The high growth rate of consumer credit is potentially risky, hence, the policy of the State Bank of Vietnam (SBV) is to strictly control lending activities. Besides, the banking industry will boost official credit to get over informal credit.
Consumer credit tends to increase rapidly
According to data from SBV, HCM City branch, in 2018, outstanding loans of credit institutions in the city increased 14.69 percent compared to 2017. This is the lowest increase in the last five years. Meanwhile, consumer credit tends to increase rapidly. Specifically, in 2015, credit outstanding in the consumer sector accounted for only 12.73 percent of the total credit balance in the city, 82.9 percent in 2016, and 18.36 percent in 2017 of the total credit balance. Consumer credit continued to increase in 2018.
Leaders of SBV, HCM City branch said that it is necessary to promote consumer credit activities, but must ensure risk control to limit arising problems related to interest rates, debt recovery methods, and debt management.
SBV deputy Governor Dao Minh Tu said that the growth rate of consumer credit as in the past years in HCM City was a matter of concern and required control, particularly with the consumer loans that were actually used in other sectors, especially real estate. In fact, the pressure to reserve capital for investment is very large, so the policy of the State Bank is to push capital into the fields of production and trade, and to control the capital source tightly into the non-production sectors.
Tu shared that, SBV received a lot of petitions of associations and enterprises requesting to open credit for real estate sector, however, it was difficult to loosen the control. SBV is considering to categorise lending for house purchase as consumer loans or real estate loans.
However, consumer credit increased rapidly mainly from lending activities to buy and repair houses, so the risk of real estate loans “hidden” under consumption is growing. In many banks, retail banking activities are associated with consumer credit and consumer credit outstanding loans have increased sharply in recent years.
This not only causes bad debt risks but also impacts on interest rates, since consumer lending rates are often higher than production and trade credit. When consumer credit increases, the interest rate mobilisation race will follow which will affect the interest rate. Notably, compared to banks, interest rates for consumer loans at financial companies are often much higher, even up to 60-70 percent per annum.
Will reduce informal credit
According to financial and monetary experts, when formal credit including consumer credit growth strongly, informal credit will be pushed back, which will cause many consequences. Most banks boost consumer lending, not only in urban areas, but also in rural areas. Besides, the continuous growth of financial companies and the fierce competition in the financial and consumer sector bring convenience to people when there is demand for consumer capital.
According to SBV, the agricultural and rural areas have increasing demand for consumer loans, the number of credit institutions expanding to this area has increased, which timely provides capital for agricultural, forestry and fishery production and capital demand for rural development, contributing to pushing back the black credit situation.
As of the end of November 2018, the credit balance of agriculture and rural areas was estimated at 1.69 quadrillion dong, up 14.5 percent compared to the end of 2017 (higher than the general credit growth of the economy), with more than 14 million customers having outstanding loans; accounting for nearly 24 percent of total outstanding loans to the economy.
Currently there are about 70 credit institutions and a network of more than 1,100 people’s credit funds and Social Policy Bank participating in lending for agricultural and rural development. In particular, in some banks, lending in agriculture and rural areas increased sharply and accounted for a high proportion, such as Vietnam Bank for Agriculture and Rural Development (Agribank) with nearly 70 percent (total outstanding loans of one quadrillion dong); Vietnam Bank for Social Policies with 94 percent of its loans granting for agricultural and rural loans. However, to gradually fight back “black” credit, the banking system should continue to promote formal credit in the near future.
In the future, Agribank will promote a five trillion dong credit package to limit black credit, with quick procedures and documentation, to meet the urgent and legitimate capital needs of the people. In addition, the Vietnam Bank for Social Policies and other credit institutions need to take part in research on consumer lending products so that people and micro enterprises can access official capital.
According to Dao Minh Tu, when credit is officially pushed up, it will repel the black credit problem. However, that does not mean banks and financial companies massively lend to consumers without controlling credit quality. In contrast, consumer credit is a risky type of credit which needs to be controlled to avoid bad debt as well as prevent too high interest rates.
In general, Tu affirmed that the banking sector still can control bad debts, especially credit growth quality. Credit growth in 2018 was 14 percent, but the economy still grew well, so this year, SBV request to continue to control credit growth at this level.
Dr Can Van Luc, a financial and banking expert, said that personal consumption now accounts for 66-67 percent of GDP and plays an important role for economic growth. In order to serve this huge personal consumption demand, if credit is not officially developed, black credit will have the chance to flourish. In addition, lending activities with “extremely high” interest rates should be strictly prohibited and controlled.
