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Luận văn tiếng Anh thương mại Solutions to improve effectiveness of consumer credit in Vietnam
INTRODUCTION Rationale: In the context of economic crisis recently, the Government has implemented monetary policy and fiscal policy to encourage domestic demands Experience from the economic development of Vietnam and of other countries around the world has shown that stable economic growth should be based on the increase in domestic demand rather than the increase in trade, especially import Policy stimulating domestic demand, especially consumption demand, is considered key economic development policy which helps reduce dependence on imports Therefore, the banking system - which provides channels to meet the needs of the economy’s capital - will play an important role in providing credit for consumer activities Also, under the situation of harsh competition in the context of international integration, Vietnamese commercial banks must diversify forms of credit in order to spread, limit, and control risks at the lowest level Although in recent years, the State Bank of Vietnam has paid considerable attention to the field of consumer credit, this form of credit is still underdeveloped, accounting for a modest proportion of total outstanding loans Therefore, to expand and enhance consumer credit growth, there is a need to promote this type of credit After consulting my academic supervisor and taking everything into consideration, I decided to title this thesis “Solutions to improve effectiveness of consumer credit in Vietnam” Research purposes Firstly, the thesis is aimed at generalizing basic fundamentals of consumer credit Secondly, the thesis targets to outline the overall picture of consumer credit activities in VN Thirdly, based on the fundamentals and the situation shown, the thesis is expected to give solutions and recommendations which may make a small contribution to the development of consumer credit in VN Research scope In terms of space, the thesis will focus on studying consumer credit activities in Vietnam’s commercial banks In terms of time, the thesis will focus on researching consumer credit activities in Vietnam’s commercial banks from 2006 until March 2010 Research methodology This thesis approaches the research topic in combination with comparative analysis, which in one hand, points out common concepts, understandings and practices in Vietnam with appropriate adjustments through quantitative and qualitative methods With regard to its scope, as an introduction to an emerging industry, this study only concentrates on consumer credit in Vietnam’s commercial banking system Therefore, “overview” is the word that can tell exactly the scope of this thesis, which in turn, reflects the overall purpose of the thesis Research structure: This thesis is divided into three main chapters CHAPTER 1: THE FUNDAMENTALS OF CONSUMER CREDIT CHAPTER 2: CONSUMER CREDIT ACTIVITIES IN VIETNAM’S COMMERCIAL BANK SYSTEM CHAPTER 3: SOLUTIONS AND RECOMMENDATIONS TO IMPROVE EFFECTIVENESS OF CONSUMER CREDIT IN VIETNAM CHAPTER 1: THE FUNDAMENTALS OF CONSUMER CREDIT The first chapter will focus on presenting the theoretical background of the thesis Key topics in this chapter include: - Definition of consumer credit and its types - Characteristics and benefits of consumer credit - Consumer lending process - Indicators to evaluation credit performance - Experience and lessons drawn from consumer credit situation in EU 1 General principles of consumer credit 1.1.1 Definition of consumer credit Not so many decades ago, consumer credit was little known and seldom distinguished from credits granted for business and related purposes Today it is recognized to be a special type of financing that greatly influences the rate of expansion or contraction of consumer demand and hence the level of business activity Consumer credit (or consumer loans, consumer lending) can be understood in a broad sense including government, non-profit, and informal credit-debt relationship For example: student loans and money lent between friends and relatives, government lending to people receiving state benefits, people paying utility and telecoms bills in arrears These too can be considered forms of consumer credit However, consumer credit is sometimes defined in a narrower context One of the pioneers in the field, Rolf Nugent, defined consumer credit in his book as credit extended to individuals to finance the purchase of consumer commodities and services or to refinance debts which had their origin in such purchases1 Consumer credit can also be illustrated at the very end of the marketing chain According to Robert Cole and Lon Mishler, “consumer credit is the use of credit as a medium of exchange for the purchase of finished goods and services by the ultimate user”2 In Consumer Credit Fundamentals, Steve Finlay defined consumer credit as ‘money, goods or services provided to an individual in lieu of payment’.3 All in all, consumer credit can be seen as a credit-debt relationship in which loans are provided to individuals and households to the purchase of automobiles, homes, appliances, and other retail goods; to repair and modernize homes; and to pay the finance the cost of medical care and other personal expenses 1.1.2 Characteristics of consumer credit Consumer credit is distinguished from business credit by the following characteristics: Firstly, due to small scale of each consumer credit agreement which leads to higher cost of lending operation, interest rate on consumer credit is typically higher than the rate applied for business loans Secondly, consumer loans tend to be cyclically sensitive They rise in periods of economic expansion when consumers are generally optimistic about the future On the other hand, when the economy turns down, many individuals become more pessimistic about the future and as a result reduce their borrowings Thirdly, household borrowings appear to be relatively interest inelastic A borrower normally considers the monthly payments required by a loan Rolf Nugent (1939), Consumer Credit and Economic Stability, Russell Sage Foundation, p.31, New York, US Robert Cole, Lon Mishler (1998), Consumer and Business Credit Management, Irwin McGraw-Hill, US Steven Finlay (2009), Consumer Credit Fundamentals, Palgrave Macmillan, p.4, New York, US agreement or the total payment at the end of agreement rather than the interest rate charged on the loan Fourthly, income and education level have a close relationship with customer’s demand for consumer credit The higher income the customers earn, the more likely it is that they will ask for consumer loans which they are able to pay at the end of agreement Both education and income levels materially influence consumers’ use of credit Individuals with higher income tend to borrow more in total and relative to the size of their annual incomes Those households in which principal breadwinner has more years of formal education also tend to borrow more heavily relative to their income level Fifthly, the borrower’s main source of payment may be subject to considerable fluctuation because it depends on the customer’s employment history, skills, working experience, health, etc Many of these factors change over the time Sixthly, customers’ personalities and behaviors which are quite challenging to define take a significant part in determining the debt payment Normally, the lender must be assured that the borrower has moral responsibility to repay a loan on time 1.2 Benefits of consumer credit As for the bank, regardless of two drawbacks which are risk and high cost, consumer credit covers significant advantages Firstly, consumer credit helps build up relationships with customer which might raise possibilities of attracting capital for the bank itself Secondly, consumer credit helps diversify bank’s businesses which consequently help boost revenue and spread the bank’s risks As for consumers, consumer credit provides a source of assistance in times of financial stress Thanks to this type of credit, they have opportunities to enjoy conveniences even before they accumulate enough money for personal expenditure Particularly, consumer credit is essential for unexpected expenses such as on health care and education However, misuse of consumer credit may bring about insidious effects, which means borrowers may spend an excessive amount of money, leading to limited capacity for saving and consuming in the future More seriously, borrowers might get themselves into trouble for being unable to pay the debts Finally, as for the economy, consumer credit exerts a dramatic effect on economic stimulus as well as creates positive conditions for accelerating economic growth; leading to sustainable development It performs a supporting role in boosting household and individual consumption by granting loans to cover essential expenses, particularly in times when the economy is weak Domestic demand including consumption and investment consequently is fueled Besides, the growth in the volume and diversity of consumer credit products has resulted in a thriving consumer credit industry providing employment for millions of people around the world Moreover, consumer credit helps diminish wealth gap by providing credit access to all kinds of customers 1.3 Types of consumer credit Credit categorizing is arranging loans into specific groups according to certain criteria A science-based classification is the precondition for organizing a proper credit-granting process and improving credit risk management Credit classifying is based on the following criteria: 1.3.1 Based on the purposes of a loan a Residential Mortgage Loan A residential mortgage loan is used to purchase, build, or renovate a fixed asset such as land or buildings, with the loan secured against the asset In most cases this will be the borrower’s home A standard mortgage is offered as a fixed term agreement In the UK this is commonly 20 or 25 years and in the US it is 15 or 30 years In Japan, terms as long as 50 years are not unusual, with the debt being passed on to the next of kin if the original borrower dies When a mortgage has been fully repaid it is said to have been redeemed b Non-residential Mortgage Loan A nonresidential mortgage loan is taken out to buy a new car; and consumer durables such as a sofa, washing machine or a television This type of credit is also used to cover things such as household bills, travel and entertainment 1.3.2 Based on methods of payment a Instalment Consumer Loan Installment consumer loan is a loan in which repayments cover both principal and interest, with the debt having been amortized at regular intervals during a fixed period of time and repaid in full by the end of the agreement This method of payment is applied for outstanding loans or in case customer’s regular income cannot cover a lump sum payment (paid gradually over the time) b Non-installment Consumer Loan Short-term loans individuals and families draw upon for immediate cash needs that are repayable in a lump sum are known as non-installment loans This type of loan is frequently used to cover the cost of vacations, medical care, the purchase of home appliances, and auto and home repairs Such loans may be for relatively small amounts and include charge accounts that often require payment in 30 days or some other relatively short time period Non-installment loans may also be made for a short period, usually six months or less, to wealthier individuals and can be quite large c Revolving Consumer Credit A revolving loan, sometimes called a flexible loan or a budget account, is a form of revolving credit A borrower agrees to make a fixed monthly payment and in return has the ability to draw cash up to a maximum limit, which is a multiple of the monthly payment amount For example, an account with a 15 times multiplier will allow a customer who agrees to pay $200 a month to draw funds up to a maximum of $3,000 1.3.3 Based on the origin of the loan a Indirect Consumer Loan This is the type of loan in which lending relationships occur in order as shown in the Figure Figure 1: Indirect Lending Relationships (Source: Paul Beares, Richard E Beck, Susan M Siegel (2001), Consumer Lending, American Banker Association, p 67) b Direct Consumer Loan Direct consumer loan is a loan in which a representative of the bank has a face-to-face meeting to assess the creditworthiness of individuals applying for credit This person is known as an underwriter or a credit officer A credit officer from the bank often receives better training in assessment of the likelihood of the applicant repaying the debt than one from a retailer does Therefore, a bank usually produces a more prudent credit granting decision 1.4 Consumer lending process 1.4.1 Steps in lending process There is similarity in lending process between consumer credit and business credit The steps in the process are shown in order from a-f as below: a Finding prospective loan customers: Most loans to individuals arise from a direct request from a customer who approaches a member of the lender’s staff and asks to fill out a loan application Sometimes loan officers will call on the customers for months before they finally give the lending institutions a try by filling out a loan application b Evaluating a prospective customer’s character and sincerity of purpose: Once a customer decides to request a loan, an interview with a loan officer usually follows, giving the customer the opportunity to explain his or her credit needs The interview also provides a chance for the loan officer to assess the customer’s character and sincerity of purpose If the customer appears to lack sincerity in acknowledging the need to adhere to the terms of a loan, this must be recorded as weighing against approval of the loan request c Making site visit and evaluating a prospective customer’s credit record: In case a mortgage loan is applied for, a loan officer often makes a site visit to assess the condition of the property The loan officer may contact other creditors who have previously loaned money to this customer to see what their experience has been d Evaluating a prospective customer’s financial condition: If all if favourable to this step, the customer is asked to submit several crucial documents the lender needs in order to fully evaluate the loan request Once all documents are on file, the lender’s credit analysis department conducts a thorough financial analysis of the applicant, aimed at deciding whether the customer has sufficient cash flow and backup assets to repay the loan e Assessing possible loan collateral and signing the loan agreement: If the loan committee approves the customer’s request, the loan officer or the credit committee will usually check on the property or other assets to be pledged as collateral Once the loan officer and loan committee are satisfied that both the loan and the proposed collateral are sound, the note and other documents that make up a loan agreement are prepared and signed by all parties to agreement f Monitoring compliance with the loan agreement and other customer service needs: The new agreement must be monitored continuously to ensure the terms of the loan are being followed and all required payments of principal and interest are being made as promised A new loan customer’s information is also saved as a customer profile to show and monitor a customer’s condition and financial service needs 1.4.2 Credit analysis Credit analysis is considered the most important step in a lending process Result of credit analysis will mainly determine the approval of loan committee towards granting decision a Credit scoring system Credit scoring can be defined as any quantitative method, technique or practice used in the granting, management or recovery of consumer credit The basic principle is to assign some rating, or score, to an individual based on the information that is known about them at the time of application The score is then taken as indicative of the future behavior of the applicant; that is, the likelihood that the applicant will prove to be an acceptable risk In general, the higher the score is, the lower the risk is 10 3.2.4 As for other related Ministries and People’s Committees at all levels a Inspecting and monitoring demography and household registration books Feature of consumer credit is that loans can be provided basing on the borrower’s creditworthiness However, there are cases where those owning two identification cards go asking for loans at two different banks This creates potential risks for the banking sector because the borrower intentionally does not make full and accurate report on his/her borrowing status Therefore, the People's Committees at all levels together with local authorities should ensure close coordination in examining and monitoring demography and household registration books in the area b Examining and monitoring real estate status: Recently, with the urbanization and the rapid enlargement of the Hanoi city, a lot of people have bravely borrowed money to invest in real estate There are cases where a borrower asks for loans at different banks to purchase different houses and apartments Nevertheless, according to the Circular No.12/2010/TT-NHNN, the banks only lend money to support the purchase of houses for accommodation rather than for real estate investment Such credit agreements are said to be of latent risks partly due to unstable real estate market Therefore, relating ministries such as Ministry of Natural Resources and Environment or Ministry of Construction should establish a data system of owning and buying houses among citizens Banks thanks to the information system may look up for reference in order to design a proper lending policy that helps eliminate risks In Germany, such information system is being in use German banks basing on the data have built up regulations towards housing purchase For example, for the first home loans, borrower can be financed from 80 per cent to 90 per cent of the house’s value 62 However, for the second home loans, credit agreement only covers between 50 per cent and 60 per cent of the house’s value 3.2.5 As for the borrower There is a fact that there are many customers asking for bank loans no have the minimum of necessary knowledge relating to borrowing activities Therefore, there are many cases where we not grasp the situation of their borrowing status, especially of interest rate calculation Therefore, the problem is the customers themselves also need to understand and self-collect knowledge of certain services and lending policies of banks carefully before signing credit agreements Additionally, customers’ hiding information is also a factor causing potential risks to the banks Customer’s serious attitude and honesty have a certain positive effect on credit performance of the banks That the customers fully implement regulations and lending policies not only helps banks reduce credit risks, but also contribute to improve operational efficiency of consumer credit CONCLUSION 63 In many developed countries in the world, consumption indicator is seen as key factor contributing to midterm economic growth It reflects expectation on income in the future of consumers Therefore, consumer credit has long been an important part of retail banking industry, which is also said to an alternative to corporate credit Consumer lending impacts many facets of personal and family economics, as well as our entire economy Its use can be either good or bad depending on the reason for its need and the ability of the borrower to repay in a timely manner With the desire to contribute my minute effort to the development of Vietnam’s banking and financial sector, I have ushered in writing this thesis with a great deal of dedication Upon completing the thesis, a few research objectives have been achieved First of all, concepts of consumer credit have been clarified Different types of consumer credit have also been logically categorized Besides, some critical factors used to evaluate effectiveness of consumer credit were singled out Secondly, an overall picture of consumer credit activity in Vietnam’s commercial banks has been sketched Finally, based on analysis of the current situation concerning consumer credit in Vietnam, solutions and recommendations addressing the issue have been proposed Such solutions are intended for improvement of effectiveness regarding consumer credit in Vietnam Upon presenting analysis of the thesis’s objectives, personal judgments and subjective opinions are inevitable Any recommendations and feedback from teachers and student fellows therefore are welcomed and highly appreciated 64 APPENDICES Predictive Factors in an Example of a Credit Scoring Model and Their Point Values Factors for Predicting Credit Quality Customer’s occupation or line of work Professional or business executive Skilled worker Clerical worker Student Unskilled worker Part-time employee Housing status Home owner Renting Living with parents or friends Credit rating Excellent Average No record Poor Length of time in current job >1 year ≤ year Length of time in current address >1 year ≤ year Telephone in home or apartment Yes No Number of dependents reported by customer More than Deposits accounts held Both checking and savings Savings account only Point Value 100 80 70 50 40 20 60 40 20 100 50 20 00 50 20 20 10 20 00 30 30 40 40 20 40 30 65 Checking account only 20 None 00 (Source: Peter Rose (2001), Commercial banking management, Irwin McGraw-Hill, p 601) 66 BIBLIOGRAPHY In Vietnamese TS Nguyen Dac Hung (2007), Cạnh tranh phát triển thị trường tín dụng tiêu dùng, Banking Magazine ThS Nguyen Tuan Anh (2009), Mối quan hệ hoạt động ngân hàng thương mại tăng trưởng kinh tế, retrieved from The SBV’s website: http://www.sbv.gov.vn/vn/tintuc/tcnh/nguyendinhtrung/tin/tapchi_2009 _10_19_025124.doc?tin=626 PGS TS Nguyen Van Tien (2009), Giáo trình Ngân hàng Thương mại, Statistical Publishing House, Hanoi The State Bank of Vietnam (2010), Thông tin hoạt động ngân hàng tháng 12/2009, retrieved from The SBV’s website: http://www.sbv.gov.vn/vn/tintuc/vp/nguyenvietle/tin/thongcaobaochi_2 010_01_14_035624.doc?tin=376 ThS Trinh Thanh Huyen (2010), Hệ thống ngân hàng Việt Nam năm 2009 toán đặt cho năm 2010, retrieved from The SBV’s website: http://www.sbv.gov.vn/vn/tintuc/tcnh/nguyendinhtrung/tin/tapchi_2010 _02_09_084524.doc?tin=654 Trinh Ngoc Lan (2008), Cho vay tiêu dùng thấp kinh tế khó phát triển, retrieved from Vietnamnet: http://vietnamnet.vn/kinhte/2008/10/811115/ Xuan Dang (2010), Thông tư 07 - đường cho chế điều hành lãi suất nay, retrieved from The SBV’s website: 67 http://www.sbv.gov.vn/vn/tintuc/vp/vuxuanthanh/tin/nghiencuutraodoi _2010_03_12_040016.doc?tin=821 In English Central Institute for Economic Management (2010), Vietnam’s socioeconomic situation – happenings and comments, Ciem, Center of Information and Document GHK Consulting (2009), Establishment of a Benchmark on the Economic Impact of the Consumer Credit Directive on the Functioning of the Internal Market in this Sector and on the Level of Consumer Protection, GHK, Brussels Margarete Biallas, Kien Dam (2008), Vietnam Financial Sector Diagnostic 2008, International Finance Corporation, World Bank Group, Vietnam Paul Beares, Richard E Beck, Susan M Siegel (2001), Consumer Lending, American Banker Association Peter Rose (2001), Commercial Banking Management, Irwin McGraw-Hill Ralph A Young (1950), Measurement of Consumer Credit, Federal Reserve Bullentin, US Robert Cole, Lon Mishler (1998), Consumer and Business Credit Management, Irwin McGraw-Hill Steven Finlay (2009), Consumer Credit Fundamentals, Palgrave Macmillan 68 The European Parliament and The Council of the European (2008), Directive 2008/48/EC on credit agreements for consumers and repealing Council Directive 87/102/EEC, Official Journal of the European Union The State Bank of Vietnam (2009), SBV reports on banking performance in 2008 and directives in 2009, retrieved from The SBV’s website: http://www.sbv.gov.vn/en/home/tinHDNH.jsp?tin=369 69 Contents INTRODUCTION CHAPTER 1: THE FUNDAMENTALS OF CONSUMER CREDIT CHAPTER 1: THE FUNDAMENTALS OF CONSUMER CREDIT .3 1 General principles of consumer credit 1.1.1 Definition of consumer credit 1.1.2 Characteristics of consumer credit 1.2 Benefits of consumer credit 1.3 Types of consumer credit 1.3.1 Based on the purposes of a loan .6 1.3.2 Based on methods of payment .7 1.3.3 Based on the origin of the loan .8 1.4 Consumer lending process .9 1.4.1 Steps in lending process 1.4.2 Credit analysis 10 1.5 Consumer credit performance .13 1.5.1 Qualitative indicators measuring credit performance 13 1.5.2 Quantitative indicators measuring credit performance 14 1.6 Necessary and sufficient conditions for better consumer credit performance 16 1.6.1 Necessary conditions 16 1.6.2 Sufficient conditions .18 1.7 Consumer credit in Europe and lessons applying for Vietnam 18 1.7.1 Overview on consumer credit in Europe 18 1.7.2 Lessons applying for Vietnam 21 CHAPTER 2: CONSUMER CREDIT ACTIVITIES IN 24 VIETNAM’S COMMERCIAL BANK SYSTEM 24 2.1 Overview of Vietnamese economic outlook .24 2.2 Credit performance in Vietnam’s commercial banking system 26 2.3 Consumer credit activities in Vietnam 29 2.3.1 Types of consumer credit product applied in Vietnam 29 2.3.2 Rules and regulations on consumer credit activity in Vietnam 30 2.3.3 Performance evaluation of consumer credit in Vietnam .35 2.4 SWOT analysis on the situation 50 2.4.1 Strengths and opportunities 50 2.4.2 Weaknesses and threats 50 70 CHAPTER 3: SOLUTIONS AND RECOMMENDATIONS TO IMPROVE EFFECTIVENESS OF CONSUMER CREDIT IN VIETNAM 53 3.1 Banking development strategy by The SBV concerning consumer credit 53 3.2 Solutions and recommendations to improve consumer credit performance in Vietnam .54 3.2.1 As for The State Bank of Vietnam .54 3.2.2 As for Vietnamese commercial banks 58 3.2.3 As for the Government 61 3.2.4 As for other related Ministries and People’s Committees at all levels .62 3.2.5 As for the borrower 63 APPENDICES 65 BIBLIOGRAPHY 67 ACKNOWLEDGEMENT 71 LIST OF ABBREVIATIONS 72 LIST OF FIGURES AND TABLES 75 ACKNOWLEDGEMENT First and foremost, I gratefully acknowledge Ms Nguyen Thi Hien (MSc.), Faculty of Banking and Finance, University of Foreign Trade, for her continued support in my completion of this thesis, without whom the work couldn’t be accomplished I am much indebted to my supervisor, Ms Nguyen 71 Thi Hien, for her valuable advice in academic research and discussion, guidance and supervision in thesis writing and furthermore, using her precious times to read this thesis and give her critical comments on it I also would like to express my warmest thanks to my family and friends, without whose persistent backing and encouragements, the completion of this thesis would be impossible LIST OF ABBREVIATIONS ABBank ACB AGRIBANK An Binh Bank Asia Commercial Bank The Vietnam Bank of Agriculture and Rural APRC ATM Development or Agribank Annual Percentage Rate of Charge Automated Teller Machine 72 CAR CI EU EUR Eximbank Capital Adequacy Ratio Credit Institution European Union Euro Vietnam Export Import Commercial Joint Stock GDP HDBank HSBC JCB OFI ROA ROE Sacombank SECCI SBV Techcombank UK US USD Vietcombank Bank Gross Domestic Product Housing Development Bank The Hongkong and Shanghai Banking Corporation, Japan Credit Bureau Other Financial Intermediary Return on Assets Return on Equity Sai Gon Thuong Tin Bank Standard European Consumer Credit Information State Bank of Vietnam Technological and Commercial Joint-stock Bank United Kingdom United States United States Dollar Joint Stock Commercial Bank for Foreign Trade of VND Vietnam Vietnam-dong 73 74 LIST OF FIGURES AND TABLES FIGURES Figure 1: Indirect Lending Relationships Figure 2: Growth of personal customer deposits in Vietnam’s commercial banks from 2005 to April 2009 (%) 27 Figure 3: Growth of credit performance in Vietnam’s commercial banks from 2004 to April 2009 (%) .28 Figure 4: Total outstanding consumer loans in Vietnam’s commercial banks by term of credit agreement between Dec 2008 & December 2009 (Billion VND) 40 Figure 5: Outstanding consumer loans by demands in Vietnam's commercial banks between December 2008 and December 2009 (Million VND) .41 Figure 6: Structure of outstanding consumer loans by demands in Vietnam's commercial banks in 2010 .43 Figure 7: Value of delinquent loans in Vietnam's commercial banks between 2006 and 2009 (Billion VND) .47 TABLES Table 1: Point-Scoring Schedule of Approved Credit Amounts .11 Table 2: Some economic indicators in 2009 .25 Table 3: The total value of outstanding consumer debts by term loans in Vietnam’s commercial banks from December 2008 to December 2009 (Billion VND) .38 75 76 ... enter into a credit contract - Lending pursuant to a line of credit: The credit institution and the client shall determine and agree on a line of credit to be maintained for a fixed period - Lending... of people around the world Moreover, consumer credit helps diminish wealth gap by providing credit access to all kinds of customers 1.3 Types of consumer credit Credit categorizing is arranging... in terms of profit, consumer credit seems to overshadow business credit in terms of efficiency and making profit In a recent survey, the world’s leading advisor on business strategy, The Boston