In 2016, FE Credit, consumer finance services of Viet Nam Prosperity Joint Stock Commercial Bank (VPBank), posted nearly VND2,000 billion (US$88 million) after-tax profit, contributing 50% of its total earnings.
This big profit helped VPBank become the largest private bank by market capitalisation on the HCM Stock Exchange (HOSE).
The FE Credit brand, though making its appearance recently, has left other consumer loan companies including HD Saison, Home Credit or Prudential Finance behind. These four companies are also dominating consumer lending market in Viet Nam.
The changes of young population's consumer behaviour in Viet Nam has created a boom in the consumer finance market in recent years. By 2016, the market grew by 29%, reaching a high of VND26 billion (US$1.14 million), according to a study by local market research company StoxPlus.
A significant change in Vietnamese borrowing habits and the high demand of borrowing loans for spending make huge room for consumer lending companies to grow.
Home Credit, a company from the Czech Republic, earned VND1,226 trillion (US$54 million) last year. HDSaison, an HDBank's company in cooperation with Credit Saison, also earned more than VND300 billion (US$13.2 million) last year.
However, behind the record profit figures, consumer finance companies also have to write off trillions of debt in their loan portfolio.
VPBank's consumer finance company had to spend nearly VND3 trillion (US$132.1 million) to handle loan risks, according to a report in 2016. Previously, in 2015, the figure was VND810 billion (US$35.6 million).
In the first half of this year, VPBank used VND3,305 billion (US$145.5) of provisions to deal with credit risk, of which 89% was used at FE Credit and VPBank AMC.
Home Credit has written off VND670 billion (US$29.5 million) of debt from its loan portfolio last year.
Consumer finance companies have to make a high deduction from profit generated quarterly/annually to provide for credit loss provision.
Last year, FE Credit put 55% of its profit into reserve (nearly VND3,200 billion (US$140.9 million)). Home Credit reserved VND715 billion (US$31.4 million) out of VND2,252 billion (US$99.2 million) in profit generated in 2016.
Consumer loans are unsecured (no collateral needed); therefore, when the loans turn into bad debts, lenders can not recover capital and have to use loan loss provision to handle.
Many new financial companies have penetrated this lucrative market. Most recently, MBBank has introduced its consumer lending brand Mcredit, with the support of its Japanese counterpart, Shinsei Bank. Many other foreign investors are also interested in acquiring domestic financial companies.
The outbreak of this market has brought economic benefits to the lenders but also led to an increase in bad debt. This requires lenders to improve their risk management capacity.
