Consmer credit development of finance companies under commercial bank in Vietnam

credit in terms of the quality of the financial company for the purpose of developing safe and effective consumer credit is shown in the following contents: implementing an effective and effective credit risk management model, credit policies and credit process. - Credit risk management model: According to international practices, there are two common models being applied by finance companies, including centralized risk management model and differential risk management model. The centralized risk management model is a model that clearly separates the business and risk management functions with the main advantage of systematic risk management on a company-wide scale, ensuring competitiveness Long-term competition, establishing and maintaining a synchronous risk management environment, consistent with the management process associated with the operation of business departments, improving capacity of risk monitoring and measurement, policy development unified risk management for the whole system. The distributed risk management model does not have a separation between business and risk management, in which the Business Center fully implements all stages of the loan from appraisal, disbursement, and control to settlement debt relief. This model, thanks to its simplicity and simplicity, has been adopted by independent, small-sized finance companies. - Credit policy: In order to ensure that consumer credit activities are implemented according to the risk management model and business strategy from the Board of Members / Board of Directors of Finance Companies, the finance companies should develop and implement a credit policy and a series of internal documents to coordinate and control the activities of consumer credit activities of finance companies. - Credit process: Regulating all principles and operational flow of professional divisions of the financial company from the time of accessing loan application of Invidual Customers until deciding to lend, disburse or collect money debt and contract liquidation. The credit process is built according to an end-to- end standard and has full of control points in the direction of automation to help the financial company ensure that there are no omissions in the lending process, helping defining the functions of professional units 10 in the financial company participating in the credit flow flow is transparent, clear, understanding the method of coordination and fully grasping its roles and responsibilities. - Credit policy: In order to ensure that the Consumer Credit operation is implemented according to the risk management model and business strategy from the Board of Members / Board of Directors of The finance companies, directly under The finance companies need to develop and enact credit policies and a series of internal regulations to coordinate and control the activities of consumer credit of The finance companies . - Credit process: regulates all principles and workflow of the operational departments of Consumer Finance Companies from the time of approaching loan application of Individual Customers until lending decision, disbursment, debt collection and contract liquidation. The credit process is built according to an end-to-end standard having full of automatic control stages to help the the finance companies ensure that there is no fault in the lending process, helping to define functions of the operational departments participating in the credit flow is apparent, explicit, understanding the method of coordination and fully perceiving their roles and responsibilities. 2.1.3. Criteria to assess consumer credit development level of the finance company 2.1.3.1. Indicators for development of consumer credit in quantity - Consumer credit products’s annual growth. - Consumer credit distribution channels’s annual growth. - Customer volume’s annual growth - Consumer credit market’s annual growth. - Growth rate of annual consumer credit outstanding. - Growth rate of consumer credit market share. - Growth rate of profit. 2.1.3.2. Indicators for development of consumer credit in quanlity NPL (bad debts) ratio NPL ratio in year n = Balance of NPL Consumer Credit year n x 100% Total Balance of Consumer Credit in year n Minimum Capital Adequacy Ratio CAR = Equity Total assets at risk In addition, the development of the finance companies’ consumer credit is also evaluated through the contribution of companies to the results, position, prestige ... parent commercial bank, in implementing the goal of limiting black credit in the national socio-economic development strategy etc. 2.1.4. Factors affecting the development of the finance companies 2.4.1.1. Factors belong to the finance companies - Development strategy. - Organizing product development capacity. - Human Resources. - Information technology capacity. - Responsible lending factor. - Service Quality. 2.1.4.2. Factors belong to commercial banks owning finance company For the finance companies, factors belonging to parent comercial banks have certain implications for the development of consumer credit. The following are factors of a commercial bank that owns a finance company that impacts on the development of consumer credit of the finance companies: Development strategy of commercial banks, prestige and brands of commercial banks. 2.1.4.3. Factors belong to borrowers Factors that belong to borrowers include customer needs, ethical risks, customer insights and customer information. 2.1.4.4. The elements belong to the business environment - Economic, legal, and political environment. - Competitors: the finance companies are under impact of the competitors directly including banks and consumer finance companies in Vietnam, Fintech Company (platform peer lending), other lending institutions are not recognized by law. 2.3. INTERNATIONAL EXPERIENCE ON CONSUMER CREDIT DEVELOPMETN AND LESSION LEARNED FOR VIETNAM 2.3.1. International experience on consumer credit development 2.3.1.1. About ways to develop consumer credit 11 - Santander Consumer Finance Company: the leading company was established in 1963, is active in 15 countries in Europe. Santander is owned by Banco Santander Bank, one of the largest banks in the world by market capitalization. Santander provides a wide range of basic consumer credit products such as unsecured cash loans, installment loans and credit cards. Because Santander focuses strongly on installment loan products, the company mainly uses traditional distribution channels to provide services including service introduction places, branches, telesales centers and receiving loan requests via website. So far, Santander has been serving 20 million customers with 130,000 service introduction places in cooperation with retail partners in many countries and 15,300 employees. - Capital Car Finance: Capital One Group is a US-owned commercial bank, listed on the New York Stock Exchange. Ranked by Forbes in 2017, on the activities of consumer credit consolidation, Capital One was ranked second behind American Express among the world’s top 10 largest consumer finance companies according to 4 combined criteria including revenue, profit, asset and market value. In 2001, Capital One Group acquired PeopleFirst Finance LLC and changed its name to Capital One Car Finance (hereinafter referred to as Capital One) in 2003. For auto loan segment, Capital One provides installment loan products for buying new cars and used cars or refinancing customers' car loans provided from other financial institutions. Capital One implements the Auto Navigator system, which allows potential borrowers to apply for a loan and view a vehicle in the same application on Capital One's website or APP. Thus, although Capital One provides consumer CREDIT product which is basically car installment loan, it has applied technology to receive and process documents online, combined with traditional distribution channel - dealers - to complete providing loan to customers. 2.3.1.2. Development strategy - APLUS FINANCIAL Co., Ltd of Shinsei Bank, Japan: Shinsei Bank is one of Japan's leading financial institutions, formerly The Long-Term Credit Bank of Japan, Ltd owned by Japanese Government. In 2000, Shinsei Bank was privatized and sold to an American company and renamed Shinsei Bank. Shinsei Bank issued shares to the public in 2014 and collected 230 billion yen. Shinsei Bank's operations focus on three main areas of activity including retail banking, wholesale banking and consumer finance. Based on the science and technology database that has been used for payments or loans for many years, Shinsei Bank has cross-sold its existing customer base with consumer demand for loans to Aplus via digital platform. 2.3.1.3. State management of Consumer Credit development by Consumer Finance Companies - Experience of Japan : Before 2006, the market of consumer credit witnessed the strong growth peaked in 1990 with credit size reached 12.000 billion yen to 14,000 companies operating in the field of lending, interest rates peaked in the cap of 109 , 5 % according to Capital Registered Law. By 2007, the Japanese Government decided to increase the penalties for borrowing at high interest rates while increasing requirements for control and complementary properties with consumer finance companies. These tight control measures in Japan have led to a negative impact on the domestic consumer credit market. As a result, in the period 2007-2009, the number of domestic Consumer Finace Company decreased sharply, many foreign consumer finance companies such as Citi Group, GE, etc. leave Japan one by one. The market exits of consumer finance companies bring enormous business opportunities for black credit. The state could not solve the problems caused to consumers from illegal lending activities, and also faced the problem of unemployment and declining tax revenues when consumer finance companies leave the market. - Experiences from countries in Community General Europe: Interest rate restriction is the solution to be recognized and applied in different countries in the EU. According to the results of a European Commission survey on interest rate restriction in the EU, there are 3 countries including Greece, Ireland and Malta are still applying interest rate restriction completely, there are 12 countries applying Use interest rate restriction relatively and 13 countries do not apply interest rate restrictions. Survey on a large scale has been undertaken to assess the impact of interest restriction to the development of consumer credit and obtained the following results: It leads to limited access to consumer credit, the size of consumer credit decreased in countries where the interest rate restriction was applied and fell sharply in the countries where the absolute interest rate was applied, consumer finance companies restricted their operation or gradually exited from the loan market. 2.3.2. Lessons learned for Vietnam 2.3.2.1. Lessons for finance companies Firstly, the finance companies need to exploit individual customers’ profiles that are in relationships with parent banks. This is the fast and effective solution for the finance companies to introduce and constantly update consumer loan products to customers trading and using services of commercial banks APP mother. Customers who are using the APP are also the channels to introduce potential consumer credit products of subsidiary the finance companies when customers know the products and introduce the products to their relatives and friends. Secondly, the finance companies should choose the business model with the consumer credit và channel distribution accordingly, constantly improve the utilities of the products of consumer credit to maintain existing customers and attract new customers. Besides the strategic diversification of consumer 12 credit products, the finance companies should focus on a number of consumer credit products with advantages, creating added value on products such as create a loan and receive online applications, notify loan results of emails, loan queries on mobile applications etc. Clarifed product strategy also helps the the finance companies to develop righteous and effective distribution channels, contributing to sustainable of consumer credit growth. Thirdly, the finance companies need to build a modern information technology system to provide credit to individuals conveniently and effectively. Thereby providing credit products applied new technologies to encourage and attract customers. 2.3.2.2. Lesson for state management on consumer credit development Firstly, consumer credit activity should be considered in correlation with consumer credit demands of individual customers, the Government when developing consumer restriction tools should be carefully evaluated to ensure consumer credit limitations not lead to a black credit boom, affecting low-income subjects but in need of consumer loans. Secondly, the restriction of consumer credit should be flexibly applied to each of the finance companies which have clear applying conditions. The finance companies have financial potential, ability to control risks better and ensure that the targets set by government regulations such as the Capital Adequacy Ratio, bad debt ratio, capital minimum charter etc should be encouraged to grow consumer Credit at a higher rate than those do not meet the requirements for credit growth. Thus, the finance companies can maximize the role of funding for consumers with low incomes and become a tool of positive black society credit restrictions. 13 CHAPTER 3: REAL SITUATION OF CONSUMER CREDIT DEVELOPMENT OF FINANCE COMPANIES UNDER COMMERCIAL BANK IN VIETNAM 3.1. OVERVIEW OF THE FINANCE COMPANIES IN VIETNAM 3.1.1. Establishment and development process of the finance companies in Vietnam The period 2007-2010 is a period with a strong participation in credit operations of a type of non-bank credit institutions as a financial company. There were 3 foreign finance companies and 9 domestic finance companies licensed to establish in this period. As of December 31, 2019, there are 16 finance companies in Vietnam, including 4 finance companies with 100% foreign capital, 6 finance companies under commercial banks and 6 finance companies under economic groups. and other shareholders. 6 finance companies under commercial banks including Community One-member Finance Company, Post and Telecommunication Finance Company, Vietnam Fe Credit, HD Saison, and MCredit, SHB Finance. 3.1.2. Management and organizational model of finance companies under commercial banks The finance companies all have relatively similar organizational structures, including the Members' Council, the Supervisory Board, the General Director, the Business/business Center Division, Risk Management Division, Internal Auditing Department, Legal Department, Operations Division, Human Resources Division, Financial Accounting Department, Treasury Department, Information Technology Center. Depending on the model of the finance companies and the size of personnel in each unit, the names of functional units will be specified in the form of Block or Board or Center. 3.2. CURRENT SITUATION OF CONSUMER CREDIT DEVELOPMENT IN VIETNAM 3.2.1. Current situation of implementing consumer credit development methods 3.2.1.1 Actual situation of developing consumer credit products Table 3.1 The development of new consumer credit products by the finance companies No. Number of consumer credit product groups 2014 2015 2016 2017 2018 2019 1 FE Credit 3 3 4 4 5 6 2 HD Saison 3 3 3 3 3 3 3 MCredit N/A N/A N/A 3 3 3 4 SHB Finance N/A N/A N/A N/A 1 1 Source: Fiingroup In the 2014-2019 period, the finance companies focused on deploying basic consumer credit product groups to meet the consumer loan needs of individual customers. FE Credit is the only financial company providing FE Credit Plus + Master Card in the market. FE Credit is also a pioneer finance company deploying digital consumer credit products. In the period of 2014-2019, HD Saison only focused on deepening customers and expanding lending purposes under 03 basic consumer credit product groups but not deploying credit cards, and digital consumer credit products. MCredit and SHB Finance also focus on basic consumer credit products right from the official operation phase and not further development, in which MCredit deploys 03 consumer credit products similar to HD Saison in In the period of 2017-2019, SHB Finance only focused on cash loans in the period of 2018-2019. Thus, consumer credit development through the method of consumer credit products has the differences between the 4 finance companies under the commercial banks in the period of 2014-2019 as follows: FE Credit implements the development of consumer credit by a mixed consumer credit product category including basic consumer credit products and numbers but with a focus on the basic consumer credit product group. The remaining finance companies are focusing on developing consumer credit by the group of basic consumer credit products, there has not been a shift to digital consumer credit products. 3.2.1.2. Current situation of development of distribution channels Table 3.2 Development of distribution channels during 2014-2019 No. Number of distribution channels 2014 2015 2016 2017 2018 2019 1 FE Credit 4 4 4 4 5 5 2 HD Saison 4 4 4 4 4 4 3 MCredit N/A N/A N/A 4 4 4 4 SHB Finance N/A N/A N/A N/A 4 4 Source: Fiingroup In the period 2014-2019, all the finance companies have deployed basic distribution channels including POS, Telesales, DSA, and Partners. FE Credit grew one more distribution channel in 2018 thanks to the deployment of loan application and automatic approval on mobile APP. In fact, although most of the 14 distribution channels are implemented by the finance companies, the differences between the finance companies are reflected in the number of POS and DSA that the financial firms provide. subordinate has grown. Developing the number of POS and DSA distribution channels, either qualitatively or quantitatively, has a positive impact on the growth of consumer credit of finance companies. In general, in the period of 2014-2019, the finance companies implemented the strategy of developing traditional distribution channels, focusing resources on developing POS / DSA channels and developing diversified distribution channels. Other, step by step developing a new distribution channel through the parent bank. 3.2.1.3. Market share Table 3.3. Level of market growth geographically during 2014-2019 No. SL TT TDTD 2014 2015 2016 2017 2018 2019 % Average growth 1 FE Credit 63 63 63 63 63 63 0% 2 HD Saison 43 51 63 63 63 63 8% 3 MCredit N/A N/A N/A 36 53 63 33% 4 SHB Finance N/A N/A N/A N/A 33 37 22% Source: Fiingroup Geographic market development plays an important role in the development of consumer credit and has been well-aware and strategically covered by finance companies in the short time since its establishment. 3.2.1.4. Sales promotion Until the end of 2017, FE Credit and HD Saison focused on promoting and introducing consumer credit products to customers through the POS network and retail partners that have signed cooperation contracts. However, with the emergence of partners providing intermediary payment services and online payment platforms and e-wallets, the finance companies are tending to gradually shift marketing activities through platforms. linking and reducing targeted marketing campaigns via POS as before. According to the results of interviews with professional officials of the finance companies, sales promotion activities were implemented by the finance companies during 2014-2019 including: POS, DSA, Telesales, SMS , magazines, headquarters and affiliates, media, Website, and Mobile APP (FE FE only), other promotion programs. Newly joined finance companies such as SHB Finance and MCredit are also implementing these programs. 3.2.1.5. Current situation of lending interest rates of finance companies under commercial banks Depending on the policy of each financial company, the lending interest rate is either published according to the basic consumer credit product or the interest rate announced by the consumer consumer credit products. Lending interest rates of the finance companies range from 29.99% -64.99% / year. Thus, compared with the interest rate for individual customers of some parent commercial banks for the purposes of buying houses and cars with the lending interest rates ranging from 12% -14% / year, the target credit interest rate is Use rate is quite high compared to the lending interest rate of commercial banks. Currently, most finance companies have not implemented online lending products, so there is no clear difference in interest rates of traditional lending products and online lending products. 3.2.2. The situation of consumer credit quality management of the finance companies in Vietnam 3.2.2.1. Actual situation of credit risk management model Currently in Vietnam, a popular consumer credit risk management model that has been chosen by the finance companies is a risk management model similar to the centralized risk management model of domestic commercial banks, in which the model has a clear separation of risk management functions and business functions. The following is a typical consumer credit risk management organization structure of the finance companies built to ensure the quality of consumer credit: Member Council, Risk Management Committee, Board of Directors control, Executive Board, Credit Risk Council, Risk Management Division, Legal Department, Agency or Internal Control Department, Internal Audit Department. In terms of operational history and annual financial indicators, FE Credit and HD Saison are currently two finance companies that have implemented consumer credit risk management organization models. use professionally and effectively, in accordance with the model and common risk management policies of the parent bank. For finance companies in the early stages of business establishment and implementation such as MCredit and SHB Finance, immediately deploy a professional risk management model with full of specialized functional units such as FE Credit. and HD Saison is not the best choice. However, with the development strategies of SHB Finance and Mcredit, both towards the Top 5 safe and effective consumer finance companies, these finance companies are in the process of completion and standardization of in-depth risk management model in which strong investment in systems and resources for 15 successful implementation of risk management projects is indispensable. 3.2.2.2. Actual situation of credit policy, credit process  Credit policy For the finance companies, credit policies or credit risk management policies are issued annually by the Board of Members according to the same standards as the parent commercial banks. The purpose of issuance is to guide credit operations at finance companies, to agree on basic principles to identify, measure, monitor, control and minimize credit risks for the loan portfolio. and each loan, assigning tasks and defining roles and responsibilities of units at the finance companies in credit risk management. With an effective safety development strategy, credit policies of the finance companies are also built to ensure that consumer credit development is accompanied by strict control of credit limits for customers. Bank, the authorities decide in credit activities and monitor the capital adequacy ratio continuously and promptly with adjustments in the lending scale to ensure the capital adequacy ratio as prescribed by the State Bank.  Credit processes In general, the consumer credit process of the finance companies is often simpler than the credit process of commercial banks stemming from the nature of the loan and the borrower. According to the results of interviews with the experts of the finance companies and information from the websites of the finance companies, the standard credit process of typical finance companies such as FE Credit and HD Saison is applying to customers including 5 steps including: Loan information consultancy - Collecting loan documents - Loan evaluation and approval - Disbursement - Tracking loans and loan recovery. With regard to the requirement of compliance with the credit pr