Huge potential for consumer lending
According to the report “Development of consumer lending – international experience and recommendations for Vietnam” by Dr. Can Van Luc and a team of experts from BIDV Research and Training Institute, the consumer lending market in Vietnam is forecasted to have 5 main advantages.
First of all, according to the report, the potential for development of the consumer lending market is huge when Vietnam’s economy recovers with growth rate being quite high (6.5 – 7% in the period 2021-2030) and increasing income per capita (about 6%/year to 2030).
Another advantage is that the Government has and will continue a number of support packages for socio-economic recovery and development after the COVID-19 epidemic is under control, as well as the policy of restructuring credit institutions, thereby contributing to stimulating consumer demand and reducing black credit.
Consumer finance also has advantages in terms of demand. Retail banking has been promoted, including personal credit from credit institutions, along with the development orientation and product diversification of financial companies, which will help the consumer finance market have a stronger development momentum.
In addition, people’s habit of consumption and borrowing is increasingly changing. In recent years (excluding 2020 due to the impact of the COVID-19 epidemic), the economy has grown rapidly, per capita income has increased, the middle class has increased, so the demand for household consumption and shopping has increased, leading to an increase in the demand for credit and consumer lending.
Finally, the strong digital transformation process has created many opportunities for the consumer lending market to modernize, diversify products, improve customer experience, reduce costs and and increase customer access.
It is estimated that consumer credit from consumer finance companies and other financial institutions in Vietnam accounts for about 18% of GDP, equivalent to more than VND 500,000 billion at the end of June 2022.
In particular, according to the Consumer Finance Club of the Vietnam Banks Association, by the end of June 2022, the total outstanding loans of consumer finance companies reached VND 207,000 billion, up 7. 9% compared to December 2021. Thus, the consumer debt balance of other financial institutions was about VND 293,000 billion.
Besides, according to statistics of the State Bank, by the end of 2021, consumer credit of commercial banks reached nearly VND 2 million billion, accounting for more than 20% of outstanding credit for the economy. Thus, a large market share of consumer debt is held by commercial banks, with about 80%, while consumer finance companies hold about 8%.
Foreign companies are gradually dominating the market
The growth in market size is also reflected in the continuous investment in Vietnamese financial companies by foreign enterprises such as Prudential Vietnam Finance Company (acquired by Shinhan Bank Vietnam and established a financial ecosystem together with Shinhan Securities and Shinhan Life), Lotte Finance – a subsidiary of Lotte Card.
At the same time, in order to realize the goal of digital transformation, consumer financial services are now gradually shifting from traditional methods to making full use of technology, from customer search to online appraisal via social networks, scoring customers with models leveraging big data and artificial intelligence.
According to Dr. Can Van Luc, consumer finance also poses risks and challenges that need attention.
First, it is difficult to increase the scale of consumer finance rapidly while asset quality is at risk of decline because customers are the most vulnerable to the impact of COVID-19 due to job loss and income reduction.
Due to external factors such as epidemics and natural disasters, individuals and households tend to save money and limit spending, causing the demand for consumer loans to decrease in the short term. Meanwhile, the main segment of financial companies (mortgage products and customers with limited income) is vulnerable, leading to reduced debt repayment capacity and increased risk of bad debt.
Profit is less positive because net interest income is at risk of shrinking due to fierce competition, causing lending interest rates to decrease to attract customers while financial companies still mainly borrow capital from credit institutions and the bond market with relatively high interest rates.
Another challenge for consumer lending market in Vietnam is that the legal framework is increasingly stricter and more cautious, which can contribute to the healthyization of the credit institution market, but will also affect the scope of operations and profitability of financial companies.