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Consumer finance market in 2015: Many changes in the pipeline

At the end of 2014, the State Bank of Vietnam (SBV) conducted some consultation to solicit inputs for the draft Circular on the Regulation on consumer finance operations of finance companies, which requires commercial banks to establish their finance companies for this business. In addition, according to the restructure timeline, in 2015, state-owned enterprises must divest from non-core business lines. In addition, Circular 36/2014/TT-NHNN requires credit institutions within 2015 to develop a divestment plan in case the ownership percentage is higher than the regulatory rate.

All of these have given rise to a new trend of mergers and acquisition and establishing new finance companies among banks in order to gear up for a potentially profitable business.

Banks acquiring finance companies

Recently, in the information pack preparing for the Shareholder’s Meeting in April 2015, Asia Commercial Bank (ACB) submitted a proposal on establishment of the ACB finance company in view of SBV’s intention to strengthen control of consumer finance operations by issuing circulars in 2015. Without due preparation, ACB and other banks will no longer be able to finance consumers the way they used to.

In early 2015, Techcombank has bought nearly 90% of outstanding shares from Vietnam Chemical Finance Joint Stock company (VCFC), adding to its initial 10% ownership, making VCFC its wholly-owned subsidiary.

Similarly, early April 2015, Credit Saison Company (Japan) has completed its capital contribution in HDFinance, a financial company owned by HDBank, which is later renamed HD Saison Finance Company. HDFinance, formerly Société Générale Viet Finance (SGVF) with charter capital of more than 550 billion VND, is one of the few 100% foreign-owned finance companies. In 2013, HDBank acquired SGVF and turned it into HDFinance, which has operated for nearly 2 years before being merged with the finance company of Credit Saison. Boosted by a strong capital base and established experience from Japan, HD Saison is expected to become a big name in consumer finance market in the near future.

Besides the HDBank merger, SBV also gave green light for Maritime Bank to takeover Textile and Garment Finance Joint Stock Company (TFC) where Maritime originally had 11% stake.

 A more transparent market?

The specific timing for the new circulars to take effect is not yet known, but recent steps taken by commercial banks are, for sure, necessary because SBV’s intention of having tighter regulation and ensuring better transparency in consumer finance business is a move in the right direction.

Currently, commercial banks and finance companies are the main players in Vietnam’s consumer finance market. While banks are bound by numerous credit risk regulations and cumbersome processes, finance companies have ample space in choosing their target borrowers, tenor, interest rate and form of mortgage. Therefore, to mitigate NPL risk, SBV requires commercial banks to own finance companies to finance consumers. Where NPL arises, it is not the responsibilities of commercial banks but of the finance company as a separate legal entity with different legal framework and charter capital. At the same time, these bank-owned finance companies shall be able to compete on a more equal footing with other finance companies in the market.

For a fast growing economy with burgeoning personal consumption, transparency and an enabling legal framework for consumer credit operations is vital. Within addition to circulars requiring banks to establish finance companies, SBV says it would issue more regulations to facilitate consumer credit.  Once a more competitive market is put in place, especially with the merger and acquisition trend between banks and finance companies, observers believe that interest rates will fall and service quality will be improved. This will benefit customers on the one hand and boost professionalism for finance companies on the other.