Quickly paying via credit card at a mobile phone shop in Hanoi, Ms Tran Le Tram, a 27-year-old PR officer, was happy to hold the latest-version smartphone in her hands. Rather than saving up, though, she preferred the “borrow and buy now, pay later” approach. Her friends do likewise, she said, and it has indeed become a more common way of purchasing among Vietnam’s younger generation. People like Ms Tram, living and working in large cities, have taken to the “borrowing-to-buy” culture with relish, with consumer lending services spreading throughout the country and a keenness being expressed by foreign companies to get a piece of the action.

Vietnam’s consumer finance market has picked up a great deal over the last five years. Besides commercial banks, financial companies have also appeared in the market and met demand for consumer lending to different groups of consumers. PPF Vietnam, which owns the Home Credit brand, believes in the potential of consumer lending in Vietnam as it has become increasingly popular over the last few years, especially among young consumers. The 20-30 age bracket accounts for 50 per cent of all the company’s customers. After five years it enjoyed dramatic growth in 2013 with net profits doubling and after-tax profits increasing five-fold compared to 2012.

Partnering with PPF and ACS, a trade finance company, since 2011, Thegioididong JSC, which owns two brands, Thegioididong.com and dienmay.com, rapidly expanded its product sales using the hire purchase method, which is a type of consumer loan, in all its 220 shops nationwide after piloting the model for nine months at its five Ho Chi Minh City shops and earning VND1 billion ($46,500) a month. “The hire purchase model now accounts for 18 - 26 per cent of our total sales,” said Mr Le Huy Toan, Director of the model at Thegioididong. The model is now not only available in its distribution network but also at other local retailers.

Policies nurture growth

Consumer lending, primarily by commercial banks, first appeared in Vietnam in the late 1990s as part of retail banking services. It was anything but popular, though, according to Mr Nguyen Tri Hieu, a local banking and finance analyst. There were 12 State-owned finance companies operating at the time, but their main business was serving the activities of their parent group, with only a few providing individual loans. Existing government policies were the main reason so few were promoting loans to consumers, coupled with a long-standing mindset among consumers that purchases should only be made when money has been saved. Any thought of taking out a loan triggered anxiety.

The majority of lending activities remained housing loans, for purchase or home improvement, and loans for motor cars. Bank credit cards were mostly still targeted at high-income earners, who were very much in the minority in the country. The market changed in 2008, with corporate lending facing difficulties from the financial crisis and non-performing loans (NPLs) beginning to soar. Local banks found that loans to individuals represented a much better growth model. The Mekong Development Bank (MDB), VP Bank and HD Bank turned to retail banking/consumer finance strategies to improve their bottom line. The total consumer finance market reached $8.2 billion in 2010, accounting for 8.1 per cent GDP and 6.5 per cent of all loans in the country. By 2012, however, it had fallen to $4.4 billion as the economic downturn started to bite and the central bank’s credit tightening policies discouraged consumer lending.

Consumer loans are currently classified as “non-production loans” and include real estate loans, securities loans, and consumer loans. Consumer loans at commercial banks consist of real estate, vehicles and credit cards, which account for 96 per cent of all consumer lending. In early 2011 the central bank asked commercial banks to cut their non-production loans (mainly real estate loans, which were resulting in many NPLs) in a bid to tighten credit and curb inflation. This resulted in the overall non-production loan ratio falling to 15 per cent by the end of end 2011 and to 11.3 per cent by mid-2012.

The consumer finance market then began to recover in 2013. Total loans were $8.8 billion, or 5.4 per cent of GDP, an increase of 15 per cent against 2012. The central bank had loosened conditions on non-production loans due to low credit demand from corporations and businesses. Financial companies are not constrained by regulations limited interest rates at 150 per cent of the central bank’s base rate, with rates to be determined by agreements between lender and borrower. As a result, many companies have recorded good business figures from lending at annual rates in a range of 30 to 70 per cent. While commercial banks focus on loans requiring collateral at annual interest rates of 20 - 30 per cent, financial companies target loans without collateral, so such high interest rates are to compensate for the high level of risk involved. According to Mr Hieu, involvement of financial companies has noticeably weakened the unofficial lending market compared to previous years, where loans often bore interest rates of 100 per cent per annum.

There is some controversy about interest rate applied to loans without collateral. Dr Le Tham Duong from the Ho Chi Minh City Banking University said that most borrowers can’t afford loans at 70 per cent interest. “This rate is similar to that found at pawnshops,” he said. Existing regulations provide no cap on interest rates on loans from financial companies without collateral, as the government believes it bolsters lending and curbs the “black” credit market. According to an unofficial source, the black credit market is in the vicinity of $50 billion annually, or 30 per cent of total loans provided by the banking system. Pawnshops, for example, can be readily found throughout Vietnam.

Challenges & improvements

With such high interest rates on consumer loans and the difficult economic climate, Vietnamese people have tended to cut their personal spending, whether from borrowings or savings. But banks and financial companies both believe the market has potential in the future. According to MDB, consumption will be strong in the long term as average incomes increase. Consumers seek to improve their standard of living, which drives the development of consumer loans. PPF Vietnam predicts that the consumer finance market will increase by 10 per cent of GDP over the next five years compared to now. Local and foreign banks note the growth of Vietnam’s wealthy class over the last 15 years, and while this has fallen slightly in recent years it’s expected to grow sharply over the next few years. “This is the opportunity for us to turn potential into profit,” said a representative from ANZ. But opportunity also comes with challenges for banks and other lenders.

Many consumers in developed countries borrow to buy while using their own savings to invest, which may earn more that the interest rate on loans and see them earn a profit. Vietnamese consumers, meanwhile, are not in the habit of taking out loans when they have the cash for purchases. Another challenge is concerns over the high interest rate on consumer loans compared to rates on business loans. “The reason for the high interest rate on consumer loans is the absence of credit ratings on consumers,” said Mr Hieu. “Without a means of assessing risk, lenders increase interest rates.”

There are two main obstacles facing lenders. Firstly, many consumers do not have bank accounts, and secondly, Vietnam does not have adequate ID cards for its citizens, so verifying personal data in determining whether to lend is difficult and time consuming. This is an even greater problem with the population increasing so rapidly. The government needs to quickly adopt a better ID system to permit accurate individual credit ratings.

According to Mr Hieu, the credit rating system in the US allows banks and financial companies to assess lending risk within seconds, with an appropriate interest rate set. Vietnam lacks such a system, so assessing risk takes a long time and is often inaccurate. “I think that, in the long term, the central bank must establish a proper credit rating system based on full consumer information from banks and financial companies,” he said. “The existing Credit Information Centre must improve and have complete data on consumers and companies for an effective system to appear.”