With lending to businesses facing many hurdles, banks and finance companies are focusing on consumer loans, or credit provided to retail borrowers to buy items like vehicles and home appliances without collateral. But to develop and regulate this market, it is necessary to provide financial education to the public. Ngoc Bich discusses this with Nguyen Thi Kim Thanh, former director of the State Bank of Viet Nam's Institute of Banking Strategy.

People complain about the high interest rates charged by banks and finance companies on personal loans. What do you have to say about it?

Nguyen Thi Kim Thanh

It stems from people's lack of knowledge of financial services. It is obvious the interest rates will be high. You should not compare the rates with those offered to companies because the target customers of the banks [in this case] are individuals. The loans are often small and for short and medium terms. Customers are low- or middle-income people.

The loans are given without collateral, and so the risk levels are higher and the interest rates must be higher to compensate for the risks.

In some countries, the rates are as high as hundreds of per cent.

What benefits do personal loans bring to customers and the economy?

First, people's demand [for credit] can be satisfied immediately. For instance, when you are eager to buy a new mobile phone, but it costs too much compared to your income and you decide to spend all your money for the purchase, your savings will be depleted.

Secondly, this will help reduce demand for illegal loans. Without this service, poor people have to seek loans from pawnshops or illegal lenders who force them to pay high interest rates and punish them harshly if they fail to pay on the due date.

The service is an important tool to stimulate consumption, which boosts production and creates more jobs.

Consumption loans remain controversial, with some critics saying people fall into debt traps if they keep borrowing to buy goods. What is your opinion?

People will probably fall into a debt trap if they rely too much on credit at low interest rates since they would have no incentive to generate an income.

But if the loan is offered at high interest rates, people will have to consider more carefully. Normally, only people who can repay debts will decide to use it.

Of course, there are cases where people try to cheat since this loan is given without collateral.

That is why I want to emphasise the need to educate people so that they will have a sense of financial responsibility. Well-educated people will know how to balance their spending and saving.

If banks and financial companies want to promote their services, they must also provide training to improve consumers' financial literacy.

What do you think of the future of personal loans?

There are two aspects. If the economy's slowdown is for the short term, consumption loans will increase because people expect the economy to recover and more jobs to be created and more incomes to repay the debts. If there is a lingering recession, people tend to limit their borrowing.

In Viet Nam, personal lending is still in a fledgling state, but I think the country has good economic conditions for this market to develop.

Old people are risk-averse, and so they usually don't want to buy unless they have enough money. On the contrary, young people now are more willing to take risks. They are ready to buy a phone whose price is five times their income. This is an element required for the market's growth. But it shows the necessity to train young people in using money and managing their budgets.

What should the Government do to regulate the market to ensure it grows well?

State agencies should have a regulatory framework to protect consumers and ensure credit institutions operate efficiently.

The regulations must be transparent, clear and in conformity with international practices. Viet Nam should learn from the experience of developed countries to avoid excessive personal outstanding loans which might cause risks to the economy, and set regulations without posing a barrier to the market's operation. For instance, the government could set an interest rate cap for credit to buy certain goods.

Japan's experience shows that a strict interest rate regime has a negative impact on the consumer credit market. Between 1990 and 2003, the ratio of consumption loans to total loans rose from 18 per cent to 43 per cent. There were 14,000 finance companies operating at that time.

However, since 2006 credit institutions have not been allowed to lend at interest rates of more than 20 per cent. This caused the number of credit institutions to decline sharply and created an oligopoly in the market, with four big companies accounting for 60 per cent of outstanding loans. — VNS