Luận văn Solutions to improve effectiveness of consumer credit in Vietnam

The tight monetary policy implemented since the beginning of 2008 has been proved as an essential decision to control rising inflation. However, this produced sort-term effects on liquidity of CIs, that is, interest rates on personal customer deposits rose dramatically. Although in 2009 the basic interest rate did not fluctuate as much as in 2008, it was remained for a long time at 7 per cent. Banking activities as a result faced challenges because a ceiling in interest rate applied for loans was set at 10.5 per cent while rate on deposits touched 9.99 per cent. The amount of capital mobilization of the whole banking system has increased at an average of 25 per cent and 30 per cent per year. Figure 2: Growth of personal customer deposits in Vietnam’s commercial banks from 2005 to April 2009 (%) (Source: The State Bank of Vietnam) Since 2008, capital mobilization of commercial banks has decreased markedly. According to figures from the SBV, the total personal customer deposit balance at CIs in April 2009 increased by 3.74 per cent compared to that in the previous month and rose by 9.88 per cent compared to that at the end of 2008. Outstanding debts in 2008 were estimated to be from 21 per cent to 22 per cent higher than those in 2007 Figure 3: Growth of credit performance in Vietnam’s commercial banks from 2004 to April 2009. (%) (Source: The State Bank of Vietnam) At the end of the first quarter in 2009, despite a wide range of solutions to combat economic downturn, outstanding loans increased by only 2.67% compared to those in December 2008. In the whole banking system, credit growth at the end of November 2009 was approximately 34 per cent while in 2008 the figure was just around 21 per cent and 22 per cent. 2.3. Consumer credit activities in Vietnam 2.3.1. Types of consumer credit product applied in Vietnam - Individual lending: On each occasion that a loan is provided, the client and the credit institution shall carry out the necessary procedures and enter into a credit contract. - Lending pursuant to a line of credit: The credit institution and the client shall determine and agree on a line of credit to be maintained for a fixed period. - Lending on installment repayment: When providing the loan, the credit institution and the client shall determine and agree on the amount of loan interest that must be paid in addition to the amount of principal which shall be divided into repayment periods during the loan term. - Lending by way of issuance and use of credit cards: The credit institution shall approve the use by a client of a loan amount within line of credit to pay for purchasing goods and services or to withdraw cash at automatic telling machines (ATM) or at the cash advance agencies of the credit institution. For lending by way of issuance and use of credit cards, credit institutions and clients must comply with the regulations of the Government and of the State Bank of Vietnam on issuance and use of credit cards. - Lending pursuant to overdrafts: The credit institution shall agree in writing with the client on making payments in excess of the account balance of the client, consistent with the regulations of the Government and of the State Bank of Vietnam on payment operations by credit institutions providing payment services. 2.3.2. Rules and regulations on consumer credit activity in Vietnam In general, consumer credit activity is regulated by many of relevant laws, especially by Decision No. 1627/2011/QD-NHNN issued by The SBV on 31 December 2001. Decision No. 1627/2001/QD-NHNN promulgates regulation of financial institutions lending to customers issued to borrowers with credit institutions and USD foreign currency, is lending the capital needs that are not prohibited by law; on term loans, financial institutions and their customers based on production cycles, business, duration of recovery of capital investment projects, capacity customer and repayment of capital loans by financial institutions to agree on the loan term, lending rates and lending rates by mutual agreement; CIs have autonomy detailed guidance on dossiers and procedures , the evaluation process, the loan check; agreements with customers about the appropriate method of lending relationship with the level of credit risk by dealing CIs considered by many to decide appropriate measures as restructure the term of credit agreement including adjustment term debt, debt extension, overdue move; reduce the interest-free loans. Besides, consumer credit is mandated by the following legal documents: - The 1997 Law on Credit Institutions and the 2004 Law amending and supplementing a number of articles of the Law on Credit Institutions. - Decree No. 16/2001/ND-CP dated 02 May 2001 of the Government on the organization and operation of financial leasing companies. - Decision No. 652/2001/QD-NHNN dated 17 May 2001 of The SBV issuing the regulation on the method of calculating and accounting the collected and paid interests of The SBV and CIs. - Decree No. 79/2002/ND-CP dated 04 October 2002 of the Government on organization and operation of financial companies. - Civil Code 2005. - Decree No. 65/2005/ND-CP dated 09 May 2005 and Decree No. 95/2008/ND-CP dated 25 August 2008 of the Government on amendment and addition to a number of articles of Decree No. 16/2001/ND-CP dated 02 May 2001 of the Government on the organization and operation of financial leasing companies. - Decree No. 163/2006/ND-CP dated 29 December 2006 of the Government on security transactions. - Decision No. 21/2007/QD-NHNN dated 15 May 2007 of The SBV promulgating the regulation on issuance, payment and use of bank cards and provision of bank card operation support services. - Decree No. 81/2008/ND-CP dated 29 July 2008 of the Government on the amendment, supplement of several articles of Decree No. 79/2002/ND-CP dated 04 October 2002 of the Government on organization and operation of financial companies. - Circular No. 12/2010/TT-NHNN dated 14 April 2010 of The SBV specifying the provision of Vietnam-dong loans at negotiable interest rates by CIs to customers. The CIs have designed their own credit manual in compliance with contemporary legal documents. There are some rules and regulations covered as follows: Scope The guidelines prescribe the rules for short-term, medium-term, and long-term loans which are provided to meet the following needs of individuals and households: - Home loans for renovation and accommodation that are paid by borrower’s salary. - Loans for vehicle purchase. - Loans for education and healthcare. - Loans for purchasing household utensils and appliances. - Loans for expenses on cultural, sports, and tourism activities. - Overdraft. - Loans provided through the issuance and use of credit cards. The branches of credit institutions (CIs) hold accountability for their lending decisions. No organizations or individuals are allowed to illegally interfere in the autonomy of CIs’ branches in lending process and debt recovery. Principles of borrowing The borrower asking for a bank loans must ensure the following principles: - Using the loan for the purposes as being stated in the credit agreement. - Repaying the loan including principal and interest rate applied on the loan by the due date written in the credit agreement. Conditions of borrowing A CI shall consider and decide to provide a loan when all of the following conditions are satisfied: - The borrower has civil legal capacity and capacity for civil acts and bears civil responsibility as stipulated by law. - The borrower has secure income which ensures his debt repayment by the due date as being written in the credit agreement. - The borrower must prove his/her using loans legally. - The borrower must satisfy regulations on loan insurance in accordance with rules and guidelines issued by the government and The SBV. Besides, in specific cases, the borrower has to meet some certain requirements. For example: - Collateral is a must. - The borrower has permanent residence in the same province or city where the headquarters or other branches of CIs are located. Any cases of lending excluded in the above conditions of borrowing must be approved by the Board of Managers of CIs. Term of loan and repayment period The CI bases on the borrower’s repayment capability and its source of capital to reach a proper agreement on term of loan and repayment period. In reality, credit agreement on house loans of over 10 years must be approved by the chief executive officer of the CI before it is carried out. Interest rate on the loan is proclaimed by the CI’s Board of Managers in each period in accordance with market conditions and mechanism of interest rate announced by the State Bank of Vietnam. The branches of CIs are not allowed to apply interest rate that is less than being stated in regulations on loans. The case of providing loans with preferential interest rates to implement the CI’s customer policy must be approved by the Board of Managers. The overdue loans must apply interest rate calculated for overdue loans in compliance with rules and regulations. Since the Circular 12/2010/TT-NHNN dated 14 April 2010, commercial banks have provided loans at negotiable interest rates. Credit limit CI bases on its source of capital, the demand for loans, customer’s repayment capability, and the value of secure assets to determine the line of credit. Specifically: Mortgage loans: As for loans funded to renovate and legalize houses, the amount of loan must not exceed 70% of estimated costs and the value of secure assets the current regulations. As for the case of transferring the property, or building houses, then the loan must not exceed 50% transferred value, estimated costs of construction, and the value of secure assets under the current regulations. Cases of providing excessive line of credit must be accepted by the Genral Manager. Consumer loans: The amount of loan must not exceed 50% of the value of secure assets. The amount of outstanding loan also must be no more than 100 million VND. Cases of providing excessive line of credit must be accepted by the General Manager. The maximum amount of loan for an individual customer is adjusted by the General Manager in each period of time in accordance with the practical situation. In the case that the borrower asks for a loan of less than 15 million VND or less, the procedure for notarization of mortgage is not required. However, evidence of permanent residence must be authorized by the local government and included in the loan application package. Assessment process and lending decision All loan applications must be verified and assessed by credit officers in accordance with opinions of Manager of Consumer Loan Department. In some cases, Branch Manager can veto his or her subordinates’ opinions and proposals. However, he or she must hold accountability for his or her own decision. The maximum length of time to inform decision on lending to the customer after receiving complete loan application package is 5 days as for the Branch Manager, and 7 days as for the case that the Branch Manager is unauthorized to make decision. CIs’ branches use the credit agreement form issued by the General Manager. The form can be adjusted in accordance with certain situations with the agreement of the General Manager. Inspection and supervision of loans - Before providing loans: Upon receipt of the loan application from customer, credit officers and other related departments carry out examination on the validity and legality of the following factors: plans to use the loan, the ability to repay debt, the status and value of secure assets. Other information of customer also needs gathering. The credit officers make initial assessment basing on available documents carefully before proposing for granting a loan. - Granting loans: Before a loan is truly granted to the borrower, the bank’s branches have to examine and compare the accuracy, validity and legality of the documents in a loan application package. - After granting loans: After providing fund, the branches take responsibility to monitor and supervise the usage of the loan, the status of secure asset supervise the use of the loan, status of loan security assets, liability for interest payment, as well as the customer’s capability of paying back the debt. If the customer fails to pay off the loan timely due to objective reasons and submits a written request, then the bank will have to carry out verification before making a decision on extending or adjusting repayment period. The bank can only grant two-time extension as for short-term loans, and four-time extension as for long-term loans. All banks impose restriction on loans that are guaranteed by a third party (known as a guarantor). In case the loans are agreed, the following procedures should be employed: credit officer makes a contact with the guarantor in person to identify the ownership of secure assets; the willingness to be a guarantor; reasons for guarantee; the relationship between the guarantor and the borrower; economic status; as well as the guarantor’s civil legal capacity and capacity for civil acts. The credit officer also notifies the guarantor of his or her duty to pay the debt in case the borrower does not make debt repayment timely. 2.3.3. Performance evaluation of consumer credit in Vietnam Regarding legal framework Until now, it has been shown in reports submitted to The State Bank of Vietnam that all banks have complied willingly with regulations and certain procedures for consumer credit. All banks base on rules and regulations which are stated in specific documents issued by The State Bank of Vietnam to formulate their own business strategy in accordance with their business conditions and customers’ characteristics. However in practice, The State Bank of Vietnam has also detected many violations on its annual inspection, chiefly of lending process and lending regulations. Many of credit officers do not ensure complete and accurate compliance with all the provisions and regulations applicable to consumer credit. They provide fund leniently to reach their target of raising the number of outstanding consumer loans and attracting customers. Rapid credit growth of CIs has been leading to loosening control over credit activities, particularly those in retail banking sector. Some banks provide loans which are guaranteed by customer’s creditworthiness with the credit limit of more than five times of the borrower’s salary in 20 years. Besides, many CIs lack ability to manage a portfolio of credit risks as well as to assess rationally the customers and their purposes of asking for a loan. In recent years, some financial institutions tend to focus on expanding investment loans on real estate area while the housing market appeared to experience abnormally high growth as well as unhealthy development due to speculative factors. Potential risks accordingly have existed behind the spectacular growth of consumer credit. Inspection and banking supervision agencies therefore have been facing many challenges of monitoring and controlling credit performance. Regarding lending policy of Vietnamese commercial banks The matter of debt refinancing is still in existence. Many customers due to objective reasons cannot repay the loan by due date written in the credit agreement. However, by considering the relationship with its customer as well as the customer's financial capacity, the bank will refinance the existent debt which means a new loan is provided for the customer. The customer then uses the loan to repay the overdue one. In doing so, the bank has killed two birds with a stone. The bank as a result not only has the number of outstanding loans increased but also eliminates overdue debts in its portfolio. However, this kind of activity is strictly restricted by The State Bank of Vietnam, particularly when it comes to consumer credit, a credit area of potential risks. In general, commercial banks have made progress in customer service. However, on the whole, there is a disseminating situation where assessment of customers’ loan application packages is still being delayed. The reason may come from weakness if banks’ real capacity to meet borrowers’ demands despite their frantic advertising campaigns. Regarding the value of outstanding loans Consumer credit activities have been developed in Vietnam for over the last 10 years. Consumer loans were at first established and developed at Vietnam Bank for Agriculture and Rural Development (also known as AGRIBANK). Local branches of AGRIBANK, particularly those located in remote and countryside areas implemented this kind of credit to provide loans for teachers, workers and armed forces in the areas. The bank branches based on their payroll and comments from local Trade Union to assist them to buy vehicles, renovate houses, and purchase other basic necessities. Consumer credit market has been witnessing intense competition among commercial banks since 2006. Commercial joint stock banks and branches of foreign banks in Vietnam are the most active ones. In the context of market share of wholesale banking sector being dominated by Vietnamese commercial banks, especially State-owned commercial banks, consumer credit has created an extremely competitive environment in retail banking. This is latest and apparent trend towards the development of banking industry in Vietnam where enterprises and businesses are considered traditional customers of the banks. This comes from a fact that consumer credit activities have been growing significantly in many developed countries, and it also brings extraordinary revenue for banking industry in these countries. In Vietnam, in order to alleviate the negative impacts of the world’s financial crisis, The State Bank of Vietnam has implemented the tight monetary policy to curb inflation, leading to a rise in interest rate applied on the loans. The number of customers asking for bank loans consequently fell dramatically. However, the growth of outstanding consumer loans increased drastically between 2008 and 2009. This came as a result from State Bank of Vietnam’s issuing Circular No. 01/2009/TT-NHNN dated 23 January 2009, which guided negotiable interest rates applied by CIs to consumer loans and loans provided through the credit card issuance and usage. In 2009, commercial banks experienced a close race between Vietnam and foreign banks in terms of range of credit products, particularly the loans granted to purchase flats or apartments. Such banks as Techcombank and Sacombank provide loans on 70% to 80% of the house value with the term of agreement up to 15 and 20 years. In a special case, HD Bank is said to providing loans on 100% of the house value in 30 years. Meanwhile, in foreign banks sector, Indovinabank offers mortgage loans with the term of 20 years, and HSBC offers home loans in 25 years. However ACB only grants fund of 70% of the house value or of secure assets value within 5 years, and the loans are no more than 500 million VND. Besides, there is a tight race for offering beneficial packages of consumer loan such as: “High-speed lending”, which provides quick and straightforward procedure for lending; Internet Banking; or providing loans with attractive interest rates, etc. ABBank is taken as an example. ABBank launched its “Financial Supermarket” product which is comprised of many forms of consumer loans. Another instance is Maritime Bank which recently has launched "New Life" package. Table 3: The total value of outstanding consumer debts by term loans in Vietnam’s commercial banks from December 2008 to December 2009 (Billion VND) Term loans Dec-08 Jun-09 Dec-09 Short-term 22,293.45 31,240.09 47,083.84 Medium and Long-term 54,300.58 63,391.06 79,560.95 Total 76,594.03 94,631.15 126,644.79 (Source: General Office, Monetary Statistics and Forecasting Department, The State Bank of Vietnam) Total value of outstanding consumer loans in Vietnam banking system until December 2008 was 76594.03 billion VND, accounting for only a little more than 6% of total value of the entire economy’s outstanding loans (which was 1,275,044 billion VND). Total value of outstanding debts improved continuously throughout 2009. By the end of December 2009, total value of outstanding loans had raised 39.52 per cent compared to that in 2008. Albeit the figures in 2009 seemed to be more optimistic, they occupied merely 7.22 per cent of the whole economy’s value of outstanding debts, which was 1,753,600 billion VND. The value of outstanding loans between December 2008 and December 2009 witnesses spectacular growth, especially in the context of economic crisis. This can be considered as a proof of the banks’ developing their policy on consumer credit. Besides, this is a positive signal of the banks’ expanding their lending activities to all types of customers, specifically individuals. However, on average, the value of a consumer loan per capita is just about 921.000 VND According to Dr Le Xuan Nghia, Chief of Monetary Policy Department, The State Bank of Vietnam in his statement replying Vietnamnet’s interview on 31 October 2008. www.vietnamnet.vn/kinhte/2008/10/811115/ . The number is too low compared to such a potential market with population of 86.5 million people as Vietnam. It is also disappointing because of the fact that only one adult has a bank account out of four people. This appears obviously that a majority of Vietnamese have no relations with banks throughout the country. Regarding term loans, short-run loans are proportionally less than mid-run and long-run loans. They occupied just about 30 per cent to 40 per cent of the total outstanding loans. Midterm and long-term loans which are about 60 per cent to 70 per cent of consumer loans appear to be more popular with lenders than short-term ones. However, it can be revealed from Table 3 the proportion experienced a downward trend throughout the years. The figures were 70 percent, 67 per cent, and 62.8 per cent in December 2008, June 2009, and December 2009 respectively. The absolute values of mid-term, long-term, and short-term loans are shown in Chart 1 below: Figure 4: Total outstanding consumer loans in Vietnam’s commercial banks by term of credit agreement between Dec 2008 & December 2009 (Billion VND) (Source: General Office, Monetary Statistics and Forecasting Department, The State Bank of Vietnam) The proportion of outstanding medium-run and long-run loans doubled that of short-run loans during 2009. It can be shown from the column chart (Chart 1) that the difference was remained unchanged from December 2008 to December 2009. This comes from a fact that most of banks prefer to provide mid-term and long-term credit. Also, borrowers ask for a bank loans to cover expenses on either the purchase of expensive things or activities requiring a large amount of money. This means the value of such loans is quite big, and borrower therefore cannot repay the debt in a short period of time. To name just a few, home loans and car loans are among the most popular ones with no less than 5 years of credit agreements. In terms of loan structure, home loans and car loans take the leading positions compared to other type of loans. Figure 5: Outstanding consumer loans by demands in Vietnam's commercial banks between December 2008 and December 2009 (Million VND) (Source: General Office, Monetary Statistics and Forecasting Department, The State Bank of Vietnam) Consumer credit not only goes up in terms of quantity but also develops its form with a variety of consumer loan products which are designed by the banks to attract their potential customers, namely home loans, car loans, loans for education and health care, loans for interior decorations, overdrafts, and others. Due to rising demand for consumption, especially demand for the purchase of houses, vehicles, and interior decorations, value of outstanding loans on these purposes climbed up consecutively from December 2008 to February 2010. The figures rose significantly between the end of 2009 and the beginning of 2010. This can be explained by Vietnamese custom to purchase s much as possible at the end of a Lunar year to prepare for Tet holiday. In 2009, commercial banks experienced a close race between Vietnam and foreign banks in terms of range of credit products, particularly the loans granted to purchase flats or apartments. Such banks as Techcombank and Sacombank provide loans on 70% to 80% of the house value with the term of agreement up to 15 and 20 years. In a special case, HD Bank is said to providing loans on 100% of the house value in 30 years. Meanwhile, in foreign banks sector, Indovinabank offers mortgage loans with the term of