Where does capital source of finance companies come from?

31-Aug-2017 Intellasia | DTCK | 6:00 AM Print This Post

Compared to other countries in the world, Vietnam consumer finance market is still very young. Therefore, consumer finance companies still have very large room to develop to meet consumption demand of the society.

In developed economies such as the United States and the United Kingdom, total outstanding loan/GDP of the entire consumer finance sector accounts for 23 percent and 16 percent respectively. Meanwhile, in Vietnam, as per the statistics of StoxPlus, the total outstanding loans of the entire consumer finance sector increased to $26.55 billion in 2016, accounting for 9.8 percent of the country’s total GDP. Though this figure has been twice larger compared to 2011 (5.2 percent), the penetration rate is low than that of other countries in the world.

Although consumer finance market has witnessed incredible leaps when the total loan growth rate hit 11.4 percent in 2016 compared to 9.3 percent in 2015. In particular, the total outstanding unsecured loans of financial companies reached $3.3 billion, but in fact, the market share of consumer finance loans remained low.

Specifically, the market share of unsecured loans of finance companies only accounts for 12.4 percent, serving more than 60 percent of customers in working-age (equivalent to more than 30 million customers). The main customers of finance companies are people with low and unstable income who cannot access financial services at banks.

Meanwhile, consumer credit market share of banks account for 87.6 percent, serving nearly 40 percent of working-age customers (equivalent to nearly 20 million customers). The consumer loan market share of banks is seven times higher than finance companies while the number of customers that banks can serve is only equal to two-thirds compared to that of finance companies.

Talking to Dau Tu Chung Khoan, Nguyen Thanh Phuc, director of the Capital Source centre cum director of Capital Mobilisation Centre, FE Credit said “The aforementioned survey shows that banks are not much interested in the group of customers of finance companies”.

Talking to Dau Tu Chung Khoan, Doan Mong Diep, Head of Capital Source Department at Home Credit Vietnam, said finance companies mobilise deposit certificates from organisations for the following reasons: Firstly, finance companies are not allowed to mobilise deposits from the people; Secondly, interbank loans are only available for a maximum lending period of one year; Thirdly, finance companies still have to comply with the State Bank’s liquidity ratios on short-term capital used for medium and long term loans.

Mobilisation through deposit certificates is one of the channels to mobilise long-term capital of finance companies from organisations, with interest rates generally higher than lending rates from short-term capital resource in the interbank market.

Besides, the mobilisation of long-term certificates of deposit only reckons for a portion in the lending portfolio of finance companies. Therefore, interest rates in the market are entirely decided by the market supply and demand along with the State Bank’s capital market regulatory policy.

“The interest rates that Home Credit are raising deposit certificates from current organisations range from eight percent per annum to 11 percent per annum for terms amounting to three years. The mobilisation of medium and long term deposit certificates make up about 15 percent20 percent of the company’s capital portfolio”, said Diep.

More specifically, Phuc said deposit certificates are issued to domestic and foreign organisations and businesses in accordance with the law of Vietnam. Accordingly, contract of deposit certificates and issuance of deposit certificates are registered in the form of book entries from one month to 60 months with the par value of one million dong/certificate (minimum 50 million dong/transaction).

For term deposits, domestic and foreign organisations and businesses are allowed to purchase term deposits in accordance with the provisions of Vietnamese law in the form of term deposit contracts and issuance of term deposit certificates (depending on customers’ requirements). Terms from one month to 60 months has a minimum amount of 50 million dong/transaction.

Buyers of bonds are domestic and foreign organisations issued by primary issuers excluding credit institutions, branches of foreign banks and subsidiaries of credit institutions. The form is separate issuance through agent. Accordingly, the total volume offered for sale and distributed is no more than 99 investors. For terms that are greater than or equal to 12 months, the issuance price is 100 percent face value.

Phuc said “The difficulty in raising capital caused many finance companies to operate less healthily, leading to customers’ loss of confidence. However, at present, finance companies work very well so the capital mobilisation is not too difficult. FE Credit, for example, is having $155 million loan deal with Credit Suisse AG Singapore (Credit Suisse). Besides, there are contracts with banks, mobilisations from corporate customers”.

In 2016, FE Credit’s capital raising activities increased significantly (nearly doubling compared with 2015), reaching more than 27 trillion dong. In August 2017, FE Credit raised its chartered capital from 2.790 trillion dong to 4.474 trillion dong.

The aforementioned reality shows that one of the main reasons for high lending rates of finance companies is because finance companies have different operations from banks. They are not allowed to mobilise capital from individual clients like banks but from banks and businesses. Meanwhile, the risk from capital raising activities of finance companies is quite a lot.

Phuc said that the risks include, the State Bank can promulgate, adjust legal documents, policies and regulations in unfavourable way relating to the capital mobilisation of finance companies; Liquidity risks due to liquidity stress at critical times such as the end of the year; Market interest rate fluctuations that occur when market interest rates fluctuate strongly will influence on the company’s capital mobilisation and profit.


Category: Finance

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