The proportion of consumer credit (TDTD) to GDP reached more than 25 percent at the end of 2018 and began to approach the International Monetary Fund (IMF) warning threshold. Developing consumer credit can lead to the risk of excessive borrowing, in addition to systemic and personal risks of losing the ability to repay.
In fact, when the ratio of consumer credit to GDP is too high, the risk of borrowers’ insolvency increases, especially when the growth rate of consumer credit is higher than the growth rate of nominal GDP. deputy director of the Monetary Policy Department the State Bank of Vietnam, Nguyen Tu Anh, said that the excessive borrowing risk was mainly due to consumers’ lack of knowledge about risk assessment and hedging. Borrowers often overestimate the ability to repay and underestimate the risks to their own future cash flows. This is especially true in the period of high economic growth rate in Vietnam recently.
According to Nguyen Tu Anh, the strong increase in consumer credit growth in recent years is partially due to an upward trend in the economic growth rate and the people’s confidence about their future income.
Although the ratio of consumer credit to GDP is still low, it is increasing, averaging from six percent in the period of 2011-2014 to about 12 percent in the period of 2015-2016 and about 24 percent in the period of 2017-2018.
Deputy director of the Monetary Policy Department said that the growth of consumer credit was faster than the average income growth rate, which would make the ratio of credit outstanding to disposable income decrease and the ability to pay debt deteriorate. Even at some point, the insolvency would happen and the credit crisis would explode.
This, once happened in Korea in the period 1998-2002 with the ratio of household credit outstanding to total disposable income increased from 38 percent to 63.4 percent, this rate in the US was 133 percent, right after the crisis bought houses below standard.
In addition, the pressure among credit institutions in competing for market share also makes them willing to lend excessively or to sub-prime loans. The 2008 US currency crisis is a good example of this type of risk.
In addition, consumers of consumer credit are often offered to those below bank standards. Their ability to assess and manage risks is often low, while “desire to change life” is often high. This makes them vulnerable to falling into debt traps. When these customers lose their solvency, legal measures to recover debts can push them into a financial dilemma and create negative social consequences.
According to Stox Plus’s report on Vietnam’s consumer finance market at the end of the third quarter of 2018, 48 percent of Vietnam’s population was facing barriers to access to financial services.
Tran Minh Hai, a lawyer at BASICO Law Company, said that, in fact, there was no denying that shadow banking was stronger than legal credit in the ability to meet the loan demand.
However, the current regulations in Circular No. 39 on general lending activities of credit institutions and Circular No. 43 on consumer lending of financial companies are all setting clear barriers to meet borrowing needs. According to these documents, credit institutions are limited to consumer loans with the requirements allowed by the Circulars. Therefore, many borrowers with actual consumer purposes are difficult to access the lending sources.
Hai cited, a person borrowing from other to buy a motorbike needed a loan to repay the remaining part of the debt due. He was certain that he could not borrow from the financial and banking system, because this demand was not in the permission of Circular No. 39 and Circular No. 43.
Reducing risks from excessive borrowing, Hai said that it was necessary to abolish the compulsory regulations on loan demand, loan application from the current regulations of SBV in consumer lending activities. BASICO’s lawyer recommended, researched to replace the regulation on “Crime of lending with extremely high interest rate in civil transactions”Article 201 of the Criminal Code in the direction of preventing bad effects of the dangerous nature of shadow banking as analysed.
Also, according to Hai, the granting of new licenses to establish financial and credit institutions is necessary to increase supply, meeting the needs of the people. He said this was a practical need with the willingness to enter the market of many domestic and foreign financial institutions.
