Interest rate situation
Currently, up to 69% of Vietnamese people do not have a bank account, do not have access to banking and financial services, and more than 33.4 million people are working in the informal sector. These people are considered the main customers that pawnshops and microfinance businesses aim at.
Meanwhile, according to FiinGroup statistics, Vietnam's consumer credit/GDP ratio is still very low compared to other countries in the region. Currently, Hong Kong's consumer credit/GDP ratio is 90.54%; South Korea, Malaysia, Japan, Singapore, Taiwan, and China are all above 50%, while in Vietnam this ratio is only 27.17%.
Vietnam's consumer credit balance is still low (Photo: Fiin Group)
The above figures show that consumer lending activities have not yet met the market demand. This comes from many factors such as debt collection ability, loan appraisal process or most importantly, whether the lending interest rate is appropriate to the current risk level.
Through research, some countries in the region have specific regulations on lending interest rates and fees for pawn services that are significantly different from Vietnam. For example, in Singapore, the ceiling interest rate does not exceed 1.5%/month and there are specific regulations on additional fees as follows: Collecting a fee of 2 USD for procedures to change non-essential information related to the pawn; Collecting a fee of 10 USD for redeeming the pawned property when the redeemer no longer holds the mortgage certificate; Collecting a fee of 10 USD for the case where the owner of the property comes to redeem the property owned by him, which was pawned by someone else and there are clear regulations that no additional fees are allowed to be collected other than the above.
Some other countries and territories such as Thailand, Malaysia, and Hong Kong also have regulations on interest rate ceilings fluctuating around 3.5%/month and clearly stipulate some additional fees and charges.
In Vietnam, financial companies operating under the management of the Law on Credit Institutions can self-adjust interest rates under the license of the State Bank.
Meanwhile, pawnbroking companies operating under the Civil Code must limit lending interest rates to no more than 20% per year, but can collect additional fees to cover loan costs. There are currently no specific regulations on fees such as loan assessment fees, mortgage management fees, etc.
Interest rates are the first concern for consumer borrowers.
However, due to the nature of consumer lending activities but with different regulations and interest rates, many opinions suggest that consumer finance lending activities should have a common law to effectively manage lending activities. In addition, many experts also believe that, in the long term, it is necessary to study the removal of the interest rate ceiling in the Civil Code. Instead, only the interest rate ceiling is left to regulate "black credit" activities.
Should interest rate ceiling be removed?
Regarding the issue of lending interest rates of pawnbrokers, Lawyer Truong Thanh Duc - Director of ANVI Law Firm said that consumer lending businesses as well as pawnbroking services are facing difficulties in lending with regulations on interest rate ceilings and service fees. Therefore, the management agency must have regulations to regulate and manage these activities; there needs to be a legal corridor to both create conditions for the market to develop but not to go beyond control.
Lawyer Duc also stated that the activities of pawn lending companies are still legal, valid, and legitimate because they operate under the permission of the State agency. The activities of pawn companies are also necessary for the market. However, all issues have negative sides and limitations, and pawn services are no exception.
Lawyer Truong Thanh Duc - Director of ANVI Law Firm
Previously, the law also had specific regulations on pawn lending services, but those regulations had many unreasonable issues so they were removed. At present, the legal mechanism for this service is also available, the important thing is how to understand and apply it to standards and reasonableness.
“Regarding the interest rate of pawn services, Mr. Duc said that if we want to apply a ceiling interest rate, it should only be applied to banks and financial institutions. In civil relationships or any other relationships, there should be no ceiling. Instead, it should be based on principles, principles, spirit and the market.
Instead, there should be only one ceiling to define usury. If there is, then there should be a very specific level. As for the interest rate, it should only be based on the market, not on making up a number to apply to a ceiling without any basis. Otherwise, it should be kept as it is, keeping the ceiling but allowing pawnshops to collect fees,” lawyer Duc analyzed.
However, some opinions still believe that if pawnshops are allowed to collect fees as they are now, there are still specific regulations to manage the level of fees and types of fees that can be applied to pawn lending activities. That is a way to support borrowers to avoid unreasonable fees, leading to overall fees and interest rates on the contract being too high and helping lenders have specific operating guidelines to orient development more clearly.
Regarding this issue, answering at the seminar "Current situation and solutions for healthy development of Vietnam's consumer finance market", Mr. Le Xuan Dong, Executive Director, Market Research and Consulting Services, FiinGroup said that it is necessary to issue specific regulations on the ceiling on lending interest rates and other accompanying service fees of informal credit institutions, not just the ceiling on lending interest rates as currently stipulated in the 2015 Civil Code.
Sharing the same opinion, lawyer Nguyen Trinh Duc - founding member of ICIC Law Firm also stated that interest rates in pawnbroking business activities must not exceed 20%/year, but there are no regulations on fees.
Although these fees are reasonable and pawnshop businesses have to pay for the actual costs incurred in providing services to customers. Therefore, the management agency needs to propose a circular to guide, cap the total interest rate and fees for easier management.
Prof. Dr. Nguyen Mai - Chairman of the Association of Foreign Investment Enterprises.
However, when asked whether the interest rate ceiling should be removed in the short term, Prof. Dr. Nguyen Mai - Chairman of the Association of Foreign Investment Enterprises, said that at present it should not be removed, and a longer-term orientation is needed because this is the early stage of development of the consumer lending market.
“The conditions for removing the interest rate ceiling need to be developed for a while longer. Although we are still aiming for it, we need to calculate, because what we want is not only to develop pawnshops but also to create a group of people below the standard to borrow at relatively low interest rates, ensuring their living conditions. This is beneficial for both sides, so in the future, if necessary, we will consider removing the interest rate ceiling,” said Prof. Dr. Nguyen Mai.
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