20% ceiling on personal loans may go

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Vietnam is likely to remove the ceiling of 20 per cent interest rates on personal instalment loans and introduce a limit of VND10 million ($445) on each loan under a draft circular from the State Bank of Vietnam (SBV) providing guidance on personal instalment loans.

Financial companies and commercial banks can negotiate interest rates on personal instalment loans with customers but the best possible rates should be offered to support borrowers, ensure their repayment capacity, and limit any risk of bad debts.

The $445 limit can be reviewed by the SBV Governor from time to time. There is a great deal of risk incurred when financial companies provide loans to customers and customers likely to take out such loans are low or middle-income earners with limited knowledge of finance, the draft circular noted.

The draft will guide personal instalment lending by financial companies, protecting the rights of customers and ensuring the transparency and sustainable development of such lending.

The Vietnam Competition Authority (VCA) under the Ministry of Industry and Trade (MoIT) previously revealed that interest rates on personal instalment can be as high as 60 to 70 per cent per annum and warned customers to be careful when signing up for loans.

In recent times there has been much confusion in regard to interest rates on personal instalment loans. Under the Civil Law from 2015, which will come into effect on January 1, 2017, rates are not to exceed 20 per cent per annum except in cases where other laws take precedence.

Mr. Phan The Thang, Deputy Director of the Consumers Right Protection Office at VCA, believes that personal instalment loans bear high operating expenses and a high risk of irrecoverable debt and so come with high interest rates.

Many financial companies have said that they cannot operate on a 20 per cent limit. Other regulations may be needed to either adjust or remove the ceiling, according to Mr. Thang.

In its draft circular the SBV permits related parties to negotiate interest rates. Notes attached to the draft state that the SBV believes the Law on Credit Institutions allows related parties to negotiate.

Based on this, the draft circular does not regulate a ceiling, meaning the limit under the Civil Law will not apply to financial companies providing personal instalment loans.

According to Mr. Nguyen Hoang Minh, Deputy Director of the SBV’s Ho Chi Minh City branch, the negotiated interest rate will not be set freely, with the SBV requiring that banks and financial companies offer affordable rates to support borrowers.

The draft also requires financial companies notify the customer of the amount of interest payable by year, month and day, to make it “convenient for customers to compare the rates of other commercial banks and financial companies.” The draft also requires the amount of interest be calculated based on the remaining debt owed and not on the initial amount.

However, the CEO of the Basico Law Firm Mr. Tran Minh Hai believes the draft runs counter to a market economy. “The SBV seems to be too concerned about interest rates,” Mr. Hai was quoted as saying.

The regulation that interest rates calculated by year, month and day with or without a ceiling and be based on the amount outstanding is for easier management, he said, but its inflexibility makes it unsuitable for the banking and finance sector. Interest rates and the method of calculation should be open to negotiation, he believes.

The draft aims at protecting consumers as in recent times there have been complaints from consumers about higher than expected interest rates compared to those advertised. Many advertisements quote low interest rates but a few months after signing the contract customers realize there are hidden costs.

A preferential interest rate of zero per cent or one to three per cent per month only applies for the first one or two months or a short period of time and afterwards increases drastically and is always calculated based on the initial loan amount.

Drafters paint a picture of customers that “have average or low incomes, limited knowledge about finance, demand to borrow small amounts for short periods, and have difficulty in accessing the personal instalment loans of commercial banks.”

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Mr. Hai believes that to protect customers the SBV can regulate that financial companies explain interest rates, penalty rates, and costs specifically and thoroughly to customers. If financial companies cannot prove that they have explained these carefully to customers then there will be fines imposed.