Direct disbursement, in common way, is called cash loans, for which borrowers do not need to buy a specific product but can still get a loan of usually up to 70 million dong. This type of borrowing is now required to be reduced at finance companies.
According to Circular 18/2019/NHNN of the State Bank of Vietnam (SBV) on amending and supplementing a number of articles of Circular 43/2016 which regulates the consumer lending of finance companies. In particular, finance companies are only allowed to offer cash loans to customers who do not have bad debts according to the credit relationship report checked at Vietnam National Credit Information centre (CIC) at the nearest time compared to the time of signing the consumer loan contract.
The total outstanding consumer loans which are disbursed directly to customers at a finance company compared to the total outstanding consumer loans of that company must comply with the maximum rate according to a roadmap.
Specifically, the rate of lending disbursed directly in cash at finance companies will reduce to 70 percent from January 1st 2021 to December 31st 2021, 60 percent from January 1st 2022 to December 31st 2022, 50 percent from January 2023 to December 31st 2023, and 30 percent from January 1st 2024.
Thus, finance companies have a five-year roadmap to lower the rate of cash loans to the lowest level of 30%.
Since cash loans, with the form of overdraft and direct lending, are flexible, the demand is very large. A loan without secured asset often ranges from one to 10 million dong in 30 days, or up to 70 million dong in three years, depending on credit history. Thus, this is a fertile land for finance companies to develop services.
Easy Credit of EVN Finance Joint Stock Company launches cash loans package to the market, which targets people with average income with a minimum monthly income of 4.5 million dong. For cash loan product, Easy Credit applies technology to all customer experiences, from applying for loans, to appraisal and approval processes, to finalisation. SHB Finance deploys a comprehensive sale through the launch of an unsecured cash loan package and channel for service consultancy and online loan application.
Southeast Asia Commercial Joint Stock Bank acquired all the capital contribution of Vietnam Post and Telecommunication Corporation in Post and Telecommunication Finance Company; and Viet Credit Finance Company (VietCredit) also target cash lending.
The three names which account for the largest market share including Home Credit, FE Credit, or HD Saison also offer cash loans at a different level, in addition to the direct instalment loans at retail stores, etc.
Cash lending is considered a fertile land not only because of the large number of customers but also because of the very high profit margin. It certainly comes with big risks because most of the loans are unsecured. To limit risks, Circular 43/2016/TT-NHNN regulates that a consumer loan of finance company must not exceed 100 million dong.
However, problems still arise such as large bad debts because many borrowers urgently need money to reverse debts, which easily lead to insolvency. Some customers even cheated finance companies, not to mention the problems arising in the debt collection process of finance companies, etc. There are many reasons for the SBV to tighten this activity in a five-year roadmap.
Finance companies are ready.
In addition to gradually reducing the proportion of cash loans, a “relaxing point” of this new regulation is that it is only applicable to the outstanding loans of the loans worth over 20 million dong.
Circular 18 also stipulates measures related to debt recovery, which does not allow measures to threaten customers.
According to statistics of the Research team of Saigon Securities Incorporation (SSI Research), by the end of 2019, for the three finance companies including FE Credit, HD Saison and Mcredit, FE Credit was most affected by Circular 18. The market shares of these three companies by the end of the second quarter of 2019 was respectively 55%, 17 percent and over seven percent of the entire market.
At mid-2019, FE Credit’s lending structure included 76 percent of cash loans, eight percent of motorbike loans, 4.7 percent of electronic loans, and 11.4 percent of credit card loans.
However, the proportion of cash loans with outstanding loans of over 20 million dong at FE Credit is currently below 70%. SSI Research believed that in the next two years (2020 and 2021), the impact of Circular 18 on the company will be low because the roadmap is yet to affect FE Credit’s business activities. However, from 2022 to 2024 FE Credit may have to sacrifice some net interest margin (NIM) to achieve a more balanced lending structure.
SSI Research assessed that HD Saison will be least affected because its lending structure includes 33 percent of cash loans, 43 percent of motorbike loans, and 24 percent of electronic loans.
For Mcredit, although cash loans account for 70 percent of the total outstanding credit, the restructuring of product portfolio may be easier for this company due to its modest scale.
Nevertheless, at the beginning of 2020, survey of the special issue on the Banking industry overview showed that all finance companies have had a roadmap to change their operation to meet the requirement of the SBV.
Leaders of finance companies either affected or less affected all said that Circular 18 is appropriate and needed to reduce unnecessary consequences, adding that finance companies are promoting communication measures to customers so that they have a clear understanding of the loan obligations.
Financial expert Dr Nguyen Tri Hieu said that Circular 18′s roadmap to gradually lower the proportion of loans disbursed in cash for finance companies is reasonable and can increase the ability to control borrowers and limit bad debts from consumer lending.
On the other hand, the government is also advocating to increase cashless lending. Thus, the gradual restriction of cash loans not only makes consumer lending business healthier, but also fits the non-cash goal of the government.
According to Dr Hieu, in the long term, finance companies must carry out the restructuring of their product portfolio to suit the roadmap set out in Circular 18.
Many finance experts believed that the five-year roadmap to reduce the proportion of cash loans from 70 percent to 30 percent has been studied by the SBV to ensure it is appropriate with the current consumer lending market of Vietnam.
The financial market is facing the rapid development of digital technology applications in the 4.0 industrial revolution. Therefore, finance companies must build new non-cash loan products to control customers’ use of capital purposes, and to suit the digital economy.
