework as that will ensure sustainable and responsible growth of the industry. Kim Jong-Geuk - General director, LOTTE Finance To companies newly entering the market within the last few years, especially foreign-invested ones, the implementation of measures in response to the new regulations will become more challenging. This is because some of these companies do not have a big customer base and are not backed by any commercial bank. Many reports on Vietnam’s consumer finance market reveal that cash loans are the most competitive product differentiating financial companies from banks. The durable loan – especially for electric equipment consumption – goes to the saturation phase while credit card services of finance companies find it hard to compete with those of banks. Therefore, most of these companies focus on direct disbursment loans, investing significantly on IT infrastructure systems compatible with this mainstream product during the market penetration stage. An immediate system renovation and restructure in the early strategic years to suit the new product portfolio will put much more pressure on these brand new financial companies.