The State Bank of Vietnam is fielding suggestions for a draft circular under which commercial banks must set up a separate finance company to provide consumer credits to customers.

According to the draft regulating consumer lending activities in the country, a finance company can provide consumer credits to individual clients via installment loans, loans on overdraft and issuance of shopping cards.

Finance firms are banned from giving real estate loans due to high risks. According to the board tasked with drafting the circular, finance companies still have many limitations such as low charter capital, poor capability in finance governance and risk control.

Notably, the draft regulates that commercial banks wanting to provide consumer credits to individual clients must set up finance companies. By referring to international standards and the reality of consumer lending activities in Vietnam, the rule aims to reduce risks for banks when extending unsecured consumer loans, the drafting board explained.

In the country, there is no clear line between consumer lending by commercial banks and finance firms. Banks give consumer credits to ineligible individuals to buy vehicles and home appliances in a similar model as finance companies do.

Meanwhile, international practices require that bank customers must earn high incomes and good credit records while finance firms aim at customers from all walks of life, in which many are middle or low-income earners, have no credit records or rack up low credit ratings. Those customers often find it difficult to access bank services.

To secure professionalism and reduce risks in extending consumer loans, some banks have lately rushed to set up finance companies. For instance, HDBank has acquired 100% equity of Société Générale Viet Finance Company and VPBank has acquired Vietnam National Coal - Mineral Finance Company to focus on the consumer loan market.

In addition, some international groups also have plans to set up finance firms in Vietnam to provide consumer credits.

The draft also includes rules on advertising and information provision before credit contract are signed to protect consumers.

Consumer lending is one of key products of local banks. Nguyen Hoang Minh, deputy director of the central bank’s HCMC branch, said that consumer and securities credits now account for around 8% of the city’s total outstanding loans, or around VND80 trillion. Of this, securities loans are insignificant.

The consumer loan segment reported a bad debt ratio of around 2% as of the end of August, lower than the ratio of 4.5% of the entire banking system.

Source: Stoxplus