In the near future, finance companies may need to undertake significant operational restructuring, reevaluate their growth strategies, and identify their primary customer segments. Simultaneously, they should think of measures to enhance their risk assessment and control processes after disbursing funds.

No longer the goose that laid the golden eggs From a peak of over VND4 trillion in 2017-2019, the profit before tax of FE Credit totaled more than VND3.7 trillion in 2020 despite all those economic woes during the Covid-19 pandemic. Following the transfer of a 49% stake to SMBC Consumer Finance Co. Ltd. (SMBCCF), its pre-tax profit in 2021 shrank to only VND611 billion. The nightmare continued in 2022, when this company made a loss of some VND3.12 trillion as its bad debt ratio further increased to 21.8% from 14.1% in late 2021. In the first half of 2023, FE Credit reported a loss of nearly VND3 trillion, equivalent to the sum lost in the second half of last year. Thus, in the past four quarters, FE Credit incurred a total loss of about VND6 trillion, entirely because of its soaring bad debt. As a result, its equity dropped more than 35%, from over VND15.9 trillion in the end of the second quarter of 2022 to VND10.25 trillion. Another finance company with a loss of nearly VND250 billion in just the first six months of 2023 is Shinhan Finance, a member of South Korea’s Shinhan Card, even though it reaped profit of nearly VND93 billion in the same period last year. Similarly, VietCredit Finance Company lost VND73.6 billion in the first half of this year, a sharp decline compared to the profit of VND42.5 billion in the year-ago period, due to the impact of its provision for credit losses shooting up to VND397 billion. Other finance companies, albeit still profitable, suffered a drastic reduction in their profits compared to the previous period. For example, Home Credit Vietnam, the lender with the second largest market share, saw its profit after tax in the first six months of 2023 dwindle by more than 80% year-on-year, from nearly VND1.19 trillion to a mere VND211 billion. Meanwhile, MB Shinsei Finance Limited Liability Company (Mcredit)—a joint venture between Military Bank (MB) and SBI Shinsei Bank from Japan—recorded a fall of over 30% in its profit after tax over the same period last year, to only VND328 billion. Notably, F88 Business Joint Stock Company, a pawnbroker which has been quietly stepping up its lending activity in recent years, posted an after-tax loss of more than VND386 billion in the first half of this year, versus over VND46 billion in profit in the same period last year, also due to costlier provisioning. This company made after-tax profit of tens of billions of dong each year in the period from 2019 and 2021, with a record high of more than VND200 billion in 2022. Soaring bad debt Once considered the goose that laid the golden eggs, finance companies are now going through an extremely difficult business period, with quite a few of them already a burden for banks due to a surge in consumer bad debt. The reasons commonly given are economic hardships and that the post Covid-19 recovery proves much slower than expected, plus the fact that businesses are now struggling with a shortage of orders and obliged to either scale down their operations or simply disband, leading to a rise in the unemployment rate, which has affected the repayment ability of those customers who have taken out consumer loans from finance companies. As a result, consumer bad debt has skyrocketed, eating into the profits of the industry players. Bad debt of finance companies by the end of 2022 had picked up 23.09% against the end of the preceding year and is likely to further enlarge in the near future, according to the Vietnam Banks Association (VNBA). While it is almost impossible to collect interest on non-performing loans, the costs of capital have been escalating since late last year due to high interest rates. As long as finance companies cannot directly mobilize capital from individuals but have to do so via credit institutions or other businesses, they will be hit harder by the surge in capital costs. Although the quality of old loans has deteriorated, the promotion of new loans in an attempt to offset one’s losses is no longer as easy as before given economic uncertainties, sluggish consumer demand, and increasingly meagre income, causing the demand for consumer loans to significantly slow down since the beginning of the year. Moreover, mounting bad debt leaves some finance companies with no choice but to stop making new loans, so as to concentrate their financial resources on debt collection. Still, it is worth noting that debt collection is a tough job at the moment, since a considerable number of workers have been made redundant or had their income reduced, combined with the growing tendency to evade paying one’s debts. Analysts have pinpointed that the percentage of debtors not fulfilling their obligations or even persuading others to do the same is on the rise, whereas sanctions against such customers are not yet in place and filing a lawsuit against them seems to be unwise considering how minimal the value of their debts is versus how complicated and time-consuming relevant procedures are. In addition, the inspection and investigation into debt collection at certain finance companies or buyers of consumer bad debt who take a heavy-handed approach to debt collection may have a detrimental effect on this activity as it has badly affected the mentality of customers when it comes to debt repayment. Besides, according to representatives of finance companies, not being able to use debt collection services as per the 2020 Law on Investment puts them in a tight corner. That said, it is undeniable that the way finance companies have been easygoing when it comes to lending and fiercely competed with one another over market share is one of the factors that have led to the current level of consumer bad debt. As remarked by Vietcombank Securities Company (VCBS), the rapid expansion over the years and the emphasis on cash lending have made the portfolio of FE Credit riskier than the industry average. Restructuring and raising extra capital Therefore, in the future, finance companies will probably need to restructure their operations, review their development strategies and determine their key customer groups, while working out solutions to improve post-disbursement risk appraisal and control. At present, some finance companies are lending solely to those customers with high credit ratings, rather than developing their business mindlessly as before. Experts believe lending to a wider range of customers at the cost of massive bad debt will push up interest rates, causing those who pay their debts on time to shoulder the interest burden for those who fail to, which is not a good strategy at the moment. The improvement of the national population database will make it easier for credit institutions in general and finance companies in particular to access and make good use of, boosting their credit growth in a stricter manner to minimize risks in the future. Along with that, online appraisal solutions provided by a third party are increasingly enhanced with more efficient models, employing big data or artificial intelligence (AI), which will also help better risk control. Currently, there are 16 finance companies in the market authorized by the State Bank of Vietnam (SBV), whose outstanding loans totaled more than VND220 trillion at the end of 2022, accounting for only 1.87% of the total outstanding loans in the economy and 8.5% of the unpaid consumer loans in the banking system. This figure is quite modest. However, it should be noted that a single customer may have borrowed from both a bank and a finance company. Therefore, when non-performing loans at finance companies change hands, the credit quality of banks gets affected as well, exerting pressure on bad debt of the industry as a whole, which actually did happen in the first half of this year. For this reason, the SBV's Circular 02/2023/TT-NHNN on debt rescheduling and debt category retention for struggling customers, promulgated in late April, has to expand the scope of debt restructuring to include individuals having difficulty paying off the loans previously taken out for consumption and other purposes. VNBA has recently proposed the SBV should develop a separate management mechanism and policy for consumer finance consistent with the characteristics of this segment. To be specific, the standard bad debt ratio for finance companies should be set at a higher level, considering how the majority of their borrowers are subprime and arrange loans without collateral. Additionally, it is necessary to issue regulations on the responsibilities and obligations of borrowers, and impose sanctions against those who deliberately delay repayments, etc. Another restructuring solution is that finance companies may consider a capital hike to improve their risk buffers, by either calling for extra capital from investors, banks/parent firms, or selling their shares to foreign investors. For instance, rumor has it that Kasikornbank (KBank)—Thailand’s second biggest lender—is in talks over the acquisition of Home Credit Vietnam, through a deal said to be worth as much as US$1 billion. Another M&A deal is also following the necessary procedures, with the fifth largest financial group in Thailand, Krungsri Bank, taking over SHB Finance.