Experts worry consumer credit risks

Individual borrowers, unlike firms, lack knowledge and experience in handling consumer loans and repayments, potentially posing high risk of insolvency and bad debts.

Can Van Luc, chief economist of the Bank for Investment and Development of Vietnam (BIDV), said consumer lending has enjoyed robust growth during the past decade. This has helped to leverage loan access of local consumers and roll back “black” credit, thus making a significant contribution to overall economic growth.

Nguyen Tu Anh, vice head of Monetary Policy Department under the State Bank of Vietnam, highlighted the benefits that borrowers can enjoy from consumer loans as such lending model enables them to buy and pay for goods and services in advance in line with their financial capacity.

Loans for building and repairing houses dominate the domestic consumer credit market with a 50 per cent market share. This is followed by loans used to pay for household utensils, durable goods, automobiles, and motorbikes, which together make up a proportion of roughly 20 per cent.

However, Anh criticised several risks and shortcomings of consumer lending as he noted that lending rates on consumer loans are often high and floating, hence leading to a big threat to the ability of borrowers to repay the loans.

Meanwhile, individual borrowers, unlike businesses, are weak at assessing and tackling risks from their borrowing. Many overestimate their financial capacity whilst also undervaluing the risks to their future cash flow and income.

Tran Kim Anh, vice head of Department of Economic Affairs under the Party Central Committee's Commission for Economic Affairs, said individual borrowers still lack knowledge and experience when it comes to handling consumer loans. She claimed this potentially poses a high risk of insolvency and bad debts.

Insights from the 2014 S&P Global FinLit Survey showed the rate of Vietnamese adults who are financially literate stands at 24 per cent, much lower than figures seen in regional peers such as Thailand with 27 per cent, Indonesia at 32 per cent, and Malaysia at 36 per cent.

Most borrowers take consumer loans at a young age while they are willing to accept high risks. Therefore, in order to minimise the relevant risks, credit institutions need to set up a borrower database used to make an analysis of borrowers’ demand and their financial capacity, Kim Anh said.

She also urged the need to design a loan management system that could offer early warning signals and solutions for debt collection. Provisions must be made to tackle relevant risks if necessary, she added.