SEPTEMBER 2019 - Vietnam's government is exposing vulnerable borrowers to the predations of unscrupulous peer-to-peer (P2P) lenders in choosing to go slow on policing this rapidly growing industry.
The State Bank of Vietnam (SBV), the central bank, has been given until 2021 to study the sector before rolling out a framework of pilot regulations.
The government may wish to balance financial system regulation with encouraging new, technology-driven industries such as P2P lending, which matches lenders with borrowers through online platforms. But this go-slow approach results in a regulatory vacuum that threatens a repeat of problems seen in Indonesia, where some borrowers have been pushed to suicide by sky-high interest rates, and in China, where thousands of investors have lost their savings and taken to the streets in protest following the collapse of hundreds of under-regulated platforms.
Vietnamese borrowers may have been caught up in the fallout from Beijing's crackdown on China's P2P lending industry, as platforms flee the country for the sanctity of a less-regulated consumer lending market.
Although the SBV estimated about 40 P2P lenders were operating in Vietnam at the end of last year, NextTech Group, a Hanoi-based investment firm, calculated up to 70 Chinese lenders have set up shop in the country since the collapse of their industry.
They are helping fuel the rapid growth of P2P lending in Vietnam. Asia-focused consulting firm Solidiance estimated that the country’s fintech market overall will process $7.8bn in transactions by next year, up from $4.4bn in 2017.
However, actual investment inflows into financial services have been small relative to the amounts flowing into retail and payment technology sectors, according to a joint study by south-east Asian venture capital firms ESP Capital and Cento Ventures.
Industry watchers see legislation as necessary to unlocking the market's full potential as an alternative to informal financing because it will give the right investors the visibility they need to put their funds to work.
"Most major foreign lending platforms are going to wait until there is more regulatory certainty around P2P lending before they consider entering the market," said Eric Johnson, senior associate at Freshfields Bruckhaus Deringer in Hanoi.
Until then, Vietnamese borrowers may be at risk.
Black credit
Vietnam already has a massive consumer finance problem. The government has spent years fighting an informal credit market of loan sharks, known as tin dung den or "black credit". The Ministry of Public Security has logged more than 7,600 crimes related to loan sharks in the past four years, ranging from fraud to murder.
These risks have not deterred borrowers, particularly those among low-income groups and the many unbanked Vietnamese - the World Bank estimates that nearly 70 per cent of Vietnamese do not have bank or mobile money accounts.
This is a huge market of borrowers desperate enough to pay eye-gouging rates for short-term loans. The Bank for Investment and Development of Vietnam, a state-owned lender, estimated the black credit market as big as 550tn dong ($24bn), equivalent to about 10 per cent of GDP or nearly twice the size of cash loans distributed through formal channels.
The formal cash loan market faces growing competition from P2P lenders amid government efforts to rein in a consumer lending boom. Lending requirements were relaxed last year to support credit growth but the SBV has proposed new rules to rein in consumer financing companies, including a 30 per cent cap on cash loans to total outstanding loans.
As consumer finance companies rein in lending to meet tighter regulations, demand is being picked up by P2P lenders. In just four years, homegrown P2P lender Tima facilitated funding for 3.9m users, with loan values typically ranging from 5m to 10m Dong. The company is valued at $22m after a funding round last October, which made it the only local P2P player to have received foreign venture funding so far.
"With fewer collateral burdens and reduced paperwork requirements P2P lending platforms offer an alternative channel to meet urgent requirements for cash," said Michael Sieburg, a Partner at Solidiance.
A long wait
The central bank’s 2021 deadline may be conservative, and the pilot rules could come sooner. However, a senior adviser to the government on financial regulation said the leadership was reluctant to risk upheaval ahead of a Communist Party congress expected to be held in January 2021. This is also a new industry, and the authorities need time to learn how to regulate P2P lending effectively, he said.
Allens, a law firm focused on the Asia-Pacific region, predicted the government will roll out a licensing regime that restricts P2P lenders to connecting lenders and borrowers only. No fundraising or banking activities will be allowed, suggesting a continuation on current narrow practices.
Risk management requirements may also include limits on the maximum number of customers and on loan values, said Nguyen Quang Thuan, chief executive of FiinGroup, a Nikkei data provider, meaning they will be constrained from competing with traditional financing companies.
"The hierarchy will be banks, then consumer finance companies, and then P2P lending companies," he said.
But two years is a long time to leave borrowers at risk. The country's competition and consumer protection watchdog this month took the unprecedented step of acknowledging growing complaints about P2P lenders, particularly how they collect debts.
Days later, local media reported that a 24-year old woman living in South Vietnam attempted suicide after service and penalty fees and interest on monies owed to P2P lenders ballooned to 200m dong from 8m in just two months.
As signs of trouble multiply, the industry’s more responsible lenders - with an eye on the SBV and its looming regulation - may step up lending discipline. But, as has been shown elsewhere in the region, it is the unscrupulous ones that are likely to test this cautious government.
Source: Financial Times