Vietnam’s risks ceding ground in financial leasing activities

The medium and long-term capital demand of the Vietnamese economy is estimated to range from $29 billion to nearly $42 billion per year, yet still heavily relies on bank credit, with financial leasing occupying only a minimal portion of the market.

Vietnam’s risks ceding ground in financial leasing activities, Photo: DucThanh

Financial leasing, a common channel for providing long-term capital in many developed countries, remains relatively small in Vietnam.

According to the Vietnam Financial Leasing Association (VILEA), the outstanding financial leasing debt-to-GDP ratio in Vietnam is very low, at less than 0.4 per cent, while it is 22 per cent in the United States and 18 per cent in China.

“The outstanding financial leasing debt in Vietnam is still tiny and cannot share the burden of providing medium and long-term capital with banks and corporate bond channels,” said Pham Xuan Hoe, secretary-general of the VILEA.

Financial leasing is an optimal form of medium- and long-term credit, helping businesses access capital easily without collateral. Unfortunately, Vietnamese enterprises, especially smaller ones, are not familiar with it, while large enterprises consider it insufficient for capacity.

In 2023, the debt of financial leasing companies group increased by 13.75 per cent, reaching $1.55 billion. In 2024, the credit growth of this group of companies is expected to rise by about 20 per cent, reaching $1.875 billion.

Enterprises expect that the Law on Credit Institutions 2024 (LCI), effective from July, will open up many opportunities for financial leasing companies. Specifically, the law allows financial leasing companies to establish subsidiaries to handle and exploit bad debts. At the same time, this law also allows small financial leasing transactions below around $4,150 without the need to control the purpose of capital use.

Hoe hopes the State Bank of Vietnam (SBV) will soon issue guiding decrees on financial leasing within the framework of the LCI so that companies in this sector can take advantage of opportunities. Additionally, he expects that relevant ministries and agencies will promptly resolve other obstacles to facilitate the market.

“If we don’t open up and synchronise legal corridors, we will surrender the market for asset leasing to foreign enterprises. Currently, many foreign firms are willing to sell equipment with deferred payments spanning three to five years to Vietnamese businesses, akin to financial leasing. They embed technology chips into the equipment, and businesses make periodic payments every three months; failure to pay results in the equipment being deactivated,” Hoe said.

Financial leasing companies are currently facing significant obstacles with Circular No.24/2023/TT-BCA regarding the issuance and registration of motor-vehicle licence plates. Some changes in new policies and procedures for registering and managing motor vehicles have created additional legal barriers, increased compliance costs, and lost opportunities for the development of financial leasing debt.

According to the VILEA, enterprises have proposed measures to reduce waiting time due to the cost and time of moving vehicles to registration places; high licence plate issuance costs, or proposed exemptions or reductions in transportation fees for customers renting in the province where they reside, while the vehicle plates are from Hanoi or Ho Chi Minh City because the headquarters of the financial leasing company are located there.

The VILEA’s statistics indicate that the outstanding debt for various types of car leasing in 2023 was $275 million, up 17.3 per cent compared to the same period in 2022. Preliminary statistics from four member companies indicate that the total amount of credit contracts not implemented due to Circular 24 regulations amounted to over $16.67 million. Moreover, the VILEA also believes the SBV needs to re-regulate the risk safety ratio for financial leasing companies, as the current 20 per cent ratio is too high.

Nguyen Quoc Hung, secretary-general of the Vietnam Banks Association, believes that the LCI fundamentally expands opportunities, maximising convenience for financial leasing companies. The issue is whether financial leasing companies have the capacity to catch market opportunities.

“The law has opened up a vast market for financial leasing companies, with no restricted subjects and favourable legal corridors. The remaining issue is whether companies in the sector can catch the opportunity, how businesses in need of long-term capital will consider financial leasing instead of just issuing bonds or borrowing from banks,” Hung said.