Banks cash in on Vietnam's micro-consumer loan segment

The sector’s interest rates could exceed 50% per year.

Banks including VP Bank, Orient Commercial Bank, HD Bank, and Southeast Asia Commercial Bank have been ramping up and going into Vietnam’s micro-consumer lending segment amidst its lucrative business potential buoyed by interest rates that could exceed 50% per year and the country’s highly unbanked population, according to a report by Fitch.

Also joining the game are foreign investors such as Japan’s Credit Saison and South Korea’s Lotte Group and Shinhan Financial Group that have inked partnerships with local consumer-finance companies in order to penetrate the market.

The research firm noted that World Bank data suggested that only 30% of the country’s population possess bank accounts, which is a lot lower compared to the average of 73% banked population in East Asia and the Pacific as of end-2017, thereby giving rise to the micro-consumer lending.
On the other hand, Vietnam’s state-owned banks have been cautious and blamed the lack of know-how in developing risk and operational processes to monitor high-risk consumers from the segment.

“Micro-consumer loans are inherently of higher risk relative to traditional mortgages or household personal-business loans in light of the unsecured nature of these loans and the borrowers’ profiles, which are traditionally outside the banking system’s target customer. The majority of these customers are therefore served by the black market and consumer-finance companies,” Fitch explained.

Moving forward, the ratings agency noted that the market could see more participation from the side of foreign investors. “We believe loan growth in this segment is likely to continue to moderate slightly in the near term, after having grown rapidly over the last five years. This is premised on the introduction of regulatory caps of $4,300 (VND100m) per customer in 2017 and recently proposed changes, which will limit consumer-finance companies’ unsecured cash loan exposure to 30% of their total loans,” they added.

Furthermore, Fitch Ratings is positive that a crisis scenario in the near-term is unlikely to happen in the near-term. “However,a continued increase in the interlinkages between the sector and the banking system would make the banks more vulnerable in the event of an economic downturn,” Fitch explained.