According to the recent assessment of Fiin Group (formerly Stoxplus), the growth of consumer finance in Vietnam is slowing down. Fiin Group’s statistics showed that in 2018, the growth of consumer credit market slowed down with a rise of 30.4 percent, lower than the nearly 60 percent increase of the average of five years ago.
In particular, the most active companies in this market are financial companies showing signs of narrowing market share. Although still the largest business in the consumer finance market, the market share of FE Credit dropped to 47.3 percent in 2018 compared to nearly 49 percent in 2017. Home Credit also decreased from 17.3 percent to 16.9 percent. HD Saison also experienced a decline in growth compared to previous years due to a change in strategy from expanding its reach to focusing on existing customers in its ecosystem.
According to Fiin Group’s analysis, in the current consumer finance market, financial companies were divided into two categories: Lenders accept high risk provisions including FE Credit, Mcredit, etc. and prudent lending group, preferring better asset quality, setting higher capital safety target than growth rate including Mirae Asset, JACCS, Prudential Finance.
JACCS is a case of a careful financial company when the company had modest credit growth due to the decrease in new contracts and auto loans. Currently, under the transition to management of Shinhan Card Co. Ltd, Prudential Finance slowed down to the lowest level of one percent because any new loans were recorded.
This narrowing of the market not only takes place in consumer finance companies but also banks are cautious when lending to consumer life. According to the latest report of the State Bank of Vietnam (SBV), by the end of June, outstanding loans for consumer life increased by 8.14 percent, lower than 8.88 percent of the same period in 2018. Leader of a small bank that once intended to buy consumer finance company to thrive in this business segment said that currently, the bank halted that intention and developed consumer finance in a cautious direction.
Explaining why both financial and banking companies were cautious about consumer lending, that leader affirmed that the potential of developing consumer finance market is still large from the young population structure and increasing people’s income, etc. However, the level of potential risks of that sector was relatively high. Risks might stem from dishonesty of customers.
On the bank side, consumer lending was often a small loan, lending in large numbers. Therefore, if banks did not have a suitable technology system to monitor the use of loans, credit risk was very high.
Taking an example of fraud, according to that leader, in Thailand, customer information was updated to the national electronic ID, which was easy for banks to look up information. But in Vietnam, that was not possible but still through the traditional methods such as looking through ID cards that were very easily counterfeited. Forging customers’ identities led to high lending risk, so banks became more cautious in that area.
A leader of Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) also affirmed that, within the next five years, the bank would not establish a consumer finance company because consumer loans with high interest rates were accompanied by high bad debt risks, affecting the operation and image of the bank. For consumer finance companies, their biggest goal was profit, so they could lend in any way.
Previously, Nguyen Tu Anh, deputy director of general Economic DepartmentCentral Economic Committee, also warned that the proportion of consumer credit was higher than 25 percent of GDP, potentially risking the system and could cause great losses to the economy and the system of consumer credit itself. Therefore, it was necessary to assess and control more closely the development of consumer credit to ensure the prevention of possible risks.
Nguyen Tu Anh pointed out potential risks that might occur. The first was the macro risk, the system like rising interest rate, income or wealth shock. These risks often directly affected the ability of borrowers to pay interest and principal. Interest rate for consumer loans was usually high and floating. The next was excessive loan risk mainly due to less knowledge of customers about risk assessment and prevention. Therefore, they often overestimated their ability to repay their debts and underestimated the risks to their future cash flows.
Ms.Nguyen Thi Mui, former deputy director of the Academy of Finance, said that based on experience from developed markets around the world, financial companies would help the consumer finance market grow more actively and healthily, bringing a formal financial channel of the state. Without that channel, due to inadequate access to loans from banks, many people would have to find usurious channel, not protected by law, leading to many economic and social implications.
However, after a period of strong growth, the slowdown of consumer lending is considered necessary for financial companies and banks to recognise and re- evaluate the business strategy, the opportunities and challenges.
