Consumer lending sector is playing the role of a goose that lays golden eggs at some banks and is continuously attracting new entrants. However, some other banks are still out of this wave or have even withdrawn from the game due to concerns about the risks of this sector.
At the Annual general Meeting (AGM) in 2018 held recently, Nguyen Duc Vinh, general director of Vietnam Prosperity Commercial Joint Stock Bank (VPBank) said that the consumer credit segment with FE Credit brand is one of the two major income sources of the bank in the past five years. In 2017 alone, the consumer credit segment of FE Credit grew by 52%. According to calculation, FE Credit is currently accounting for over 50 percent market share of consumer finance companies. Under the 2018 plan, VPBank set a profit target of 10.800 trillion dong, of which 50 percent comes from finance company.
To complete this goal, according to Vinh, VPBank will have to operate in a higher risk environment than many other units. Taking the example of unsecured lending, CEO of the bank said that in addition to the finance company which provides small unsecured loans, the bank also offers unsecured loans to individual customers and card lending.
Similar to VPBank, many other banks have started to join or are planning to develop consumer finance companies. Specifically, Military Commercial Joint Stock Bank (MB) expects to develop Mcredit brand to become the top five consumer finance companies with a total outstanding loans of 5.9 trillion dong and pre-tax profit of 300 billion dong in 2018. Mcredit has piloted some appropriate financial products within a year, especially for military personnel and hopes that these products will grow fast in the coming years.
The AGM of Orient Commercial Joint Stock Bank (OCB) has approved the policy to establish OCB finance company or acquire a finance company with a minimum of 70 percent of its charter capital this year. This finance company will carry out consumer credit, financial leasing, factoring and other activities in accordance with the law.
According to OCB’s management board, the bank’s Division for mass customers ComB which provides consumer loans is operating efficiency with a fast growing scale and has started to contribute to the bank’s profit. Accordingly, it should be separated into an independent finance company to facilitate business management and risks management. In addition, according to OCB Chair, Trinh Van Tuan, the launch of consumer finance products to the market will help replace back credit. OCB mainly targets small business owners. However, since ComB still belongs to the bank, the procedures will be more complicated. If it is successfully separated into a finance company, there will be opportunity to reduce procedures for customers.
Nevertheless, in the current consumer credit fever, some banks are still standing out of the game. Specifically, talking at the 2018 AGM, Dang Khac Vy, Chair of Vietnam International Commercial Joint Stock Bank (VIB) confirmed that the bank still has many better options rather than establishing finance company. VIB is currently one of the market leaders in the segments of home loans, car loans, and insurance cross-selling. The bank’s retail segment grew by 83 percent in 2017 and 13 percent in the first quarter of 2018 although it included the Lunar New Year. This segment is even forecasted to increase by 100 percent in 2018. These numbers show the huge potential to make profit from this segment without a need for a finance company. Although the interest rates of consumer lending are very high at 3-60 percent per annum, the risks are very high and the profits are often short time only.
Recently, the Vietnam Technological and Commercial Joint Stock Bank (Techcombank) has sold its TechcomFinance. According to the bank’s Chair, the bank does not choose a model of high risks and high profits but prefer other segments with lower risks.
Potential risks
According to analysis of Viet Dragon Securities Company, the growth of consumer finance segment is still a door to increase credit at banks. In the medium term, the development room of this segment is still wide open as the scale of consumer finance was just about 19 percent of Gross Domestic Product (GDP) in 2017. More importantly, this source of capital will positively affect the economic growth in the next one or two years.
This development will also support the recovery of the real estate market and the vibrant picture of Vietnam’s securities market. In the context when the “fiscal wheel” is seriously eroded and the pressure of debt repayment in the next three years is very huge as nearly 60 percent of the government bonds in the country are about to mature, a loosening monetary policy will continue to drive the Vietnam’s economy.
Nevertheless, according to statistics, the consumer credit of Vietnam surged unexpectedly by up to 60 percent in 2017 and is predicted to rise at an average of 29-30 percent per annum in the next three years. Thus, experts have given warning about the overly fast growth rate of the consumer credit flows, which may create deviations from the original direction. Therefore, the promotion of consumer finance should generate motivation for the aggregate demand of the economy and accelerate domestic production activities.
Concerning the sectors with high speculative level such as real estate and securities, experts believed that the current picture is still rosy, but potential risks cannot be ignored as over 50 percent of the consumer credit flows into this area and is one of the major drive to support the market recovery. This contributes to the deviations in calculation method and the data announced regarding real estate credit flows. This development will also bring risks when the above assets are mortgaged and banks overestimate the credit rating of borrowers.
