Is the interest rate cap on consumer loans necessary?

>> Removing barriers to consumer loans an effective way to combat loan sharks

These regulations will be especially significant in the context of consumer loans, which are sluggish to develop, of poor quality, and difficult to get back.

Depending on the real estate market

According to the SBV's statistics, by the end of May, the total outstanding consumer loans had surpassed VND 3 billion, accounting for more than 21% of the total outstanding loans in the whole economy. Meanwhile, according to VNBA statistics from the end of February 2024, 15 financial companies' outstanding consumer loans totaled VND 138,800 billion, representing approximately 5% of the banking industry's existing consumer loans.

As a result, it is clear that consumer loans are only beginning to gain traction, owing to the growing favorable momentum of retail sales and domestic consumption. Besides, the real estate industry is showing signs of improvement in certain segments.

In recent years, the credit boom of the Vietnam banking system has indicated that credit growth in general, and consumer loans in particular, may be dependent on property liquidity. For example, in 2023, when credit growth was quite rapid, the property market was stopped. SBV Governor Nguyen Thi Hong said Vietnamese people are cautious with consumer real estate loans.

By the end of 2023, the Vietnam banking sector would have outstanding loans totaling around VND 2.8 billion. Of which consumer loans accounted for almost 60% of the overall debt load. In large banks, this percentage might reach 70-80%. When the demand for home-purchase loans declines, the total outstanding credit of the bank system falls, and vice versa, substantial credit growth occurs when the loan demand for the house rises rapidly.

It is worth noting that, according to Dr. Can Van Luc, a member of the National Financial and Monetary Policy Advisory Council, many banks classified house repair loans or even home purchase loans as consumer loans. This is also why many banks concentrate on lending in the real estate industry.

>> Consumer credit needs a legal framework

Is an interest rate cap needed?

With real estate credit, or consumer real estate credit, since the beginning of this year, both the Big 4 banks and commercial joint stock banks have deployed competitive interest-rate loans, despite their differing business strategies.

Dr. Tran Du Lich, a member of the National Financial and Monetary Policy Advisory Council, believes that with high demand for homes, reduced lending rates will drive demand for homebuyer loans, hence strengthening the real estate industry. As a result, focusing on housing loans is necessary to stimulate credit growth.

Aside from lowering interest rates on home loans, Nguyen Le Ngoc Hoan, a financial expert, believes that for strong and quality consumer credit growth, floating interest rates should be regulated within a reasonable range.

"Controlling floating interest rates within a reasonable range does not imply imposing a lending rate caps, as banks must comply with other rules. However, with the rising interest rate trend, and banks' floating rate margins ranging from 3 to more than 5% based on policy rates, floating interest rate control for banks' consumer loans is required for people to be confident about their ability to repay loans at suitable lending rates in the future," Nguyen Le Ngoc Hoan explained.

Nguyen Le Ngoc Hoan stated that it was vital to set the consumer loan interest rate caps for financial companies since many of them have charged hidden costs for consumer loans. Furthermore, consumers are unable to comprehend all of the terms of consumer credit contracts, which contain several difficult-to-understand regulations. Ensuring an interest rate cap on consumer loans is another way to improve the quality and recovery of consumer debt, increasing borrowing demand among many consumers rather than forcing them into the "shadow banking sector."