However, although it is still in the draft stage, it may still face difficulties in opening the doors to e-lending if the current laws continue to create barriers which impede and constrain the activities of the State Bank of Vietnam to manage and keep up with the current pace in technology development.
Move towards technology
According to data published on the website Tima Financial Connection Floor, from 2017 until now, this unit has disbursed online loans of a total amount of about VND 108,833 bn, with the number of people applying for online loans now reaching over 9.6 mn. A peer-to-peer lending platform (P2P Lending) also shows that people's demand for quick loans through online channels is very huge today. Credit services through online platforms is a big challenge for credit institutions, but at the same time offers an innovative change in lending methods from offline to online.
The journey of credit institutions to penetrate the online lending trend must include the pioneering of FE Credit, when launching the first automatic loan application in Vietnam called $NAP in August 2018. This application receives documents, verifies, approves customers automatically, signs an electronic contract and enables the borrower to receive a loan within a day via bank account or post office.
After this was introduced, other financial companies also joined in. Faced with this trend, a number of large banks such as BIDV and VietinBank have proposed to the State Bank of Vietnam to allow the implementation of online lending, but the management agency has not yet responded. In the meantime, many banks have implemented online loans on digital banking channels, but only limited to online savings for overdraft loans.
Currently the State Bank of Vietnam is developing a draft to Circular 39/2016/TT-NHNN, amending and supplementing a number of articles for regulating lending activities of credit institutions and foreign bank branches, including additional regulations on lending via electronic means.
According to the State Bank of Vietnam, this regulation comes from a request from the credit institutions and is also in line with the policy of digital transformation of the banking sector until 2025 and orientation till 2030 that was set forth by the Governor of the State Bank of Vietnam under Decision 810/QD-NHNN dated 11 May 2021. If this regulation is approved, credit institutions will have a great opportunity to grow outstanding loans. Banks can then serve a large number of customers only through automated processes, with quick reviews of records at a cheaper cost.
Many problems remain
Previously, the regulator had allowed credit institutions to use guidelines on electronic Know Your Customer (eKYC) application in opening personal payment accounts and for issuing cards. However, in lending activities, credit institutions must comply with Circular 39/2016/TT-NHNN, while this circular has no regulations on the application of eKYC.
Currently, this issue has been resolved in the draft amendment and supplement to Circular 39/2016 by opening up lending activities via electronic means, and partially removing difficulties in digitizing lending activities. It is expected that early consumer lending will be implemented online by the bank and will explode in the near future. However, digitized lending activities in the future still face many big problems.
The first is that electronic transactions in the banking sector are not just related to the authority of the State Bank of Vietnam but also must comply with the Law on Electronic Transactions. This law was promulgated in 2005, and up to now technology has developed at a rapid pace with many regulations having become redundant and outdated.
Currently, the Ministry of Information and Communications is in the process of finalizing the Law on Electronic Transactions in order to build a unified law and create a legal corridor to carry out the transformation of activities from the physical environment to the digital environment in all industries and fields. If this law is perfected and there are relevant regulations made that are suitable to the current hi-tech environment, including future long-term changes, then new credit institutions can open online lending as expected.
The second factor concerns lending on digital platforms which faces many problems such as cybersecurity when banks are still the target of cybercriminals. It is easy to see that now personal information such as citizen identification and facial recognition is very easily stolen. This is a huge challenge as it is necessary to have a strong protective buffer to avoid risks, as well as have legal regulations to deal with rights and responsibilities in case of such risks. In addition, there must be regulations to handle applications where problems arise, or disputes between banks and customers come up when transacting on this channel.
Another basic point which the State Bank of Vietnam has talked about for a long time is that so far there has been no agency that performs individual credit scoring for the entire population. Currently, banks deploy their own system to score their customers, while the National Credit Information Center (CIC) has not yet covered the entire population.
These are the technical issues that must be present if one wants to promote lending via electronic means. Because CIC only creates customer profiles with loan and credit transactions with the bank, it does not give credit scores to all individuals. Of course, without a credit scoring system, banks can still continue to lend based on the internal scoring system or on collaterals, but the risk of bad debt will become higher.
For instance, in the US people have a social security index and the government can track income as well as determine the benefits people are entitled to. They have three individual credit scoring companies to do this. The standard score of each citizen is 800 points, then these three companies base their set of criteria to calculate the score, and all lending banks send information to these companies.
This is the basis of credit scoring. Persons with bad debts, unstable jobs, or violations will have their points deducted. People with low credit scores will either not be able to borrow or can borrow at high-interest rates, through which they can self-discipline to improve their credit score.