The Vietnam Chamber of Commerce and Industry (VCCI) has suggested the State Bank of Vietnam (SBV) reconsider a proposal on limiting unsecured personal loans in cash by consumer finance companies.

A member of staff at FE Credit introduces financial packages to a customer.
(Source: VNA)

The move was made after the SBV recently released a draft circular to amend Circular No. 43/2016/TT-NHNN stipulating consumer lending by financial companies.

The proposed changes under the draft circular include limiting unsecured personal loans in cash to existing customers with good credit and no overdue debt; and limiting the maximum amount of such cash loans to 30 percent of total loans.

In financial companies, cash loans are one of the main products besides instalment loans and credit cards. Target customers of these product packages are more than 50 percent of the country’s population who do not have a bank account and have an average income of only 3-5 million VND (129-215 USD) per month, depending on the requirements of each company.

As explained by the SBV, cash loans are at high risk of becoming non-performing loans (NPLs) as they don’t require collateral and declaration of borrowing purposes. With easy requirements and simple procedures, cash loans are an easy way to develop credit even though lending interest rates are much higher than those of banks.

Therefore, to ensure consumer lending for sustainable, healthy and efficient development, the SBV said cash loans should be limited to finance companies’ existing customers with good credit history and no overdue debt.

However, according to the VCCI, the SBV should explain more clearly the necessity of the regulations as no statistics on NPLs of consumer finance companies have been released yet.

Especially, the VCCI noted, the application of the new regulations should be scrutinised when the Government is taking measures to fight loan sharks.

“Should the regulations be applied as it will increase costs of financial companies, making it more difficult and expensive for borrowers to access to consumer loans?” the VCCI asked.

Experts also said though the proposed regulations would contribute to controlling bad debts, it would cause the Government difficulty in implementing its policy to fight loan sharks.

According to banking expert Nguyen Tri Hieu, without consumer loans with easy requirements from finance companies, borrowers without collateral and low income will have to depend on loan sharks. 

However, in a credit outlook report released recently, the international ratings agency Moody’s Investors Service backed the SBV’s proposal.

According to Moody’s, the proposal is credit positive for Vietnamese finance companies because the stricter regulations will help alleviate asset quality pressure by curbing excessive growth in the riskier consumer-loan segment, which will lead to stronger risk-adjusted returns and will support internal capital generation in the future.

Vietnam’s consumer finance industry grew at a compound annual rate of 41 percent between 2013 and 2017 on the back of higher personal income and greater penetration of services.

Moody’s expects growth in personal loans to slow significantly when the new regulations come into effect, after far exceeding growth over the past three years for other less-risky consumer loans, such as those for the purchase of motorcycles and durables.

The demand for consumer finance is strong and supported by the buoyant Vietnamese economy.

Now, finance companies constrained from extending new personal unsecured loans because of the new regulations will focus on growing other product segments and will benefit from increased diversification in their lending portfolios and more emphasis on lower-risk products.