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An overview on Vietnam's consumer finance market.

Consumer finance is a commonly used term in modern life. However, in order to provide a comprehensive understanding of consumer finance and how to effectively utilize consumer financial products, Vietdata is pleased to introduce a series of articles "What's your understanding of Vietnam's consumer finance market?"

In the first article, Vietdata will provide an overview of the consumer finance market, including definitions and segments of consumer financial products in Vietnam.

What is consumer finance?

Consumer finance is the provision of direct loans by credit institutions to individuals/households for the purpose of purchasing goods and services for consumption.

Consumer finance plays a crucial role in stimulating consumer demand and the economic growth of a country. As human financial needs go beyond trends of borrowing for buying houses or cars, they encompass various stages of life with diverse products ranging from purchasing assets, and homes, to expenses for education, healthcare, travel, etc. Especially, when income is not sufficient to cover expenses, the emergence of borrowing needs becomes unavoidable.

Which segments are there in Vietnam's consumer finance market?

Consumer finance has developed significantly worldwide, especially in developed economies, where a large portion of the population carries consumer debt. However, the consumer finance market in Vietnam is still relatively young, with significant growth potential.

Currently, consumer finance products in Vietnam include the following segments: First, consumer loans from banks. Second, loans from financial companies. Third, credit card loans. Fourth, lending through Buy Now Pay Later (BNPL - fintech model). Fifth, pawnshop business.

First, consumer lending products of commercial banks

Typically, consumer lending products of commercial banks (CBs) have lower interest rates compared to those offered by financial companies, but they require customers to have good credit conditions. In some CBs, these loans are often unsecured, but are secured through salary accounts, and typically include products related to home construction, renovation, car purchase, etc.

This segment accounts for a significant proportion of the consumer finance market, which is an important part of the consumer finance market in Vietnam. According to the SBV's statistics, by the end of 2022, consumer credit from the commercial banking system reached nearly VND 2.4 quadrillions, accounting for over 20.13% of the total credit balance for the economy. It can be observed that the large market share of consumer loans is still held by commercial banks (more than 80%).

Second, loans from financial companies

According to Article 4 of the Law on Credit Institutions, financial companies are one of the non-bank credit institution forms. These financial companies are licensed, regulated, and supervised by the State Bank of Vietnam (SBV).

The consumer loan products offered by financial companies typically have higher interest rates and fees compared to those offered by commercial banks, along with lower credit standards and requirements. One distinctive difference of this product group compared to bank products is that financial companies often do not require financial proof, only requiring household registration and/or identification documents such as an ID card or citizen identification card.

Typical products offered by financial companies include loans for purchasing Honda motorcycles (in partnership with showrooms) and installment loans for smaller items valued at less than VND 20 million (through partnerships with supermarkets, and electronics stores).

As of the end of 2022, the outstanding consumer loans provided by consumer finance companies are estimated to reach around VND 192 trillion, an increase of about 20% compared to the end of 2021, accounting for nearly 8% of the total consumer loans within the system and representing 1.61% of the total outstanding loans in the economy. Currently, there are 16 licensed consumer finance companies operating in the Vietnamese consumer finance market, with some notable names such as FE Credit, HD Saison, and Home Credit...

Third, credit card loans

The outstanding credit card debt is the amount that customers have utilized from their credit cards to pay for consumer expenses such as shopping, travel, dining, bill payments, and other costs.

At its core, a credit card allows customers to spend money upfront and repay it later. The issuing bank sets a predetermined credit limit for the customer, which represents the maximum amount they can borrow. Customers can borrow money within this credit limit to make purchases, and then repay the bank either in full or in installments. If the customer does not repay the entire borrowed amount (including installments), they will be charged additional interest by the bank.

Credit cards have been a well-established payment method in Vietnam for many years, and they are widely used in urban areas. They provide users with benefits such as flexibility, convenience, and speed. However, to be eligible for a credit card, the minimum requirement is for the cardholder to demonstrate income through a salary account.

Fourth, lending through Buy Now Pay Later (BNPL - Fintech model)

This is a newly emerging model in Vietnam. Buy now pay later (BNPL) is a payment model that allows consumers to make purchases upfront and pay later over a specified period of time, usually without interest or fees. The characteristics of this product are quite similar to credit cards.

BNPL differs from credit cards in several aspects such as interest-free period (the time when customers fulfill their repayment obligation without incurring fees/interest for those purchases), registration requirements, and popularity. Specifically:

Interest-free period: With credit cards, the interest-free period typically ranges from 45-60 days depending on the credit card product and the regulations of each bank. With BNPL, this payment method allows users to divide their purchases into smaller installments and make multiple payments without paying interest within a designated timeframe, usually ranging from 15-90 days.

Registration requirements: The registration requirements for BNPL are simpler than credit cards. Generally, companies only require a phone number and National identity card/ Citizen identity card, without specifying personal income limits.

Popularity: BNPL has not been widely adopted yet, with only a few businesses accepting it, and the product segment is typically associated with e-commerce, fashion, and watch purchases (products with a value ranging from 5-7 million VND or lower).

Fifth, the pawnshop business

Pawnshop business is typically provided in the form of individual household businesses or registered enterprises with the business code "6492 - Other credit granting activities; details: pawnshop services". This is a conditional business activity, although it is not subject to the supervision and management of the State Bank like the above-mentioned lending activities.

In Vietnam, pawnshop activities have existed for a long time in the form of individual household businesses and are quite common in small provinces, and rural areas. However, in recent years, there has been a trend towards "professionalizing" this business service through the establishment of pawnshop companies. F88 Joint Stock Company (F88) is one of the pioneering enterprises in promoting the "professionalization" process of the pawnshop model.

Although the interest rate for pawnshop loans are regulated by Article 468, Section 1 of the 2015 Civil Code, which states that the interest rate for loans must not exceed 20% per year, in reality, most actual interest rates and fees applied by pawnshops businesses exceed the regulated limit (and are disguised under various forms and types of fees).

Despite the high-interest rates that borrowers have to pay, there is a significant demand for borrowing in this segment due to the lenient borrowing conditions. However, due to the lax borrowing conditions, debt recovery can also pose challenges. In fact, sometimes debt recovery methods and practices can be distorted. Recently, the Criminal Police Department under the Ministry of Public Security, in coordination with the police of Ho Chi Minh City and some other provinces, conducted inspections and searches at the headquarters and transaction points of F88 Joint Stock Company and some other companies operating in the debt recovery service sector.

In the next article, let's continue to explore the potential of the consumer finance market and the current development situation of the industry in Vietnam with Vietdata!

Source: Vietdata's Consumer Finance Report 2022


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