P2P Lending is booming
With the development of technology, peer-to-peer lending (P2P Lending) appeared and became a branch of financial technology (fintech) in Vietnam. This is a new business model that connects borrowers directly to lenders (investors) without financial intermediaries (such as credit institutions, foreign bank branches) on the basis of digital technology applications. All borrowing and debt repayment activities (principal and interest) between borrowers and lenders are recorded and archived by an online trading platform.
China was one of the markets with a booming period of peer lending companies. However, this market quickly retreated. According to Nikkei, in 2018, the number of peer lending companies in China decreased by 25 percent to more than 1,000. The market also noted that Goldman Sachs, Citigroup, JPMorgan and Credit Suisse simultaneously canceled the guarantee agreement for Chinese lender companies due to concerns about the uncertain future of this type.
One of the main reasons was the lack of monitoring policies and mechanisms for peer-to-peer lending that made counterfeit forms to appear, causing loss of confidence for investors. According to Bloomberg, peer-to-peer lending platform in China had about 50 million registered users and about $192 billion of bad debt with an average interest rate of 10.2 percent in 2018.
In Vietnam, according to information from the State Bank of Vietnam (SBV) in March, there were 40 peer lending companies operating including Tima, Trustcircle, We Cash, Interloan, Lendbiz, etc., 10 companies from China, some from Indonesia, Malaysia, Singapore, etc. Meanwhile, data released by Nguyen Hoa Binh, Chair of Nexttech Group, in July showed that about 60-70 enterprises providing P2P Lending service of China flooded into Vietnam after this model collapsed in the second largest economy in the world.
Risks of Chinese P2P Lending company
Tran Viet Vinh, Chief Executive Officer (CEO) of Fiin Financial Technology Innovation JSCone of the peer-to-peer loan providers in Vietnam, shared that there were many risks when Chinese P2P companies operated rampant in Vietnam.
Firstly, borrowers would have to pay very high interest rates because these companies were taking advantage of market exploitation. When the legislation was still unclear, these companies lent easily at high interest rates. On the other hand, these companies made loan collection quite troublesome when affecting people around. These things made it easier for people to get into the habit of accepting loans but it would be easier to avoid repaying the loan.
According to Tran Viet Vinh, these behaviors would make people’s psychology negatively affected, the market would be viewed negatively. Without eliminating companies that violated the law, online lending would become a bad image in society, thereby affecting transparent peer lending companies.
Nguyen Tri Hieu, a financial expert, acknowledged that Vietnamese laws currently did not have regulations on that form of lending and there was no regulatory framework, so peer lending still contained many risks for participants.
Sharing the same view, Can Van Luc, Chief Economist of Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV) and director of BIDV Training School, said that P2P lending method was risky because there was no specific legal framework. However, that was a type that should not and could not be banned. Management measures needed to be taken to avoid overabundance, such as usury.
Tran Viet Vinh also mentioned that there were some companies transforming the peer loan model such as using direct capital to lend, not connecting investors to borrowers; taking advantage of capital mobilisation, appropriating and using capital for wrong purposes leading to collapse, for example the Chinese market. When it collapsed, the economy would be affected and the peer-to-peer lending would be affected before it could thrive, it was stopped.
One of the differences between companies that provided peer-to-peer lending with Chinese companies was the control and debt recovery mechanism. Companies that operated according to the model would evaluate the capacity, financial capacity of borrowers and lenders before connecting the service. That was to minimise risks for both sides. In case borrower was really unable to repay the debt, companies following the standard model would create a support mechanism to extend the repayment period, ensuring the interests of investors and lenders.
Meanwhile, Dao Trang, CEO of Vaymuon.vn, a subsidiary of Nexttech, said that an important point was that investors’ money must be transferred to borrowers through intermediary payment accounts or credit institutions licensed by SBV. Chinese companies did not follow that process correctly.
In the current situation of the market, Dao Trang expected the legal framework for that type was soon enacted, so that service providers could operate smoothly. Besides, P2P Lending businesses would also be clearly classified, and step by step strengthen and build people’s confidence in that kind of business.
Meanwhile, Tran Viet Vinh said that authorities should refer to peer-to-peer lending models in countries around the world. The world had lessons of success and failure like China. Authorities could build a pilot model in each specific framework, each field to control the cash flow from investors, lenders to borrowers and the purpose of the loan. Thereby, the market could minimise risks, frauds and bad debts arising.
Regarding the purification of Chinese transformation companies in Vietnam, Tran Viet Vinh said that was not difficult. These companies took advantage of the unclear legal status to provide high-interest loans through an online environment, similar to usury, which would be detected as soon as the transaction was made. When retrieving business data, the information of these companies and related entities would also be revealed. Vinh also proposed that Vietnam should soon be able to deploy electronic identification and authentication, and conduct a “sandbox” of P2P Lending field.
In fact, SBV developed a legal framework for peer lending and will submit it to the government for piloting this activity in the near future. At a Fintech event in Hanoi, Ngo Van Duc, deputy Head of Payment Supervision Division, Payment Department of SBV, said that SBV was working with ministries and agencies to build. SBV would play the role of focal point and connection.
