Transforming after the storm

Báo Đầu tư•12/04/2024

Consumer credit experienced its most turbulent year in history, as consumption – one of the drivers of economic growth – failed to recover in 2023. Despite stimulus measures, increased purchasing power, and changes within the internal workings of credit institutions, the picture is expected to remain "as bad as it could get."

Mcredit, adhering to its "humane lending" and "humane debt recovery" strategies, places customers at the center.

Addressing the dual challenge

Despite deep discounts and massive promotions, demand remains weak – the motorcycle market, usually bustling with sales during the Lunar New Year season, is displaying a gloomy tone in the month leading up to the Year of the Dragon. Data from the Vietnam Motorcycle Manufacturers Association (VAMM) shows a significant decline in sales in 2023: only nearly 2.52 million motorcycles were sold by the five member manufacturers, a decrease of 16.21% compared to the previous year.

Mr. Hieu, the manager of a large motorcycle dealership in Hanoi , said that business has deteriorated significantly since mid-2023 and hasn't improved since. While sales haven't dropped drastically, revenue has plummeted due to price reductions, even selling below the manufacturer's suggested retail price for some models.

Electronics and home appliances are also among the products that people are "tightening their spending" on. MWG, a retail giant that earns billions of dollars annually, saw a revenue drop of over 20.1 trillion VND this year, equivalent to a 14% decrease, across its two brands, The Gioi Dien May and Dien May Xanh. According to the head of MWG, 2023 was one of the most challenging years in its history.

The scenario of a post-pandemic recovery in purchasing power has not unfolded as expected, with low incomes and weak consumer confidence. This has also led to a slowdown in consumer lending and a challenging period ahead.

Specifically, within the group of finance companies, which provide capital to the subprime customer segment (often having difficulty accessing bank credit), consumer credit outstanding, according to the latest updated data, has decreased by approximately 40% compared to the end of last year. Specifically, by the end of Q3 2023, the total outstanding loans of finance companies were only VND 134,000 billion, while non-performing loans increased by 10-15%.

FE Credit, the largest finance company in the industry, is estimated to have seen its customer loan balance decrease by 14.6% compared to the beginning of the year. In 2023, FE Credit reported a loss of VND 3,699 billion. Foreign-owned finance companies such as Mirae Asset Finance, JACCS, and Shinhan Finance all suffered significant losses.

EVN Finance, Home Credit, and Mcredit still maintained positive profits, albeit lower than the same period last year. Among consumer finance companies, EVN Finance reported the smallest decrease in profit (nearly 10.4%), but this was mainly due to realizing profits from a significant portion of its portfolio of shares.

According to Mr. Le Quoc Ninh, General Director of MB Shinsei Finance Company Limited (Mcredit) and Chairman of the Consumer Finance Club, finance companies faced a "double" challenge last year. Besides the noticeably weakened consumer demand, especially for durable goods like motorcycles, televisions, and mobile phones, customers' ability to repay loans was also affected. Workers' incomes plummeted amidst rising unemployment, declining orders, and the lack of additional income from overtime work.

Furthermore, the phenomenon of some customers defaulting on loans not only increases bad debt but also necessitates stricter risk management in consumer lending activities. At car dealerships, like the one Mr. Hieu manages, this is partly why the proportion of car purchases made through installment plans has decreased sharply.

With the increasing rate of borrowers defaulting on loans, coupled with inadequate sanctions and difficulties in pursuing legal action for low-value debts, Dr. Nguyen Quoc Hung, Secretary General of the Vietnam Banking Association (VNBA), estimates that the average non-performing loan ratio in the finance company group is at risk of exceeding 15%.

New impetus from policy

A cautious sentiment in the face of economic difficulties has led to reduced purchasing power and tighter spending by the public. This trend continued into 2023. Despite efforts to stimulate consumer demand, the growth rate of domestic consumer demand in the first quarter remained lower than the same period in 2023 and the pre-pandemic years of 2011-2019. Newly released economic data shows that total retail sales of goods and consumer service revenue increased by only 8.2% year-on-year, lower than the over 9% growth seen in previous years.

At the regular government meeting in March 2024, low domestic market demand and high competition were identified as the biggest challenges facing manufacturing businesses today. Therefore, continuing to revitalize traditional growth drivers, including consumption, is one of the five key tasks that the head of government has requested be prioritized.

From the banking sector's perspective, the priority has been boosting consumer lending since the beginning of the year. According to Mr. Dao Minh Tu, Permanent Deputy Governor of the State Bank of Vietnam, only by boosting consumer lending can demand be stimulated, thereby opening up the market for businesses' products and consequently increasing customer demand for capital.

A new policy mechanism from the regulatory authorities aimed at boosting consumer credit will soon be activated from July 1, 2024. Smaller loans will therefore no longer require proof of the purpose of the funds, thus strongly stimulating retail lending – especially small loans.

Despite the streamlining of procedures, the General Secretary of the Vietnam Banking Association emphasized that credit institutions will not aggressively promote small-scale lending at all costs, but will remain cautious given the potential for a continued rapid increase in bad debts and the numerous obstacles remaining in the legal framework for debt recovery and resolution.

Besides policies to promote credit disbursement, experts expect debt recovery to soon become easier for banks and finance companies as data can soon be directly linked to the Ministry of Public Security's data. The State Bank of Vietnam previously stated that it would cooperate with the Ministry of Public Security, using data from Project 06 to develop applications of population data, identification, and electronic authentication to serve digital transformation and facilitate consumer lending.

To date, the Ministry of Public Security has collaborated with five banks (Vietcombank, Vietinbank, Pvcombank, VIB, BIDV) and one credit institution (Mcredit) to finalize the technical solution and deploy a product for assessing the creditworthiness of loan customers.

Stimulating consumer demand is a common challenge for the economy. Faced with weak demand, many manufacturers have recently implemented efforts to lower product prices and offer promotional programs. For commercial enterprises like MWG, despite cautiously forecasting stagnant consumer demand, the retailer aims for a 6% increase in revenue and a strong recovery in profits compared to the low base level of 2023.

Regarding the consumer credit sector, recovery often lags behind macroeconomic signals. Mr. Le Quoc Ninh, General Director of MB Shinsei Finance Company Limited (Mcredit), believes that this year will not yet see truly positive signs for this sector. However, according to Mr. Ninh, the market has passed its most difficult phase and cannot get any worse, especially with the government's efforts to support economic growth through boosting consumption. At the same time, the difficulties of 2023 also present an opportunity for the consumer finance industry to reflect and transform.

“The consumer finance sector will need some new regulatory mechanisms from the State Bank of Vietnam. After the events, spontaneous practices will be re-evaluated and become established procedures. Both finance companies and customers will benefit from this change,” the CEO of Mcredit emphasized.

At Mcredit, we remain committed to our "humane lending" and "humane debt recovery" strategies, placing customers at the center. A clear and detailed customer profile is developed to offer loan and consumer products that suit their needs and financial capabilities, thereby fostering sustainable credit growth and effectively managing debt quality.

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