Luận văn Tiếng Anh thương mại: Solutions to improve effectiveness of consumer credit in Vietnam

Luận văn khoa tiếng anh thương mại Đại học ngoại thương INTRODUCTION1. 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”. Contents ACKNOWLEDGEMENT LIST OF ABBREVIATIONS LIST OF FIGURES AND TABLES INTRODUCTION 1 CHAPTER 1: THE FUNDAMENTALS OF CONSUMER CREDIT. 2 1.1. General principles of consumer credit 3 1.1.1. Definition of consumer credit 3 1.1.2. Characteristics of consumer credit 4 1.2. Benefits of consumer credit 5 1.3. Types of consumer credit 6 1.3.1. Based on the purposes of a loan. 7 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. 9 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 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 28 2.3.1. Types of consumer credit product applied in Vietnam 28 2.3.2. Rules and regulations on consumer credit activity in Vietnam 29 2.3.3. Performance evaluation of consumer credit in Vietnam 35 2.4. SWOT analysis on the situation. 49 2.4.1. Strengths and opportunities. 49 2.4.2. Weaknesses and threats. 49 CHAPTER 3: SOLUTIONS AND RECOMMENDATIONS TO IMPROVE EFFECTIVENESS OF CONSUMER CREDIT IN VIETNAM . 52 3.1. Banking development strategy by The SBV concerning consumer credit 52 3.2. Solutions and recommendations to improve consumer credit performance in Vietnam 53 3.2.1. As for The State Bank of Vietnam 53 3.2.2. As for Vietnamese commercial banks. 57 3.2.3. As for the Government 60 3.2.4. As for other related Ministries and People’s Committees at all levels. 61 3.2.5. As for the borrower 62 CONCLUSION 62 APPENDICES. 64 BIBLIOGRAPHY 66

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is kind of activity is strictly restricted by The State Bank of Vietnam, particularly when it comes to consumer credit, a credit area of potential risks. In general, commercial banks have made progress in customer service. However, on the whole, there is a disseminating situation where assessment of customers’ loan application packages is still being delayed. The reason may come from weakness if banks’ real capacity to meet borrowers’ demands despite their frantic advertising campaigns. Regarding the value of outstanding loans Consumer credit activities have been developed in Vietnam for over the last 10 years. Consumer loans were at first established and developed at Vietnam Bank for Agriculture and Rural Development (also known as AGRIBANK). Local branches of AGRIBANK, particularly those located in remote and countryside areas implemented this kind of credit to provide loans for teachers, workers and armed forces in the areas. The bank branches based on their payroll and comments from local Trade Union to assist them to buy vehicles, renovate houses, and purchase other basic necessities. Consumer credit market has been witnessing intense competition among commercial banks since 2006. Commercial joint stock banks and branches of foreign banks in Vietnam are the most active ones. In the context of market share of wholesale banking sector being dominated by Vietnamese commercial banks, especially State-owned commercial banks, consumer credit has created an extremely competitive environment in retail banking. This is latest and apparent trend towards the development of banking industry in Vietnam where enterprises and businesses are considered traditional customers of the banks. This comes from a fact that consumer credit activities have been growing significantly in many developed countries, and it also brings extraordinary revenue for banking industry in these countries. In Vietnam, in order to alleviate the negative impacts of the world’s financial crisis, The State Bank of Vietnam has implemented the tight monetary policy to curb inflation, leading to a rise in interest rate applied on the loans. The number of customers asking for bank loans consequently fell dramatically. However, the growth of outstanding consumer loans increased drastically between 2008 and 2009. This came as a result from State Bank of Vietnam’s issuing Circular No. 01/2009/TT-NHNN dated 23 January 2009, which guided negotiable interest rates applied by CIs to consumer loans and loans provided through the credit card issuance and usage. In 2009, commercial banks experienced a close race between Vietnam and foreign banks in terms of range of credit products, particularly the loans granted to purchase flats or apartments. Such banks as Techcombank and Sacombank provide loans on 70% to 80% of the house value with the term of agreement up to 15 and 20 years. In a special case, HD Bank is said to providing loans on 100% of the house value in 30 years. Meanwhile, in foreign banks sector, Indovinabank offers mortgage loans with the term of 20 years, and HSBC offers home loans in 25 years. However ACB only grants fund of 70% of the house value or of secure assets value within 5 years, and the loans are no more than 500 million VND. Besides, there is a tight race for offering beneficial packages of consumer loan such as: “High-speed lending”, which provides quick and straightforward procedure for lending; Internet Banking; or providing loans with attractive interest rates, etc. ABBank is taken as an example. ABBank launched its “Financial Supermarket” product which is comprised of many forms of consumer loans. Another instance is Maritime Bank which recently has launched "New Life" package. 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) Term loans Dec-08 Jun-09 Dec-09 Short-term 22,293.45 31,240.09 47,083.84 Medium and Long-term 54,300.58 63,391.06 79,560.95 Total 76,594.03 94,631.15 126,644.79 (Source: General Office, Monetary Statistics and Forecasting Department, The State Bank of Vietnam) Total value of outstanding consumer loans in Vietnam banking system until December 2008 was 76594.03 billion VND, accounting for only a little more than 6% of total value of the entire economy’s outstanding loans (which was 1,275,044 billion VND). Total value of outstanding debts improved continuously throughout 2009. By the end of December 2009, total value of outstanding loans had raised 39.52 per cent compared to that in 2008. Albeit the figures in 2009 seemed to be more optimistic, they occupied merely 7.22 per cent of the whole economy’s value of outstanding debts, which was 1,753,600 billion VND. The value of outstanding loans between December 2008 and December 2009 witnesses spectacular growth, especially in the context of economic crisis. This can be considered as a proof of the banks’ developing their policy on consumer credit. Besides, this is a positive signal of the banks’ expanding their lending activities to all types of customers, specifically individuals. However, on average, the value of a consumer loan per capita is just about 921.000 VND According to Dr Le Xuan Nghia, Chief of Monetary Policy Department, The State Bank of Vietnam in his statement replying Vietnamnet’s interview on 31 October 2008. . The number is too low compared to such a potential market with population of 86.5 million people as Vietnam. It is also disappointing because of the fact that only one adult has a bank account out of four people. This appears obviously that a majority of Vietnamese have no relations with banks throughout the country. Regarding term loans, short-run loans are proportionally less than mid-run and long-run loans. They occupied just about 30 per cent to 40 per cent of the total outstanding loans. Midterm and long-term loans which are about 60 per cent to 70 per cent of consumer loans appear to be more popular with lenders than short-term ones. However, it can be revealed from Table 3 the proportion experienced a downward trend throughout the years. The figures were 70 percent, 67 per cent, and 62.8 per cent in December 2008, June 2009, and December 2009 respectively. The absolute values of mid-term, long-term, and short-term loans are shown in Chart 1 below: Figure 4: Total outstanding consumer loans in Vietnam’s commercial banks by term of credit agreement between Dec 2008 & December 2009 (Billion VND) (Source: General Office, Monetary Statistics and Forecasting Department, The State Bank of Vietnam) The proportion of outstanding medium-run and long-run loans doubled that of short-run loans during 2009. It can be shown from the column chart (Chart 1) that the difference was remained unchanged from December 2008 to December 2009. This comes from a fact that most of banks prefer to provide mid-term and long-term credit. Also, borrowers ask for a bank loans to cover expenses on either the purchase of expensive things or activities requiring a large amount of money. This means the value of such loans is quite big, and borrower therefore cannot repay the debt in a short period of time. To name just a few, home loans and car loans are among the most popular ones with no less than 5 years of credit agreements. In terms of loan structure, home loans and car loans take the leading positions compared to other type of loans. Figure 5: Outstanding consumer loans by demands in Vietnam's commercial banks between December 2008 and December 2009 (Million VND) (Source: General Office, Monetary Statistics and Forecasting Department, The State Bank of Vietnam) Consumer credit not only goes up in terms of quantity but also develops its form with a variety of consumer loan products which are designed by the banks to attract their potential customers, namely home loans, car loans, loans for education and health care, loans for interior decorations, overdrafts, and others. Due to rising demand for consumption, especially demand for the purchase of houses, vehicles, and interior decorations, value of outstanding loans on these purposes climbed up consecutively from December 2008 to February 2010. The figures rose significantly between the end of 2009 and the beginning of 2010. This can be explained by Vietnamese custom to purchase s much as possible at the end of a Lunar year to prepare for Tet holiday. In 2009, commercial banks experienced a close race between Vietnam and foreign banks in terms of range of credit products, particularly the loans granted to purchase flats or apartments. Such banks as Techcombank and Sacombank provide loans on 70% to 80% of the house value with the term of agreement up to 15 and 20 years. In a special case, HD Bank is said to providing loans on 100% of the house value in 30 years. Meanwhile, in foreign banks sector, Indovinabank offers mortgage loans with the term of 20 years, and HSBC offers home loans in 25 years. However ACB only grants fund of 70% of the house value or of secure assets value within 5 years, and the loans are no more than 500 million VND. Besides, there is a tight race for offering beneficial packages of consumer loan such as: “High-speed lending”, which provides quick and straightforward procedure for lending; Internet Banking; or providing loans with attractive interest rates, etc. ABBank is taken as an example. ABBank launched its “Financial Supermarket” product which is comprised of many forms of consumer loans. Another instance is Maritime Bank which recently has launched "New Life" package. During the first quarter 2010, the outstanding consumer loans in the whole banking system reached 123,020.7 billion VND. At the end of March 2010, credit growth in the whole industry achieved merely 3.34 per cent which is a modest figure in comparison with 25 per cent of growth set up for goal in 2010. However, in the context of economic crisis, the number is not too disappointing. Also on 14 April 2010, The SBV issued Circular No. 12/2010/TT-NHNN which replaced Circular No. 01/2009/TT-NHNN and Circular No. 07/2010/TT-NHNN, allowing the CIs to apply negotiable interest rates on loans, including consumer loans. However, this does not mean the banks will loan more customers. This comes from a fact that the banks are allowed to, and also they themselves prefer to provide funds to those with a convincing plan of borrowing and using money efficiently. Figure 6: Structure of outstanding consumer loans by demands in Vietnam's commercial banks in 2010 (Source: General Office, Monetary Statistics and Forecasting Department, The State Bank of Vietnam) However, it can be seen from the pie chart in 2010 (Figure 6) that home loans took the major part in structure of outstanding consumer loans while loans for education and health care only shared a tiny proportion, 46% and 1% respectively. The reason is that improvement in living standards in recent years have resulted in increase in buying cars for transportation; houses and apartments for accommodation or for rent. However, due to buying habits, people mainly borrow money to purchase things of high value such as houses or vehicles. Household utensils and appliances are often purchased without asking a loan. Moreover, they are usually financed by the retail companies with a much more affordable interest rate compared to that of a bank. Loans for education are also not attractive to customers despite its growth in recent years because the banks focus mostly on providing fund for overseas study rather than domestic study which normally requires a small amount of money to invest. Also, nowadays, people tend to go study abroad by their own financial resources and scholarships instead of borrowing money to cover tuition and living expenses. Regarding the expected return Difference between input and output of consumer credit can be understood as the banks’ expected return on this credit form. The input, which means the interest rate to mobilize capital for a bank, is comprised of real interest rate to mobilize funds, deposit insurance costs, payment protection insurance costs, and operation costs. Let’s say this kind of costs A. A is the same to any forms of credit. So is the value of total capital mobilized. However, the output from credit activities, i.e. lending interest rate, is different towards different types of credit. Therefore, from Formula (1) as mentioned in Chapter 1 Formula (5), page 18, Chapter 1. , we only consider the numerator in the right side of the equation to compare interest rate differential between business loans and consumer loans. We have: x = X – A y = Y – A In which A is the interest rate for capital mobilization. X is the interest rate for business loans. Y is the interest rate for consumer loans. x is the interest rate differential for business loans. y is the interest rate differential for consumer loans. At the end of March 2010, the value of X, Y, and A in the credit market is generally known as follow: A is about 11.5 per cent. X is from 16 per cent to 18 percent. Y is from 16 per cent to 21 percent. Thus, we have: x ranges from 4.5 percent to 6.5 per cent. y ranges from 4.5 per cent to 8.5 per cent. So, by quoting such interest rate on consumer loans, the banks expect a higher return on capital towards consumer credit. It can be seen that 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 Consulting Group, has revealed that though consumer credit occupies only 30 per cent to 50 per cent of the total value of outstanding debts, it contributes to over 60 per cent of the total profit of the leading commercial banks in Asia. The reason is quite simple to understand. Tough competition among lenders results in a decline in return on business credit, whereas consumer credit seems to be on the rise due to a fact that consumer credit outweighs business credit in terms of the number of customers. The banks therefore have a potential market to exploit. Since the stiff competition among finance companies, investment funds and stock markets on business credit in the 1970s, consumer credit has been seen as an optimal solution to save commercial banks. In case of Vietnam, the customer base of over 86 million people is truly bringing commercial banks great opportunities to promote their consumer credit activities. Profit earning from consumer credit is not only from difference between the input and the output but also from value added services that go with the credit activity itself, especially card services. This exerts a significant effect on a bank’s performance and operation. Thanks to such retail banking activities, the banks have chance to improve and restructure their income. The source of income will be mostly from retail banking and services instead of wholesale banking. In terms of spreading and mitigating risks, consumer credit does help the CIs to reduce heavy dependence on profit from corporate credit. In Vietnam, until the time of the dissertation, in most of state-owned commercial banks, income from business credit is about 60 per cent of the total income. The figure at other Vietnamese banks is around 45%. Regarding nonperforming loans The quality of credit growth is still under control. However, the number of non-performing loans tend to climb up, especially at the branches of foreign banks and joint venture banks (doubling), followed by finance companies (nearly 100 per cent) and joint stock commercial banks (around 36%). The value of delinquent loans increased continuously over the time as shown in Chart 5. This also means a rise in the number of overdue debts between 2006 and 2008. The period from 2006 to 2008 witnessed triple growth of delinquent loans. Banking system seems to face challenges in collecting debts including principal and interest applied on the loans. Figure 7: Value of delinquent loans in Vietnam's commercial banks between 2006 and 2009 (Billion VND) (Source: General Office, Monetary Statistics and Forecasting Department, The State Bank of Vietnam) By December 2009, Vietcombank had kept its non-performing loans to 3% of total outstanding loans (compared to 4% at the beginning of the year). The figure at Eximbank was over 2% compared to 4.71% in 2008 and 6% in the early 2009. Other banks such as ACB and Sacombank also maintained the ratio very low, of less than 1%. As for the whole banking industry, the ratio was 2.46 in 2009. However, whether consumer credit performance is guaranteed or not has been remained controversial. Provision for risks was also required to increase. This can be understood in two ways. Firstly, thanks to good performance on business activities, the banks have larger capacity to make reserve so as to prevent potentially unexpected risks. Secondly, it can be seen that a rise in total outstanding loans is not in tandem with a rise in credit performance, which lead to an additional amount of reserve needed. Regarding the issue of providing consumer loans through credit card issuance and usage: Vietnam’s payment card market is relatively small but one of the most potential markets in the world. The popularity of payment cards in Vietnam has soared significantly over the past couple of years. The cards are increasingly used in the number of shopping malls and various on-line portals that carry luxury or world-class brands of consumer goods. Therefore, the market for credit cards remains largely untapped and full of opportunities. All major credit card service providers have a presence in Vietnam, including MasterCard, American Express, Visa, JCB and Diners Club. By the end of 2009, there had been more than more than 17 million ATM cards issuing in Vietnam with over 9,000 ATMs across the country. Vietnam Banks Association website The Vietnam credit card market is expected to undergo a major thrust in next ten years. According to the international credit card agency Visa Inc, the number of Visa cards issued in Vietnam hit 1 million cards at the end of 2009. However, many banking leaders admitted that card transactions are actually far less than the number of cards released. Even though a lot of promotion and advertising campaigns have been launched, the banks still have difficult in attracting card holders to use credit cards. Commercial banks are currently making extra investment in credit and debit card service because profit from this area is said to be enormous. However, not many customers can bear the interest rate of 1.875 per cent monthly which is equivalent to 22.5 per cent annually when paying by cards. Not to mention when the customers delay their payment of overdraft, they will be charged an interest rate up to 25 per cent a year for penalty. Card holders also suffer from many other types of service charges. All the above things seem to put a limit on providing loan through the issuance and usage of credit cards. 2.4. SWOT analysis on the situation 2.4.1. Strengths and opportunities Even though consumer credit has just received considerable attention since 2006, it has been experiencing exponential growth, particularly in the loan volume. Commercial banks have offered many credit product packages to attract the customers. This not only creates a broad array of goods and services for customers’ choices but also helps diversify the banks’ investment portfolio. In addition to traditional products such as home loans, car loans, or loans on education and health care; Vietnam’s commercial banks are paying more attention towards other types of consumer loans, namely overdrafts and loans through credit cards. With the customer base of more than 85 million people in which the majority of the population are young people and an increase in income and consumption level, consumer credit market in Vietnam appears to be one of the most potential lending markets in the world. Besides, a widespread network of more than 45 banks and financial companies seems to offer plenty of opportunities for the development of consumer credit activity in Vietnam. 2.4.2. Weaknesses and threats Consumer lending activities despite positive and significant changes still have not met social demand for bank loans. Internal factors The banks prefer providing fund to officials rather than normal households so as to manage the debt repayment and credit assessment more conveniently. This has led to imbalance in loan structure. Investment portfolio in terms of consumer credit accordingly is not diversified. Time of registration for security transactions is long. So is time to carry out the necessary procedures before disbursement, causing difficulties for customers due to the lack of consensus among the agencies of registration for security transactions. Another limitation lies in the ability of credit officers to carry out credit evaluation, which is still much of objective. External factors The implementation of loans that are secured by houses or land uses goes through many complicated procedures such as notarization in the past and registration for security transactions currently. Meanwhile, the registration for security transactions has not been instructed completely. The management of consumer lending is difficult as for loans secured by customer’s salary. The reason is that most companies do not notify to the banks timely in case the employees resign, leading to difficulty in collecting debts. Or in many cases, although the loans are guaranteed by the employee’s manager, the banks still face many difficulties due to the guarantor’s unwillingness to repay the debt. The information exchange and coordination among commercial banks has not been carried out properly. Data about individual customers is not updated and exchanged in the banking system. This creates conditions for the customers to have loans in many banks simultaneously, leading to inaccuracy in assessing the customers’ solvency Consumer lending is not common in such Asian nations as Vietnam. Besides, with psychology of accumulation, especially in the situation of economic crisis, Vietnamese are less enthusiastic about spending. Even in a better condition, many people would rather save money than spend those purchasing goods and services. Risks from customers which play a significant part are very diverse. Poor level of the borrower in business prediction, management; or intentional fraud can be listed as the main causes of credit risks. In a changeable economy full of competition, that the customer does not take potentially unexpected risks into careful consideration as well as the customer has no adaptability and capacity to deal with uncertain situations may lead to insolvency. There are also cases in which the customer provides inaccurate and false information to get a bank loan. CHAPTER 3: SOLUTIONS AND RECOMMENDATIONS TO IMPROVE EFFECTIVENESS OF CONSUMER CREDIT IN VIETNAM In the previous chapters of the thesis, most of the issues regarding consumer credit in Vietnam’s commercial banking system are discussed. The chapters also clarify the current situation of consumer credit in Vietnam. This final chapter will synthesize the main findings of the thesis and provide several solutions and recommendations to help improve and enhance this credit activity in Vietnam. 3.1. Banking development strategy by The SBV concerning consumer credit - Consumer credit is a part of the credit mechanism. However, consumer credit also consists of distinct features associated with consumption patterns of the society. Renovating mechanism of consumer credit in the coming years therefore should be in harmony with the renovation of the whole credit mechanism in consistence with consumption patterns of the society. - In the context of a market economy and international integration, consumer credit mechanisms must be built in compliance and synchronization with rules and regulations, and other related legal documents to ensure safety and create favorable conditions for the expansion of consumer credit; as well as to create equal legal environment for credit activities, improving the autonomy, self-decision, self-responsibility of commercial banks. This will help remove interference into the lending process by administrative authorities. - Improvements in credit mechanism must be achieved in association with the content of monetary policy operation in order to remain stable value of VND, control inflation, and contribute to the economic growth in a sustainable manner and in agreement with international monetary and financial institutions. - Mechanism for consumer lending is designed to spur credit growth safely and is expected to demonstrate the following annual indicators of orientation: (1) Credit growth of CIs towards the entire economy reaches an average of 23.5% annually while the capital resource grows sustainably and ensures the CAR of 8%; (2) The delinquency rate is below 5% out of total outstanding loan; (3) The CI maintains the interest rate differential reasonably so as to set up risk reserve, recover costs, and make profit. - Changes in the consumer credit mechanism must be appropriate and consistent with relevant legal documents. The regulations should be made clear, specific, and easy to apply in accordance with socioeconomic context. - Simplifying the procedures of loan applying in agreement with relevant regulations and legal environment to facilitate the expansion in banking credit relations and ensure the capital adequacy ratio simultaneously. - Consumer credit mechanisms should be regulated in accordance with banking modernization, banking service expansion, and banking administrative reform, concerning all three aspects: of institution, of apparatus and of human resources. - Implementing effectively and timely The Overall Project which aims at strengthening and invigorating the CI system. 3.2. Solutions and recommendations to improve consumer credit performance in Vietnam 3.2.1. As for The State Bank of Vietnam In the context of integrating and opening domestic financial market, a legal framework which is complete and consistent with international constitutions and practices will encourage a fair and favorable business environment for the development of banking system. Basing on the study in chapter 2, the dissertation therefore would like to put forward the following recommendations regarding The State Bank of Vietnam: Issuing detailed legal documents on consumer credit activity Until now, no complete and precise definition of consumer credit has ever been issued by The State Bank of Vietnam in its legal documents. After several amendments, have a number of documents been issued. The latest one was the Circular 12/2010/TT-NHNN announced on 14 April 2010. However there still has been no clear definition of consumer credit. The documents only indicate the purposes of consumer loans. Also in the table of "Report on loans with agreed interest rate in VND” written in the Circular 12/2010/TT-NHNN, consumer credit is understood as “lending to finance the needs of consumption” with five different categories of loan purposes. Among them is “loan to renovate houses and purchase houses for accommodation in which the source of repayment is from the borrower’s periodical payroll. This can be understood that this type of loan is granting for subjects with stable income wage only (which means the loan is applicable to staff in certain organizations and companies). Meanwhile, a large number of customers asking for a bank loans have difficulty in proving their ability to repay the debt. They are businessmen with high capacity of finance which is not shown in any payrolls. The banks, therefore, normally refuse to provide them with any loans, because according to the Circular 12/2010/TT-NHNN, they are not among the subjects of credit granting. Even if the bank considers providing a loan for this category of customers, they will not know how to list the loan in the report sending to The State Bank of Vietnam. In theory, granting credit to those whose sources of payment are either not from payrolls or not clearly identified is said to violate the general credit rule and regulation because it is not stated or quoted in any written documents of instruction by The SBV. In practice, not only commercial banks but also The SBV itself seems to be confused when it comes to such loan classification. The recently continuous amendments to instructive documents have revealed weakness in promulgating legal documents sustainably. Even the latest document also does not produce a clear definition of consumer credit. Therefore, the SBV itself should issue sustainably legal documents which can be used in the long run. Consumer credit, following the new rule and regulation, should be defined and categorized flexible according to the purposes of loan instead of payment source as at present time. Controlling commercial banks’ applying interest rate on loans On April 14 2010, The SBV announced the Circular 12/2010/TT-NHNN, allowing the CIs to specify the provisions of Vietnam-dong loans at negotiable interest rates to customers. However, in reality, interest rates applied on the loans are not calculated in accordance with contemporary regulations, particularly in accordance with Regulation 652/2001/QĐ-NHNN on the method of calculating and accounting the collected and paid interests arising in the operation of The SBV and the CIs in Vietnam. The CIs accordingly may apply either of the two following methods of calculation: in accumulated amount or in sum. As for the interest calculation in sum, this method must be based on the deposited amounts or the debt payment amounts, the money-depositing or loan use duration and the specific interest rate applicable to the money-depositing or –borrowing. Thus, the interest rate stated in the credit agreement should be the interest that a customer actually has to pay. However, many banks are currently calculating the interest rates applied on the loans in the following way: Considering an example, a bank advances a customer 360 million VND to cover the purchase of a car. Interest is charged at monthly rate of 0.9 percent as stated in the credit agreement. According to the repayment schedule established by the bank, the customer is committed to make a monthly repayment of 13,240,000 VND in which 10,000,000 VND is the principal and 3,240,000 VND is referred to interest. From the second month during the term of credit agreement, the principal should be 350 million VND. From the third month, it should be 340 million VND. However, the customer still has to pay 13,240,000 VND every month, which means the actual interest rate on the loan is very high. As being calculated in the above example, the interest rate of 0.9 percent per month, which is written in the credit agreement, is actually the nominal interest rate. Meanwhile, the interest that a customer has to pay is in reality much higher. Therefore, The SBV should draw up more specific regulations as well as imposing fines for violation of interest calculation and interest quotation. The interest rates quoted and written in the credit agreement thus must be the interest rates on loans in practice. This not only helps protect customers’ interests but also strengthens the inspection and control of The SBV towards lending operations of the CIs. Imposing restriction on debt refinancing The government and The SBV should adopt regulations to give the CIs guidance on debt refinancing. Refinancing debt therefore should be seen as restructuring a CI’s loans as well as be distinguished from providing loans to cover non-performing ones incurred by subjective causes. Refinancing debt is of latent risk and can be used inappropriately to conceal disappointing credit performance. Hence, restrictions should be included in the guidelines on this issue. For example, lending should be prohibited in case: of delinquent loans; of covering up the CIs’ poor credit performance and the borrowers’ low financial status although the loans are not delinquent. Loans also cannot be used to repay interest expense for the CIs themselves. Debt refinancing can be done once only for each loan, from the time the loan occurs until it is recovered at any CIs. 3.2.2. As for Vietnamese commercial banks International integration is considered the motivation for renovating. Vietnamese commercial banks therefore must run their businesses under principles of the market. While overcoming existing drawbacks, commercial banks should improve competitiveness simultaneously by enhancing operation management as well as developing and diversifying banking services. Concerning loan products Consumer credit is said to be of potential risk because the lenders here includes individuals and households who may be in default on the loans due to objective causes such as sickness or unemployment in the time of economic crisis. Providing loans consumer credits requires high standardization on product features, sales processes, distribution channels, and risk management in order to meet the needs of each customer type. Consumer credit products should be built up in reference with international standards and in association with Vietnamese’s customs and buying habits. The banks therefore should have appropriate investment in market research, consumer demand, and habits of target groups in consideration to develop distribution channels and design risk management mechanisms and proper guidelines Advertising campaign One of the rigorous requirements when it comes to consumer lending products is convenience for customers. When creating a package of consumer lending, banks should actively promote through means of technology and mass media so that consumers acknowledge and understand the products and services of the bank. Therefore, banks can hardly boost consumer lending activities with providing insufficient information and appeal customers by inconvenient products. Raising awareness of bank officers of consumer lending The average number of business loans (wholesale lending) is always larger than that of consumer loans. This is true theoretically and practically due to nature, scale and demand for business loans which outnumber those in area of consumer lending. It is of many bank officers’ opinion that profits from wholesale lending activities must be greater than the profits from consumer lending activities. Thus, bank officers, particularly credit officers at the state-owned commercial banks, are much afraid of providing consumer loans compared to corporate loans. Bank officers therefore should be more flexible and more active towards processes review, appraisal, and monitoring and debt recovery. Improving quality of banking human resources Capacity building of human resources in the current period becomes a matter of urgency, especially the requirements of economic development - economic development of the country and in the period of international economic integration. Capacity building requirements of human resources becomes all the requirements of the industry in general and the banking sector in particular. Capacity building of human resources currently is becoming a matter of urgency, especially under the requirements of economic development in the context of international integration. Therefore, banks should improve staff qualifications and skills as well as formulate appropriate staff appraisal. Staff training is also of great importance. Staff should undergo appropriate training in basics, planning, monitoring to ensure that they have the requisite knowledge and skills in handling a loan application package. In addition, regular training for all staff at all levels and branches should be organized and reviewed to make sure that there is an equal chance for staff of all responsibilities and functions to experience training & development programs. Another concerning issue should be considered is that bank staff should display favorable attitude and caring service towards customer coming to the bank. Improving operational performance Building a professional organization structure with more staff, each of whom has certain responsibilities that are clearly defined; they can concentrate more on their own work. Hiring additional staff also helps avoid the overlap and confusion in staff’s task assignment, which in return, will increase efficiency. Besides, bank should also critically review the organizational structure from the top management board to the branch credit officers on a regular basis. In doing so, the efficiency of the operational system can be assessed and improved towards better performance. Moreover, work rules and operational manuals of all levels and functions should be reviewed and developed regularly and strict control should be kept over in compliance with these rules.. Strengthening risk management Like other businesses, in the course of their activities, banks also face risks: liquidity risk, credit risk, etc. The risks of commercial banks directly influence the general activity of the entire economy. Therefore, banking risk management has an important role in stabilizing the banking industry which exerts a positive impact on the economy. There is a need to access to international practices (Basel) to improve risk management. In tandem with this, it is also necessary to complete quickly model of organization and operational mechanism of internal control and audit so as to improve consumer credit performance. Preparing development plans in the long run Above all, bank’s management board should work on defining future strategies for a certain period of time, let’s say, 5 years. Thinking ahead and planning for future development will help the bank have clear objectives to reach appropriate criteria to assess existing performance. Not only the head managers but staff at all levels and branches must also be aware of the organization’s key objectives and work hard to contribute to the achievements of the common goals. Strategic thinking reflects a professional working style and a well-organized operational system. Strategic and analytical thinking is also the key to the bank’s success under the new legal framework. 3.2.3. As for the Government The Government should issue documents on orientations and measures to promote consumer credit through the banking channel. Since 2008, the Government has implemented a lot of measures to support the economy. But the assistance is mostly for business sector. The decisions, regulations on interest rates almost exclusively focus on creating conditions for enterprises to boost production. They actually have no direct impact on consumer credit activities. The Government therefore should pay more attention to this type of credit which has been seen as the development trend in the world credit market. The Government directs related ministries and departments to coordinate implementation of banking credit and policies to support the consumption needs of individuals and households. The provisions on security transactions need to be simplified in terms of processes and implementation so as to facilitate those who are regulated by these rules. 3.2.4. As for other related Ministries and People’s Committees at all levels 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. 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. 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 do no have the minimum of necessary knowledge relating to borrowing activities. Therefore, there are many cases where we do 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 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. APPENDICES Predictive Factors in an Example of a Credit Scoring Model and Their Point Values Factors for Predicting Credit Quality Point Value 1. Customer’s occupation or line of work Professional or business executive 100 Skilled worker 80 Clerical worker 70 Student 50 Unskilled worker 40 Part-time employee 20 2. Housing status Home owner 60 Renting 40 Living with parents or friends 20 3. Credit rating Excellent 100 Average 50 No record 20 Poor 00 4. Length of time in current job >1 year 50 ≤ 1 year 20 5. Length of time in current address >1 year 20 ≤ 1 year 10 6. Telephone in home or apartment Yes 20 No 00 7. Number of dependents reported by customer 0 30 1 30 2 40 3 40 More than 3 20 8. Deposits accounts held Both checking and savings 40 Savings account only 30 Checking account only 20 None 00 (Source: Peter Rose (2001), Commercial banking management, Irwin McGraw-Hill, p. 601) 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 giữa hoạt động của ngân hàng thương mại và tăng trưởng kinh tế, retrieved from The SBV’s website: PGS. TS. Nguyen Van Tien (2009), Giáo trình Ngân hàng Thương mại, Statistical Publishing House, Hanoi. The State Bank of Vietnam (2010), Thông tin về hoạt động ngân hàng tháng 12/2009, retrieved from The SBV’s website: ThS. Trinh Thanh Huyen (2010), Hệ thống ngân hàng Việt Nam năm 2009 và những bài toán đặt ra cho năm 2010, retrieved from The SBV’s website: Trinh Ngoc Lan (2008), Cho vay tiêu dùng thấp kinh tế khó phát triển, retrieved from Vietnamnet: Xuan Dang (2010), Thông tư 07 - con đường mới cho cơ chế điều hành lãi suất hiện nay, retrieved from The SBV’s website: 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. 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: Contents 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 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 An Binh Bank ACB Asia Commercial Bank AGRIBANK The Vietnam Bank of Agriculture and Rural Development or Agribank APRC Annual Percentage Rate of Charge ATM Automated Teller Machine CAR Capital Adequacy Ratio CI Credit Institution EU European Union EUR Euro Eximbank Vietnam Export Import Commercial Joint Stock Bank GDP Gross Domestic Product HDBank Housing Development Bank HSBC The Hongkong and Shanghai Banking Corporation, JCB Japan Credit Bureau OFI Other Financial Intermediary ROA Return on Assets ROE Return on Equity Sacombank Sai Gon Thuong Tin Bank SECCI Standard European Consumer Credit Information SBV State Bank of Vietnam Techcombank Technological and Commercial Joint-stock Bank UK United Kingdom US United States USD United States Dollar Vietcombank Joint Stock Commercial Bank for Foreign Trade of Vietnam VND Vietnam-dong LIST OF FIGURES AND TABLES 1. FIGURES Figure 1: Indirect Lending Relationships 8 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 2. 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

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