Risk management required in consumer finance arena

Pre-tax profits for FE Credit in the first nine months of 2021 were only $39.1 million, contributing 7 per cent to the total profit of VPBank. Meanwhile, loan disbursement in the period reached $1.8 billion, down 6.6 per cent on-year.

Along with that, FE Credit’s net profit margin (NIM) also continuously declined to the lowest level since 2018, around 24.2 per cent. The capital adequacy ratio, however, improved dramatically, rising from 17.3 to 21.6 per cent. Capital spending in the first nine months fell to 7.4 from 8.2 per cent in the previous year.

HD Saison’s profit reached $34.6 million, a bit higher than last year’s same period. Despite a slowing in profit growth, it continued to expand its network of transaction points by 1,800 points, bringing the total to 21,313 points nationwide.

HD Saison’s credit recorded a decline for the first time since 2016 with a decrease of up to 13.5 per cent compared to the beginning of the year. Its bad debt ratio skyrocketed to 7.4 per cent after remaining stable at 5.8 per cent in H2. At the end of Q3, the firm’s NIM was 29 per cent.

At the same time, MCredit reported pre-tax profit of $18.8 million, equivalent to a 105 per cent increase on-year. Notwithstanding, in Q3 only, the company’s pre-tax profit was $3.8 million, a significant decline compared to the previous two quarters.

According to Nguyen Quoc Hung, general secretary of the Vietnam Banks Association (VBA), the bad debt ratio of consumer finance companies climbed from 6 to 10 per cent in the first nine months of 2021 due to the pandemic.

“Borrowers of these unsecured consumer loans are low-income workers, employees, and small entrepreneurs who are worst-hit. Many clients’ income has been adversely impacted, resulting in their inability to pay. Others in strict social distancing localities are unable to physically follow required processes. These factors both exert a significant pressure on disbursement and debt collection, leading to overdue debts and high bad debts,” he elaborated.

The consumer finance sector is also confronting other roadblocks because of present legislation. A representative of MCredit requested that the State Bank of Vietnam (SBV) priorities early adjustment of legislation in 2022.

Nguyen Dinh Duc, deputy general director of HD Saison, stated that the average bad debt ratio at consumer finance companies around the world is around 8-10 per cent, and in Vietnam it is currently at 9 per cent because it primarily lends to disadvantaged customers with unstable income. However, the SBV set a target of less than 3 per cent bad debt for consumer financing firms, identical to that of commercial banks, making it harder to offer credit capacity to consumer finance companies.

“Because of the industry’s unique characteristics and distinct operational tasks, it is hard to compare the bad debt percentage of a consumer finance company to that of a bank. As a result, the management agency requires a distinct lane for the consumer finance group,” Duc explained.

In the same vein, Tran Thanh Nu Tuong Vy, deputy CEO of SHB Finance, stated that the SBV’s application of a credit growth rate of 12 per cent annually has given rise to difficulties for consumer finance firms.

New companies with low outstanding loans are likely to hit the credit ceiling in Q4. According to Vy, limiting credit growth while current debts are not recovered for re-lending would raise total outstanding loans, and if new loans cannot be provided, consumer finance businesses will be compelled to increase their provisioning for loan risk management.

Meanwhile, based on the actual execution of digital transformation at financial institutions, a FE Credit representative urged that the government create a new regulatory framework for electronic transactions shortly.

“Furthermore, the VBA and other media channels should coordinate in implementing communication campaigns to facilitate a more comprehensive financial literacy and the crucial role of this industry in repelling black credit and loan sharks,” the representative highlighted.