Consumer loan interest rate will be according to agreement?

The State Bank recently issued a draft circular guiding consumer loans of finance companies, with many regulations to protect consumer rights and ensure healthy and sustainable development for this activity.

Notably, in this draft, the State Bank has applied consumer loan interest rates according to the agreement between the credit institution and the customer, without controlling the interest rate of 20%/year, based on the Law on Credit Institutions allowing agreement on interest rates. On this basis, the draft circular does not stipulate a ceiling on consumer loan interest rates.

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Revenue from consumer lending is typically smaller and more volatile than revenue from commercial lending.

More uncertainty means higher profits

According to Mr. Nguyen Anh Duong, Deputy Head of the Macroeconomic Policy Department - Central Institute for Economic Management, in the consumer loan market, if in the past it was mainly commercial banks, now with the presence of financial companies, the market has become more vibrant.

The increase in the number of unsecured loan providers inevitably leads to a variety of products with many incentives, aiming to attract customers to access cheaper and more in-demand loans.

However, in reality, it is not easy to borrow consumer capital from a commercial bank, because not everyone has a bank credit card, and when wanting to make a bank card, not everyone is eligible to open a card.

Typically, the minimum income requirement of 7 million VND through the bank is a big barrier for many ordinary workers; the annual fee to be paid each year ranges from 250,000 VND to 1.2 million VND (depending on the card type)...

This explains why recently, although they really wanted to borrow in installments from banks, most "subprime" consumers had to turn to financial companies.

Meanwhile, consumer lending activities of financial companies often have higher interest rates than traditional commercial lending activities. The reason is that the customers of these loans are often low-income people or do not qualify for consumer loans from commercial banks, the loan size is small, the loan term is short, suitable for the price of goods, consumer services and the income level of the borrower.

Most of these loans are provided in the form of unsecured, installment loans and unsecured assets. On the other hand, finance companies do not have the function of mobilizing capital from the population like banks.

The above characteristics have greatly affected the cost of loan formation, thereby pushing consumer loan interest rates higher than commercial loan interest rates. The cost for a consumer loan balance unit can be 2 to 5 times higher than the cost for a commercial loan unit. The credit risk of consumer loans is therefore also many times higher than that of commercial loans, making the risk compensation cost therefore always higher.

Meanwhile, revenue from consumer loans is often smaller and more volatile than revenue from commercial loans.

Manage smartly

Therefore, the draft circular above applying consumer loan interest rates according to the agreement between credit institutions and customers has received many positive comments from experts.

According to Dr. Nguyen Tien Dong, Director of the Department of Credit for Economic Sectors (State Bank), consumer finance products in developed markets often have lower prices because their financial companies have more data on customers. In particular, with statistics on the rate of customers at risk of not paying their debts, they can build appropriate pricing models. But in emerging markets, the above data is not available, so the profit margin needs to be higher to compensate for the risk costs that were calculated at the beginning.

Previously, Mr. Phan The Thang, Consumer Rights Protection Department (Competition Management Department), said that consumer loans have high operating costs and many risks of not being able to collect debts, so the interest rate must be high. Lending companies have complained that the 20% interest rate ceiling is too low and cannot operate.

However, according to Mr. Nguyen Hoang Minh, Deputy Director of the State Bank of Vietnam, Ho Chi Minh City branch, the negotiated interest rate is of course not as high as you want. The State Bank has asked banks and financial companies to apply the best interest rates to support borrowers, ensure their debt recovery ability, and limit risks.

From another perspective, answering the press, Lawyer Tran Minh Hai, Executive Director of Basico Law Firm, said that with the application of agreed interest rates, it is possible to simultaneously stipulate that financial companies must explain in detail and specifically to customers about interest rates, penalty interest and penalty fees.

According to Minh Toan/vneconomy