Vietnamese banks find out car loans not low-hanging fruit
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Vietnamese banks are struggling to recover overdue car loans since many customers mortgage vehicles bought using bank loans. Dao Minh Tuan, manager of the debt recovery department at private lender Vietnam International Bank (VIB), said 50 percent of non-performing car loans are because of this.
Borrowers are supposed to get the bank’s permission before pawning a car, but most don’t, which makes it difficult for the bank to repossess the car, he said.
“Pawn shop owners decline to meet our staff while our customers are unreachable. As the banks do not technically own the car, we have trouble recovering the debt.”
Since banks normally lend 80-100 percent of the cost of a car, getting the cars back by paying off pawnbrokers would cost too much, he said.
“The last resort would be to sue the customer, but this will take a long time and cause damage to both sides.”
Banks also have to pay a commission to car dealers of 0.7-1 percent and offer competitive interest rates of 7-9 percent in the first year. All this means, in a competitive, crowded segment, banks are unable to earn much.
A banking expert who asked not to be named said: “Banks which want to maintain high credit growth often focus on increasing the amount of car loans, not quality.”
Those focused on this segment are usually banks which are not competitive in other areas with higher interest rates, such as real estate, the expert said.
The auto loans segment has seen average growth of 38 percent in 2012-2016, according to data from Viet Capital Securities VCSC.
Questions & Answers
Q.What is the primary reason banks struggle to recover overdue car loans?
What is the primary reason banks struggle to recover overdue car loans?
Banks find it difficult to recover overdue car loans because many customers mortgage their vehicles after purchasing them with a bank loan. This often happens without the bank's permission, complicating repossession efforts and making it hard to contact borrowers.
Q.What percentage of non-performing car loans are attributed to customers pawning their vehicles?
What percentage of non-performing car loans are attributed to customers pawning their vehicles?
Dao Minh Tuan, a manager at Vietnam International Bank (VIB), stated that 50 percent of non-performing car loans are due to customers pawning their purchased vehicles. This practice hinders the bank's ability to recover the debt effectively.
Q.What makes it too costly for banks to repossess cars that have been pawned?
What makes it too costly for banks to repossess cars that have been pawned?
Banks typically lend 80-100 percent of a car's cost, so buying back vehicles from pawnbrokers to repossess them is financially unfeasible. This makes directly recovering the debt very expensive for the lending institutions.
Q.Why do some banks focus on increasing car loans despite the difficulties?
Why do some banks focus on increasing car loans despite the difficulties?
A banking expert suggested that banks wanting to maintain high credit growth often prioritise increasing the volume of car loans over loan quality. These institutions are frequently less competitive in other sectors offering higher interest rates, like real estate.
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