Meeting w/t SBV on Decision 16 on Interest Rate Cap Vietnam Business Forum 2008

SUMMARY OF THE MEETING

Date: 9:00 am ~ 10,.00 am, Monday, May 16, 2008

Venue: State Bank of Vietnam (SBV), 47 – 49 Ly Thai To, Hanoi
Present: Appendix 1 – List of Participants

AGENDA FOR DISCUSSION

Decision 16 on interest rate cap and its impact on Consumer Finance

DISCUSSION POINTS

ƒ BWGRetail Sub-Group Comments

- Decision 16 primarily aimed at corporate lending has had a severe impact on
consumer lending segment.
- Consumer lending is characterized by a higher risk profile and much higher
operation and capital expenses comparing to corporate lending, and thus is
affected heavily by interest cap imposed by Decision 16.
Ö Whether the SBV has considered possible impact on consumer lending sector
when it issued Decision 16 and whether it is possible for the SBV to review the
applicability of the Decision to mitigate its negative impacts on consumer
lending?

ƒ Response from the SBV - Mr. Nguyen Ngoc Bao, Director of Monetary Policy Dept.
- The SBV did take consumer lending into consideration when issuing Decision
16 and was well aware of the negative impacts of Decision 16 on consumer
lending sector (finance companies/retail banks).
- The SBV understood that in normal practice, interest rates of consumer lending
are much higher than corporate lending’s ones, some times are even double.
However, given that the first priority of the Government is to control inflation
and reduce trade deficit, the SBV will maintain a tight monetary policy,
specifically:
Ö Consumption to be tighten, especially luxury goods.
Ö Consumer lending to be limited in order to reduce import (thus to narrow
trade deficit) and to save capital for economic development purposes.
- The SBV noted the Sub-group’s comments but there is no other alternative in
the short term.
- Early 2008 the SBV already announced that there would be tight control of
consumer lending.

ƒ BWG Comments
- The Sub-group understands and fully supports SBV’s decision on inflation
control and trade deficit reduction.
- Consumer lending control is OK as far as it aims at curbing consumer credit for
speculative business which led to bubble in some areas recently. However,
consumer lending to meet legitimate life needs should not be curtailed, as this
supports domestic consumption by providing fund for buying products of local
manufactures.
- Lending provided by financial institutions (FIs) is formal and regulated. If
consumers can not borrow from FIs they will have no option but go to
informal/unorganized lenders lending at exorbitant rates.

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Meeting w/t SBV on Decision 16 on Interest Rate Cap Vietnam Business Forum 2008

ƒ Response from the SBV - Mr. Nguyen Ngoc Bao, Director of Monetary Policy Dept.
- In 2007, there was a boom in the consumption and consumer lending market in
VN. In 2008, the government’s intention is to slow down consumption in order
to save the capital for corporate sector. All the measures currently aim at a single
objective: inflation control and trade deficit reduction.
- Impact of consumer lending on Vietnam’s GDP at the time being is still not
large.
- It is impossible to have a separate mechanism for consumer lending at this stage
- Till now, it is a normal practice in VN that people get informal loan from
relatives, friends etc.
- The current 21% - interest rate cap still allows financial companies to make
profit by lending to good customers.
- Speculation screening should be done by FIs

ƒ BWG Comments (Maurice Nhan)

- To develop consumer finance business in Vietnam, most of banks and finance
companies have made substantial financial investments in infrastructure and
operational capability including new employment on the basis of normal growth.
- Foreign financial companies lend to average people to help them fund legitimate
life needs, not luxury goods/speculation.
=> Decision 16 stops this lending activity and put FIs in great difficulty

ƒ Response from the SBV - Mr. Nguyen Ngoc Bao, Director of Monetary Policy Dept.
- SBV will study to see how and when to have appropriate measures to help
consumer finance sector. At the meantime, financial companies should look for
other alternatives/business areas to overcome this difficult period.
- At the moment, all FIs have to implement Decision 16. There is no exception.

ƒ BWG Comments (Peter Schiesser)

- Credit card is one form of consumer lending.
- In Vietnam, lending via credit card is still very limited. Only app. 50% card
holders pay credit interest. Furthermore, it is mainly unsecured credit => high
risk and very low margin
- Credit card business needs huge investment in infrastructure => banks needs at
least 3 years to reach break even point.
- In credit card segment it is impossible to stop business for a while. It is also very
difficult for credit card service providers to change to other business.

ƒ Response from the SBV - Mr. Nguyen Ngoc Bao, Director of Monetary Policy Dept.
- FIs have to temporarily accept this challenging situation and share the difficulty
with the government including the current negative impact
- When the economy is back to track, the SBV will review the current policy
approach. But it is expected that this will not happen before June 2009.
- The basic interest rate will follow market conditions and the tolerance of the
economy.

ƒ BWG Comments (Sanjay Gupta)

- The Sub-group understands the need to slow overall credit growth in Vietnam to
control inflation but Decision 16 doesn’t slow down but stop consumer lending
activities. Every consumer loan granted at the moment made loss. The SBV
should consider to find immediate remedial measures to help formal consumer

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Meeting w/t SBV on Decision 16 on Interest Rate Cap Vietnam Business Forum 2008

lenders to be able to continue their business. Otherwise, it would stop the whole
sector and may cost years to recover.
- Ref. fees: suggested the SBV to clarify what kind of fees are allowed to be
charged.

ƒ Response from the SBV - Mr. Nguyen Ngoc Bao, Director of Monetary Policy Dept.
- In principle, FIs were allowed to charge any fees that are not related to the loans.
Fees related to loans are currently not eligible. As there were many kind of fees,
it is impossible to specify the eligibility of each fee. FIs should ask their
lawyers to identify this.

CONCLUSION
The Retail Sub-group understands the government’s utmost objective in controlling
inflation and narrowing trade deficit. The Sub Group will revert with some suggestions
on how to mitigate negative impacts of the current policy on the consume lending
segment and at the same time not to affect government’s objective

APPENDIX 1 – LIST OF PARTICIPANTS

State Bank of Vietnam

Nguyen Ngoc Bao Director Monetary Policy Dept.
Nguyen Ngoc Quynh Expert International Cooperation Dept.
Banking Working Group – Retail -subgroup
Sanjay Gupta Country Manager GE Money
Maurice Nhan Country Chief Rep. Societe General
Namita Nal Country Head of Consumber Banking Standard Chartered Bank
Kalidas Ghose Director Prudential Finance Vietnam
Chief Representative and Country
Truong Minh Ha Manager Vietnam, Cambodia, Laos VISA
Peter Schiesser Head of PFS Vietnam ANZ
Thiên-Nga NGÔ-ROCABOY Deputy General Director SG VietFinance
Vietnam Business Forum Secretariat (VBF)
Pham Lien Anh Project officer VBF

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