Many experts warn that limiting lending in cash by finance companies can negatively impact the consumer finance market and create opportunities for black credit to rise.
In the report on the Circular Draft amending Circular No. 43/2016/TT-NHNN, Hochiminh Securities Company (HSC) opined that major finance companies such as FE Credit, Home Credit, HD Saison (currently holding 88 percent market share) could be significantly affected if the circular draft was issued.
The draft stipulating consumer lending at finance companies is attracting much attention from the public, especially experts. This is because the Circular Draft appears to create counter-effect on efforts to limit black credit with formal credit by restricting cash lending of finance companies.
Specifically, the Circular Draft divides consumer loans of finance companies into two categories, of which indirect disbursement (a traditional financial product that supports the purchase of consumer goods) mainly consists of loans to purchase motorbikes, electrical appliances, mobile phones, etc. For these loans, finance companies must disburse funds directly to the seller and do not disburse to borrowers.
The other form is direct disbursement to borrowers, in which finance companies disburse in cash to borrowers or transfer disbursed amounts into the customers’ payment accounts as agreed in the consumer loan contracts.
However, the Circular stipulates that financial companies can only disburse directly to customers who have been borrowing from that finance companies and are evaluated to have a good repayment track record according to the internal regulations of the financial companies and have no bad debts according to the debt classification results by Vietnam National Credit Information centre at the latest time from the signing date of the consumer loan contract. In addition, finance companies must ensure that the total consumer loans disbursed directly to a borrower must not exceed 30 percent of the total consumer credit balance of the finance companies.
Many experts said that this provision may not achieved its target since risks in credit activities arise from the ability of customers to repay, not entirely depending on the form of disbursement. Perhaps with indirect disbursement, financial companies can also hold ownership documents for large assets such as cars and motorbikes as collateral in case risks arise.
According to experts, this regulation will not reduce risks, but may affect the lending activities of financial companies, thereby creating opportunities for black credit to grow.
Dr Vu Dinh Anh, a financial expert, also said that if the Circular Draft is issued, financial companies will be narrowed down since new customers find it difficult to access loans, and not all existing customers are approved for new loans, but depending on repayment history. “When finance companies are constrained to direct disbursement channel, black credit is difficult to be fought back,” Anh said.
At this point, Dr Nguyen Tri Hieufinancial expert said, to repel black credit, credit institutions and finance companies must boost consumer credit. If a borrower needs a lot of money, but the financial company is controlled by 30 percent of cash disbursement, he/she cannot borrow. Therefore, this customer may have to look for black credit to meet urgent needs.
Further analysing, a member of the National Monetary and Financial Policy Advisory Council said consumers like to borrow cash because they can flexibly use the fund. For example, if borrowing 40 million dong, consumers can use it for many different purposes, not necessary having to buy a certain item. In case consumers want to borrow to serve the needs for celebrating events, they will need immediate direct disbursement, but are limited to direct disbursement rates. That will push the customers who need such loans to black credit.
Therefore, according to experts, in order to both promote the operation of finance companies, while ensuring safety and stability of consumer lending market, it is recommended to let consumer loans to develop in accordance with market and competition rules. Then, the beneficiaries will be customers and finance companies, thereby contributing to the development of the economy.
