The State Bank of Vietnam has proposed changes to regulations on personal unsecured lending by consumer finance companies. The proposed changes include limiting unsecured personal loans in cash to existing customers with good credit and no overdue debt; and limiting the maximum amount of such cash loans to 30 percent of total loans.
The central bank has not specified when it intends to carry out the new regulations.
According to Moody’s, the proposal is credit positive for Vietnamese finance companies because the stricter regulations will help alleviate asset quality pressure by curbing excessive growth in the riskier consumer-loan segment, which will lead to stronger risk-adjusted returns and will support internal capital generation in the future.
The rating agency also said that the bottom-line profitability of finance companies was expected to decrease in 2019 as companies adjust to the new rules.
VPBank Finance Co Ltd (FE Credit) has the highest proportion of personal loans in its loan portfolio among the three largest finance companies by total loans in Viet Nam. The other two companies are Home Credit Vietnam Finance Co Ltd (Home Credit) and HD Saison Finance Co Ltd
All three companies will need to make adjustments to their businesses by focusing on lower-yield products such as consumer durables and motor vehicle loans. Moody’s expects that FE Credit will need to make the most significant adjustments to comply with stricter regulations because of the higher amount of personal loans on its books.
The three companies are also market leaders in other consumer finance segments in Viet Nam and will have to make fewer adjustments to their business practices than smaller finance companies as a result of the new regulations.
These smaller companies have been more reliant on personal loans for business growth and will have greater pressure on their revenue than the top three companies.
Revenue growth of finance companies remains supported by strong consumer demand for credit, while credit costs will be contained by the tighter lending requirement. Both factors will drive stronger risk-adjusted returns for finance companies, according to Moody’s.
Vietnam’s consumer finance industry grew at a compound annual rate of 41 percent between 2013 and 2017 on the back of higher personal income and greater penetration of services.
Moody’s expects growth in personal loans to slow significantly when the new regulations come into effect, after far exceeding growth over the past three years for other less-risky consumer loans, such as those for the purchase of motorcycles and durables.
The demand for consumer finance is strong and supported by the buoyant Vietnamese economy.
Now, finance companies constrained from extending new personal unsecured loans because of the new regulations will focus on growing other product segments and will benefit from increased diversification in their lending portfolios and more emphasis on lower-risk products.