Vietnam's consumer finance market holds significant potential for future development, attracting the interest of foreign companies.
Quickly paying via credit card at a mobile phone shop in Hanoi, Ms Tran Le Tram, a 27-year-old PR officer, was happy to hold the latest-version smartphone in her hands. Rather than saving up, though, she preferred the “borrow and buy now, pay later” approach. Her friends do likewise, she said, and it has indeed become a more common way of purchasing among Vietnam’s younger generation. People like Ms Tram, living and working in large cities, have taken to the “borrowing-to-buy” culture with relish, with consumer lending services spreading throughout the country and a keenness being expressed by foreign companies to get a piece of the action.
Vietnam’s consumer finance market has picked up a great deal over the last five years. Besides commercial banks, financial companies have also appeared in the market and met demand for consumer lending to different groups of consumers. PPF Vietnam, which owns the Home Credit brand, believes in the potential of consumer lending in Vietnam as it has become increasingly popular over the last few years, especially among young consumers. The 20-30 age bracket accounts for 50 per cent of all the company’s customers. After five years it enjoyed dramatic growth in 2013 with net profits doubling and after-tax profits increasing five-fold compared to 2012.
Partnering with PPF and ACS, a trade finance company, since 2011, Thegioididong JSC, which owns two brands, Thegioididong.com and dienmay.com, rapidly expanded its product sales using the hire purchase method, which is a type of consumer loan, in all its 220 shops nationwide after piloting the model for nine months at its five Ho Chi Minh City shops and earning VND1 billion ($46,500) a month. “The hire purchase model now accounts for 18 - 26 per cent of our total sales,” said Mr Le Huy Toan, Director of the model at Thegioididong. The model is now not only available in its distribution network but also at other local retailers.
Policies nurture growth
Consumer lending, primarily by commercial banks, first appeared in Vietnam in the late 1990s as part of retail banking services. It was anything but popular, though, according to Mr Nguyen Tri Hieu, a local banking and finance analyst. There were 12 State-owned finance companies operating at the time, but their main business was serving the activities of their parent group, with only a few providing individual loans. Existing government policies were the main reason so few were promoting loans to consumers, coupled with a long-standing mindset among consumers that purchases should only be made when money has been saved. Any thought of taking out a loan triggered anxiety.
The majority of lending activities remained housing loans, for purchase or home improvement, and loans for motor cars. Bank credit cards were mostly still targeted at high-income earners, who were very much in the minority in the country. The market changed in 2008, with corporate lending facing difficulties from the financial crisis and non-performing loans (NPLs) beginning to soar. Local banks found that loans to individuals represented a much better growth model. The Mekong Development Bank (MDB), VP Bank and HD Bank turned to retail banking/consumer finance strategies to improve their bottom line. The total consumer finance market reached $8.2 billion in 2010, accounting for 8.1 per cent GDP and 6.5 per cent of all loans in the country. By 2012, however, it had fallen to $4.4 billion as the economic downturn started to bite and the central bank’s credit tightening policies discouraged consumer lending.
Consumer loans are currently classified as “non-production loans” and include real estate loans, securities loans, and consumer loans. Consumer loans at commercial banks consist of real estate, vehicles and credit cards, which account for 96 per cent of all consumer lending. In early 2011 the central bank asked commercial banks to cut their non-production loans (mainly real estate loans, which were resulting in many NPLs) in a bid to tighten credit and curb inflation. This resulted in the overall non-production loan ratio falling to 15 per cent by the end of end 2011 and to 11.3 per cent by mid-2012.
The consumer finance market then began to recover in 2013. Total loans were $8.8 billion, or 5.4 per cent of