Consumer credit: Big potential, high risk

Consumer credit is forecasted to grow to 30% over the next three years. Picture: collection.

Some are eager, others are indifferent

At the General Meeting of Shareholders (GMS) in 2018, Mr. Nguyen Duc Vinh, Chief Executive Officer of VP Bank, said that consumer credit with FE Credit brand was one of the two major sources of bank profit in the last 5 years. In 2017, FE Credit's consumer credit grew by 52%. According to calculations, FE Credit had currently accounted for over 50% market share of consumer finance companies. According to the plan in 2018, VP Bank set a profit target of 10,800 billion VND, of which 50% comes from the financial companies. To achieve this goal, Mr. Vinh said that the bank might also operate in a higher risk environment than many other institutions. Taking the example of mortgage lending, the CEO of the bank said that the financial companies supplied small credit loans to individual customers, and card credit loans.

Similar to VP Bank, many other banks have also started participating or planning to participate in the development of consumer finance companies. Specifically, the Military Bank (MB) expects to develop the Mcredit brand to become the Top 5 of the consumer finance companies with total outstanding loans of 5,900 billion VND and pre-tax profit of 300 billion VND in 2018. Mcredit has been experimenting with the appropriate financial products for one year, especially for military personnel and they expect these products to grow rapidly in the coming years.

The General Meeting of Shareholders of OCB has just approved the establishment of OCB Finance Company to buy another financial company with a minimum of 70% of its chartered capital this year. This financial company will carry out the consumer credit, the financial leasing, factoring and other activities in accordance with the law. According to the OCB's leader board, the bank had a mass customer group – ComB in the consumer financial loans, which was operating efficiently with a fast growing scale and began to play a role in revenue as well as profits for the bank. Thereby, it should be separated into an independent financial company to facilitate business and risk. In addition, according to Mr. Trinh Van Tuan, Chairman of OCB, bringing the consumer financial products into the market would replace black market credit. OCB was aimed at small business owners primarily. However, because ComB still belonged to the bank, the procedure would be more complicated. If the financial company was split, it would have the opportunity to reduce the profile of customers.

However, in the consumer financial "fever" now, some banks show "immunity". Particularly, at the annual shareholders meeting in 2018, Mr. Dang Khac Vy, Chairman of VIB said that VIB had surplus, the better choice was the establishment of a financial company. VIB was one of the market leaders in terms of turnover in housing loans, car purchasing loans and insurance cross-selling. VIB's retail banking segment had grown by 83% in 2017 and 13% in the first quarter of 2018, although this time included the Lunar New Year holiday, even this segment was expected to rise 100% by 2018. These figures showed the potential profit of this segment was huge, although it was unnecessary to have a consumer finance company. While the consumer loans had a high interest rate of 30-60%, but the risk was very high and profit was often short-term, not long-term.

Recently, Techcombank has also sold TechcomFinance Company. According to Mr. Ho Hung Anh, Chairman of Techcombank, the bank did not choose the high risk model, high profit, they had found other segments with lower risk.

Potential risks

According to analysts of Viet Dragon Securities, the consumer credit growth was a door for the credit growth of banks. In the medium term, the growth in this sector would still be open even if the size of consumer credit was only about 19% of GDP in 2017. More importantly, this capital inflow would impact positively economic growth in the next 1 to 2 years. The move would also support the recovery of the real estate market and paint the picture of Vietnam's stock market. In context that the fiscal "wheel" was being eroded seriously and the pressure of debt repayment in the next 3 years was very large, when nearly 60% of Government bonds in the country would be due, the loose monetary policy would drive the Vietnamese economy.

However, according to the statistics, the growth of consumer credit in Vietnam was rising sharply, reaching nearly 60% in 2017 and it was forecasted that the average growth rate of this sector would reach 29-30% per year in the next three years. As a result, the experts warned that the rapid growth of consumer credit flows could create the deviation from the original orientation. Accordingly, the promotion of consumer credit should generate the momentum for the aggregate demand of the economy and promote domestic production.

Relating to high speculative fields such as the real estate and securities, the experts said that the current picture was still adorned with pink. However, the potential risks could not be ignored when over 50% of consumer credit flows flowing into this sector was a great motivator to support the recovery of the market. This has contributed to creating the untruth of the calculations and public figures on the real estate credit flows. When this happens it indicates high risk, but when the above assets were taken over by mortgages, the banks appreciated highly the creditworthiness of borrowers.