Burgeoning Consumer Culture Brings Vietnam New Credit, Debt

Blogs - Vietnam: yesterday

When Jonas van Binsbergen first decided to found his own coffee company in Vietnam, there was one thing he knew he didn’t want to do: borrow money from a bank. It wasn’t so much a fact that he was doing business in Vietnam, but rather that he was doing business in general.

“Especially for entrepreneurs, not having a loan means that you’re free in how you can spend your time, how you want to make your own decisions, what you want to do,” he said. If you take out a loan, “maybe you also become, in a way, more dependent.”

Van Binsbergen attributes this business decision to a byproduct of coming of age in the heart of the financial crisis of 2007/2008. Though he was never personally affected by the debt crisis, he “heard a lot of stories”. Today, he has opened five of his Shalom Coffee shops in Ho Chi Minh City, starting in District 2 and slowly expanding outward when he had enough capital to do so.

It’s the control he values most, and it’s just this control slowly slipping away from many private consumers in Vietnam.

Following the Ups and Downs

The fact that Van Binsbergen never borrowed money from the bank does not mean that he never borrowed money at all. Instead of dipping into a professional institution, the business owner preferred instead to borrow money from friends and family. “We did this in the past and we paid that back, and I think for Vietnamese business owners this is very OK,” he said.

Today, personal finances have taken a more systematised approach. For Ralf Matthaes, Managing Director of consumer research company Infocus Mekong Research, the change happened in 2007 and 2008, smack dab in the middle of both the financial crisis and Vietnam’s entry into the WTO. While Vietnam’s long-awaited entry meant good things for international trade, it also profoundly affected the country’s financial environment domestically.

“A lot of these consumer finance companies came in, and [they would lend] anything from US$1,500 to US$3,000 if you want to buy a new bike, or whatever else,” he said. “So I think that sort of spawned it.”

The largest of these companies, Home Credit Vietnam, came from the Czech Republic and set up camp in Vietnam in 2009. Other notable companies include FE Credit (a branch of the Vietnamese VP Bank, established in 2010); SHA (in cooperation with SHB, established in 2006); and Prudential Vietnam Finance (UK, established in 2007). All advertise quick, professional service and money delivered fast.

debtImage source: vneconomictimes.com

Independent lending houses have sprung up alongside a spate of financial institutions developed within both state-owned banks (BIDV and Vietinbank are big players) and commercial banks (Sacombank and ACB also have a part of the action)—a necessity as regulations stipulate that only certified finance companies are allowed to carry out consumer credit activities.

Today Vietnamese consumers use these companies to borrow money of wildly varying amounts, and the number of customers is increasing every year. According to a market report by StoxPlus, a “robust surge” of 18 percent occurred in 2014, while the market increased 44.1 percent in 2015. Loan balances shot up alongside: US$10.5 billion in December 2014, and US$15.12 billion at the end of the next year.

debtImage source: cmsv5.stoxplus.com

Whether these loans will eventually lead to outstanding debts is another issue entirely. According to the same report, in 2016 the outstanding loan balance reached US$26.65 billion, 11.4 percent of the total loan value in Vietnam. While outstanding loans might not necessarily mean they are bad debts, it does point in a troubling direction—one that might potentially affect the current, official, very low non-performing loan (NPL) rate of under 3 percent.

debtImage source: static.atimes.com

Though the number looks manageable, many experts believe the lack of transparency in the system, as well as a changing definition of what an NPL actually is, means that the number could actually be much higher.

After experiencing a 17.2 percent official NPL rate in 2012, during the height of Vietnam’s own banking and real-estate crisis, encouraging faith in the financial system has been hard-fought, but also recently won.


“We’ve been working with some of the banks recently, and the portfolio of products that they have is really quite astounding, what’s happened over the past 10 years,” Matthaes said. His own research company has recently focussed on mobile banking trends of 2017, and according to his numbers, the outlook for an increased presence of banking in digital form is good, and perhaps the key for companies looking to invest in consumer financing in the future.

The Ministry of Finance has worked to encourage the bank account adoption for decades. From 2010 to 2012, interest rates soared from 8 percent to 15 percent in four short years, topping at the height of the financial crisis. Just as suddenly, they dropped precipitously down to 6.5 percent in 2015. Today, 6.25 is the average, a cut made in July 2017 despite advice by the International Monetary Fund to keep the rate where it was; the State Bank of Vietnam defended the decision, saying it would boost the economy and raise the GDP closer to the 6.7 percent targeted for 2017.

Offering loans and providing credit is not in itself bad, or inherently bad for an economy; even debt, at least what is termed “good debt” (investment that will likely lead to capital gains in the future, such as a loan for a university degree or for a house to put up for lease), can actually strengthen an economy.

For Vietnam, in the past few years, the trouble has come from grey areas surrounding the lending system in general.

“There’s a catch-22,” Matthaes said. “What is considered a bad loan? There aren’t clear bankruptcy laws, and the financial institutions aren’t [in] positions or don’t have the resources to actually be able to collect the bad debt. So what they do is extend your loan and lower your interest rate, so they can get their money back.”

Video source: Business Today

Vietnamese law does reference alternative loan repayment, though the terms are vague. Sales of secured properties are committed, either through an auction centre or a “qualified enterprise”, which has set auctioning as its business line; the properties go to the lender once the value of the property is determined, though by all accounts this procedure rarely happens. Even rarer is declaring for bankruptcy, so much so that no system for financial reorganisation is in place.

Huong Pham, a former employee of ACB who spent five years in the organisation’s valuation department, said that the financial system depends on a five-tiered system called nhóm nợ (group debt), organised by an overarching Credit Information Centre (CIC), launched in 1992 and controlled by SBV. Today the system is used by all banks in Vietnam, commercial and state-owned alike. Depending on how late a payment is, the customer slowly travels down the tier, with opportunities to renew the loan under different terms depending on multiple factors. By level five, the loan is considered an NPL, though this isn’t a guarantee that the bank will sue the individual for defaulting on the payments; property seizure is by all accounts considered a last resort.

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“There’s not enough transparency in the system to understand what is considered a bad loan and what isn’t,” Matthaes said. “I think it just gets shuffled around.”

During Pham’s experience at ACB, one of the few banks in Vietnam that has an in-house valuation department, real estate collateral is usually used to insure a loan, and is usually used for larger loans.

For smaller loans, between US$1,000 to US$3,000, and for people who do not own property, the system becomes a bit more nebulous—these smaller loans are exactly the ones that have been rising in popularity.

According to Matthaes’s recent debt survey done across Vietnam, four out of 10 urban dwellers have taken out a loan in the past year. A staggering 42 percent listed the reason as “personal”, a broad category that includes everything from vacations to new computers to upgraded smartphones. Further, 30 percent used the loan for real estate, 32 percent for business, 6 percent for automotive payments and 10 percent for education.

“Obviously that doesn’t add up to 100 percent,” Matthaes noted. “It adds up to more, but that’s because people are taking out multiple loans a year.”

With most loans supporting personal products that won’t lead to income in the future, if the customer defaults on the loan, this automatically becomes bad debt.

Matthaes does not see it as a potential problem for the country, but rather as a necessary step as the economy continues to develop. “Everybody has to go through it,” he said. “Thailand went through it, Indonesia went through it. In many ways, I think Vietnam is ahead of the curve, simply because the people are more industrious.”

Money Management

As lending practices grow and become more legitimised in daily life, and digital devices become expected parts for every urbanist, money management has become a priority for some. For Cong Le, COO of the popular app Money Lover, the creation of the account-management system was born not out of opportunity but necessity.

“[Founder Ngo Xuan Huy] created the app as a personal solution, for his own reasons. He wanted to control how much he spent, his cash flow, and he couldn’t find a product on the market that did it well and simply. He wanted an app, and he could only find systems online,” Le told us.

Created in 2012, the free app—it also comes with a premium version available for a monthly fee—is an intuitive system that allows customers to log purchases and deposits. By labelling the reason for each expense, the program creates a personal pie chart, and makes suggestions on overspending or budgeting. If a personal goal has been set, the app will alert the user when spending becomes untenable for it.

Video source: Money Lover - Money & Budget Manager

The app was voted the Best App of 2017 by Google Play, and currently has 1 million active users in Vietnam. Le said the popularity has spread abroad, mainly to the United States. Currently, the Money Lover team plans to push marketing in neighbouring Southeast Asian countries, such as Malaysia and Cambodia.

Le said the app currently doesn’t work with banks, though the company is in the process of developing connections with two at the moment. He declines to specify which.

“Right now, you can only manage personal finances in cash [with the app], but when we work with banks, we can manage credit money and loans,” he said.

Developing in tandem with banks in Vietnam is a major priority for Le’s team. “We’ll redesign the product, which will help banks provide tools for customers, and help them make loan recommendations.”

Le himself says he’s never taken out a loan. Asked if he only uses cash and a debit card, he said, “I have a credit card. I like it, I can just pay for it when I get paid every month.”

debtImage source: images6.moneysavingexpert.com

The benefits for credit cards are high, though Le notes that many Vietnamese don’t have credit cards yet, simply because the requirements for approval require larger salaries than many workers have at the moment.

This is likely to change in the next year. In October 2017, Korean giant Lotte announced intentions to introduce its Lotte Card to the Vietnamese market in partnership with Techcombank. FE Credit has also been pushing a credit card service.

“Vietnam has gone from a cash country to a debit country to a credit company to a debt country in 10 years,” Matthaes said.

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