Thriving online lending carries potential risks

Rising online lending activities need to be regulated, not discouraged

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A boom in online lending

Recently, online lending is becoming more and more popular due to the wide range of benefits it offers to borrowers. With a higher amount of deposits received and lower interest rate, financial institutions that offers online lending services are luring numerous borrowers.

For example, according to an advertisement of huydong.com, which belongs to new fintech startup Finsom JSC, it offers a deposit rate of 10-20 per cent per year for depositors. This is nearly doubled or triple of the deposit rate offered by commercial banks. Meanwhile, borrowers have to shoulder a similar interest rate plus an addition of 1-1.5 per cent per year only.

Huydong.com’s founders said that this model bridges the gap between unbanked/underbanked individuals and investors by creating an accessible channel for individuals to acquire loan financing and for investors to earn solid fixed-income returns. Putting it more simply, this model is like Uber or Grab, which created a system connecting people with different demands so that all parties will benefit.

Besides huydong.com, there are many other financial institutions that offer online lending, such as Tima, SHA, and Mobivi, with an average annual loan interest rate of 20-30 per cent (including fees charged).

According to Dr Bui Quang Tin from the Business Administration Faculty of Banking University of Ho Chi Minh City, online lending is peer to peer (P2P) lending, a business model that is flourishing all over the world.

“P2P is a kind of direct and unsecured lending. It connects people with a shortage and surplus of funds by offering better deals that will benefit both through an online platform with innovative technology,” Tin said.

Tin believed that with outstanding benefits, P2P models will strongly develop in Vietnam, especially when the review process and requirements of commercial banks in Vietnam are too complicated and strict. Now individuals and small- and medium-sized firms will find it easier to access the funds needed.

High risk high return

P2P lending has brought about plenty of benefits for borrowers by offering loans without collaterals, short review period, and reasonable loan rates. However, this new kind of lending contains certain risks.

The first risk may come from P2P enterprises themselves. P2P may call for deposits from investors, but instead of lending this money, they may use them for other personal purposes and then fail to pay off, which leads to the collapse of the whole system.

Thus, Tin proposed that there should be regulations on how P2P enterprises manage funds. In particular, P2P enterprises should allow a third party to manage outstanding loans to avoid damages for depositors if these enterprises go bankrupt or P2P enterprises should buy insurance for each deposit received.

In addition, according to many experts, lending services of many enterprises should be monitored closely. F88.vn is a good example. Registering to operate as a pawnshop, F88.vn has started offering loans with a very high annual interest rate of 50-70 per cent.

Dam The Thai, general director of HD Saison Finance Co., Ltd., a non-banking financial institution with 100 per cent foreign capital, said that the State Bank of Vietnam (SBV) should study carefully the P2P lending model. P2P lending itself is good, and it may largely contribute to the economic development, but there may be some financial institutions abusing borrowers’ narrow knowledge about this new model to offer super high interest rates, thus, borrowers may be burdened by an incredibly huge debt impossible to pay off.

Also, many experts agreed that online lending is an inevitable trend and cannot be forbidden.

“Instead of banning, SBV should have measures to prevent P2P companies from acting as black market lenders at a very high interest rate, because we cannot ban this lending model forever. It is an evitable trend, a product of creativity in the era of digital banking. We should accept its existence and introduce administrative measures to limit risks for attendees,” economist Dr. Can Van Luc said.

Besides, many experts said that there have been almost no regulations for the operation of the P2P model in Vietnam. Thus, SBV should enact new regulations soon to ensure its legality and strong development.