Banks tended to promote retail lending and consumer loans to maximise profits in the context that credit growth seemed to tighten.
However, high profit was always in parallel with considerable risks. Although there was no specific disaggregated data, consumer lending certainly contributed a significant part to the overall picture of the banking industry’s non-performing loans.
Consumer loan boom
‘Are you in need of money to make plans to marry, travel, play or consume, buy furniture, household appliances without wanting to mortgage the security property?’. ‘Quick loan without mortgage with flexible interest rate to meet all spending needs conveniently, without collaterals.’ ‘Need money? Immediately in 5 minutes’. These were the words promoting consumer loan products and overdraft loans via cards, which most banks deployed recently.
In fact, in recent years, most banks had turned to retail credit, focusing on meeting the needs of individual customers in car loans, construction, home repair. Consumer loans significantly developed when the operator’s attitude towards this activity had changed. Previously, the State Bank of Vietnam (SBV) classified consumer lending activities as a high-risk group and discouraged bank’s consumer lending, but then required banks to promote consumer lending to prevent shadow banking.
In a recent report to the National Assembly deputies, SBV said that by the end of August 2019, credit for life demand increased by 13.92%, while the general credit growth in the first nine months was only 9.4%. Currently, consumer credit debt accounted for 20.69 percent of total credit balance.
Financial statements of many banks in nine months also recorded that consumer loans grew at a relatively high rate and accounted for a small part of total balance of the loan to customers. For example, in Vietnam International Commercial Joint Stock Bank (VIB), at the end of September 2019, personal loans and other loans accounted for 78 percent of total loans and increased by 35.9 percent compared to the end of 2018, while the speed of the overall credit growth only increased by 28.2%. Vietnam Prosperity Joint-Stock Commercial Bank (VPBank) also recorded loans to businesses and individuals increased by 13.1 percent in the first nine months of this year and then accounted for 57.16 percent of total customer loans, which was the highest among customer group.
High profits with big risks
A banking expert said that the reason banks rushed to consumer loans was to maximise profits. Credit growth was increasingly tightened to prevent threats to the system. In this context, banks would tend to put capital into areas with high profit margins such as consumer loans to maximise profits, because consumer lending rates were much higher than the rates for other areas, the expert said.
The expert also noted that consumer lending rates were higher than commercial lending rates mainly due to the higher level of risks to consumer lending. Because in principle, a higher level of risk required a high interest rate to cover the risk. Even regulators in previous years considered consumer loans to be highly risky and discouraged lending to this sector.
The fact had also proved the truth of high profits with big risks when shining into the operation of banks. Accordingly, it was undeniable that most banks gained large earnings in the first nine months of this year, including a significant contribution of consumer credit. However, with this vast profit, bad debts of many banks also increased sharply, mainly due to consumer loans.
According to SBV Report to National Assembly deputies, the non-performing loans ratio of the credit institutions system as of the end of August 2019 was 1.91%. That meant that bad debt had increased slightly compared to 1.89 percent at the end of 2018. In terms of absolute bad debt balance, it would undoubtedly be much higher.
More worrying, according to the banking expert, real estate investment loans were hidden in consumption. Because home loans often had long term, loan value was immense, while real estate market still had sudden ups and downs. All of which made lending risks of this area become great, this expert warned.
Therefore, according to this expert, banks should not just follow profit targets but forget the risk prevention criteria. It was also useful to promote consumer loans to improve profits. From a particular perspective, consumer lending also had an impact on encouraging business activities and limiting shadow banking. But, whether it was lending for any purpose, the most crucial factor was to preserve capital. To do so, it was necessary to abide by the rules on risk management strictly, the expert emphasized.
