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Banking & Finance

Lending extending beyond banks

Released at: 08:15, 15/08/2018

Lending extending beyond banks

Photo: Viet Tuan

The consumer finance market is witnessing a golden age of development but some caution is needed.

by Khanh Chi

Having waited a few months since the iPhone X became available in Vietnam, Mr. Tran Trung Duc, a 27-year-old marketing officer at a furniture showroom in Ho Chi Minh City, decided to buy one for $1,300. With a monthly income of $520, he took out an installment loan with a consumer finance company. “They are easier to approach than banks, with simpler procedures for individual loans,” he said. “Though the interest rate is a little high, at between 15 and 20 per cent per annum, my personal circumstances mean I don’t meet the requirements of banks.”

Consumers like Mr. Duc have become a major customer segment of consumer finance companies as local spending habits gradually change. A recent Nielsen report noted that Vietnam’s consumer confidence index (CCI) reached its highest score (124 points) for a decade in the first quarter, up 9 points compared to the previous quarter on the back of increased positivity about local job prospects and especially the state of respondents’ personal finances.

Market soaring

Vietnam’s consumer finance market has seen robust growth over the past five years, given the country’s young population and rising incomes together with a greater willingness to borrow and easier accessibility to loans. According to figures from the National Financial Supervision Commission (NFSC), Vietnam’s consumer credit market has rocketed five-fold since standing at $10 billion in 2012. Growth in 2016 and 2017 was 50.2 per cent and 65 per cent, respectively. 

Increasing demand for consumption loans is the main reason “black market” lending or usury have also developed strongly, even more so than legal lending. “Regardless of black market borrowings, the proportion of consumer credit reached 18 per cent of the country’s total outstanding loans last year, from less than 10 per cent a few years ago,” said Mr. Nguyen Hong Khanh, Head of Analysis and Research at the Vietnam International Securities JSC (VIS). “Consumer finance has become a significant driver of economic growth and contributed up to 6.57 per cent of GDP as at the end of the first quarter of this year. This is behind the wave of both local and foreign finance companies and banks investing in the field.”

Mr. Kalidas Ghose, CEO of FE Credit, said Vietnamese people are earning more and have more disposable cash. “Rising incomes and growing aspirations among the population also give impetus to the higher demand for financial products and services, especially those that support consumption,” he said.

The consumer credit sector is expected to continue growing at a stable 30 per cent a year in the 2018-2020 period, according to Mr. Bernard Lapointe, Head of Research at Viet Dragon Securities JSC (VDSC). “Key players used to be limited to FE Credit, Home Credit, HD Saison, and Prudential Finance,” he said. “The market is now more competitive after the arrival of MCredit and Lotte Card.” 

Set to boom

The local consumer lending market has been attracting much wider attention from foreign organizations and domestic banks, with joint ventures and mergers and acquisitions (M&A) being common means of approaching the market. As the market leader, VPBank’s consumer lending arm, FE Credit, holds a market share of around 48 per cent and has mobilized $200 million from international financial organizations in the last year, including Credit Suisse AG and Deutsche Bank.

It maintained strong growth throughout last year and the first half of this year. Revenues were up 45 per cent last year, profits 55 per cent, and mobilized funds 36 per cent. “This growth story has now extended into the first half of 2018, with nearly 2.2 million new accounts and totaling 4 million for the first time, creating one of the largest customer bases among all financial institutions in Vietnam,” Mr. Ghose told VET. “The number of new contracts has risen 35 per cent annually for the first time and the loan balance 27 per cent.”

It has also announced it will continue accelerating the use of digital technology and big data to approach customers in a smarter and more efficient manner. The lender most recently deployed bots to automate the first set of processes with robotic technology, which helps in not only reducing costs and improving services but in enhancing control. It has once again been at the forefront of such initiatives and assumed a pioneering role in innovation by being among the first local businesses in Vietnam to deploy robotic automation in its processes.

Home Credit Vietnam, meanwhile, has installed nearly 10,000 PoS (points of sale) and provided 10 million loans of different types to more than 8 million customers, providing millions with no credit or a low credit history with their first-ever loans. Total loans in the second quarter of this year increased 11 per cent year-on-year, with key segments being consumer durables, vehicles, and cash. Total new contracts in the first half was 24 per cent higher year-on-year.

Risk management is well-controlled and its bad debt ratio is always under 3 per cent, despite its business model of working with riskier and unbanked customers, said Ms. Do Nguyen Van Anh, Head of Business Transformation at Home Credit Vietnam. It is the first non-banking financial institution (NBFI) in the country that both Fitch and Moody’s have rated, and the first consumer finance company to officially announce international credit ratings.

Credit-to-GDP gap & Consumer financing-to-GDP

Source: VDSC, 2017

With a strategy of targeting the young consumer segment and providing short-term lending, HD Saison, a joint venture between HDBank and Credit Saison, one of Japan’s leading consumer lending organizations, posted nearly $18 million in profit in 2017, an increase of 17.9 per cent against 2016. It currently has a network of 4 million customers and 12,000 POS nationwide. Consumer finance loans totaled $408.5 million last year, putting it in third place among lenders, following FE Credit and Home Credit.

Launched in 2016, Mcredit, the lending arm of MB Bank, had outstanding loans of $96.5 million as at the end of the first quarter of this year, with over 352,000 customers and 648 service points. Mcredit aims to be among the Top 5 consumer finance companies in Vietnam this year, with total outstanding loans of more than $254 million and pre-tax profit of around $13 million.
Lotte Card, a member of South Korea’s Lotte Group, outlaid $73 million on acquiring Techcombank’s consumer finance arm TechcomFinance, while the country’s Shinhan Bank paid $151 million for Prudential Finance after acquiring ANZ Vietnam’s retail banking division.

Growth and traps

According to some financial analysts, the net interest margin (NIM) in the consumer loan segment is up to 20-30 per cent, and at 5-7 times higher than at commercial banks has encouraged many to jump into the market. It’s a risky sector, however, which is why consumer finance companies impose high interest rates. 

Common issues for finance companies include a lack of professional management infrastructure to assist customers in accessing services and effective risk monitoring mechanisms, which still largely require human intervention, according to Mr. Khanh from VIS. “Poor debt collection activities have also caused angst and distrust among customers,” added. “Some credit companies make huge profits but hold bad debts and have a high probability of incurring losses. Lending without strict supervision can see a company collapse quite quickly if a recession strikes the economy.”

Mr. Lapointe from VDSC said that foreign credit organizations are taking greater advantage of the circumstances than local firms as they have financial resources overseas. “It’s not easy for a foreign bank to lend in Vietnam due to the many legal barriers and different customs, and we have therefore seen a wave of foreign investment into commercial banks and consumer finance companies in the country,” he said.

The State Bank of Vietnam (SBV) has basically completed the legal framework for the lending activities of financial organizations and banks and recently released documents reorganizing the country’s consumer lending activities. Mr. Nguyen Tu Anh, Deputy Head of the SBV’s Monetary Policies Department, told a recent conference in Hanoi that risk management experience among financial organizations and consumers in Vietnam remains limited, so the industry’s heated development may present challenges for credit institutions, local authorities, and consumers.

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