Consumer lending by commercial banks has been taken off from late 1990s as part of retail banking products. The market was further fuelled from 2008 when corporate loans by banks were in difficulties with soaring NPLs. Local banks found that loans to individuals are a better growth model. The participation of foreign-owned consumer finance specialised companies also makes the market much more competitive. There were 12 State-owned finance companies established from late 1990s but their main business was to serve their parent group activities. Only few provides individuals loans.
Economic growth and government policy are a big part of the consumer lending story. Total consumer loans reach US$8.2bn in 2010 which is 8.1% GDP and 6.5% total country loan book. However, it was reduced to almost a half at US$4.4bn by June 2012 following the economic downturn and the discouragement of consumer loans as part of the central bank’s credit tightening policy.
Consumer loans in Vietnam are currently classified into so called “non-production loans” which include real estate loans, securities loans and consumer loans. In early 2011, the central bank asked all commercial banks to reduce the non-production loans to below 22% by 30 June 2011 and below 16% by 31 Dec 2011. This made the overall non-production loan ratio has fallen to 15% in overall by year end 2011 and significantly declined to 11.3% by 30 June 2012. As a result, consumer loans declined sharply over this time.
Main consumer finance products are motorbike loans and mobile phone loans. The main consumer finance market (loans to personal consumptions of goods and services) are dominating by the 6 foreign consumer finance companies with total loan book by these 6 players is VND6.8 trillion (US$340mn) as at 31/12/2011. The most two common consumer goods financed by these companies are motorbikes and mobile phones. Typical loan amounts ranged from VND5mn to VND45mn with interest rates 20-30% per annum for 2-year duration maximum. The most active in this segment is PPF Vietnam (US$133mn total loan book as at 31/12/2011) and SGVF (US$58mn loan book). 65% of PPF Vietnam’s loan book was made for motorbikes by partnering with motorbike retailers throughout the country.
Prudential Finance, however, focuses on payroll based lending with much higher loan amount up to 10-month’s total salary and tapping higher income groups such as white color workers in major cities including HCMC and Hanoi.
Commercial banks also provide consumer loans in various forms such as housing, payroll deductions and mortgages. However, they mostly leverage on their corporate banking customers to introduce such retail banking products. The most active banks in consumer finance is Techcombank, VPBank, ACB and Sacombank. There are some small banks involving in student loans such as Kien Long but in a very small scale.
Informal consumer lending is very significant. There are many investment companies unlicensed and involve in consumer finance business at various forms of products and services. It is unable to determine how big is the pawn shops and unofficial consumer finance markets but it is undoubtedly that the market is significant. People can easily find a pawnshop in every corner of the streets in Vietnam. In Hanoi alone, there were 2,200 registered pawnshops in 2011, according to the Statistics Division of Hanoi Police Department.Services offered by informal businesses vary from mortgage loans with collateralized assets (e.g. autos, gold), hire-purchase service, cash loans backed by insurance agreement to credit card ownership . The large informal businesses normally operate at the back of a commercial bank.
The key challenge is that the Government is not supporting the consumer finance sector. It is currently classified as a non-production business. The government wants to allocate money to production areas and constrain money flow to non-production areas, as an effort to tighten credit and curb inflation. Other challenges to this business are that the current economic downturn will lower personal spending with leverage i.e. borrow to buy. In addition, current infrastructure for consumer finance is very just starting. There are only 11,500 ATMs and 41,500 POS terminals in Vietnam in 2010. Also, Vietnamese people still prefer cash payment as the most common payment mode in country despite they hold financial cards. Only 5% of total transaction value via financial cards in Vietnam is for payment of goods and services via POS, ATM and online payment platform.
But why consumer finance is growing in Vietnam?. Consumer loans as an initial low penetration. Total consumer loans of Vietnam as of 30 June 2012 was just US$4.4bn, accounting for just 3.2% total country loan book. The figure as at 31/12/2009 was USD7.2bn, accounting for 7.8% of nominal GDP which is far below the figures of the peer countries such as Indonesia (10%), Malaysia (42.5%) and Thailand (18%).
Young affluent population in Vietnam are now getting familiar with borrowing to pay. Each year, 1.5 million young Vietnamese (about 2% of total population) join labor force. This makes Vietnam’s current population structure is what some economists described as a golden opportunity of demographic bonus to trigger economic growth. Young Vietnamese population ratio (15 - 44 years old) accounts for 51.9% of total population.
Consumer finance proven as attractive business. Consumer finance companies still reported attractive performance results while banking sector is experiencing a tough time. Overall Vietnamese banking sector has very low profitability with average ROE at only 4.1% and ROA only at 0.4% as at 31/8/2012. In the same macro economic environment, consumer finance companies made very attractive performance results. PPF has ROE ratio at 36.7% and ROA at 6.3% for 2011. Prudential Finance also had good results.