Regulatory framework on consumer protection for financial inclusion in vietnam

Nội dung text: Regulatory framework on consumer protection for financial inclusion in vietnam

1. REGULATORY FRAMEWORK ON CONSUMER PROTECTION FOR FINANCIAL INCLUSION IN VIETNAM Thi Phuong Thao Le, MPP. - University of Economics and Business – Vietnam National University Abstract Consumer protection is recognized by policymakers, researchers, practitioners and other stakeholders as an important enabler for financial inclusion around the world. In Vietnam, as the market for consumer financial services is increasingly developed, consumer protection has become a growing concern. The study reviews the country’s regulatory framework on consumer protection for financial inclusion regarding five potential problems (i) high prices, (ii) overindebtedness, (iii) post-contract exploitation, (iv) fraud, and (v) discrimination. The focuses will be on weaknesses of the framework and its effectiveness in protecting financial consumers, especially those at the base of the pyramid. Key words: Regulatory framework, consumer protection, financial inclusion, high and hidden prices, overindebtedness, post-contract exploitation, fraud, and discrimination, loans, deposits, low- income customers. Introduction In Vietnam, the market for consumer financial services is increasingly developed. Government policies to accelerate financial inclusion, digital transformation of financial services, and the rapid development of the economy contribute to the market growth. When more people of lower-income group with less financial literacy engage in the market with increasingly sophisticated products and services, consumer protection has become a growing concern. The paper reviews Vietnamese regulatory framework in financial customer protection with the focus on vulnerable customers. Better protection of this group of customers will improve their trust on the financial system, encourage their use of financial services, and thus enhancing financial inclusion in Vietnam. Existing regulations on the five issues, namely (i) high prices, (ii) overindebtedness, (iii) post-contract exploitation, (iv) fraud, and (v) discrimination will be compared and assessed against good practices as reviewed by the World Bank (2017). Their effectiveness in protecting consumers’ benefits will also be analysed. The paper will concentrate on household banking services, especially credits and deposits provided by formal credit institutions. The issues covered, however, are also relevant for insurance and SME finance. 1. High prices Interest rate caps are often used by many countries to prevent lenders from charging high prices on loans. Interest rate caps, however, may lead to reduced credit access and quantity. Regulators may still choose to impose interest rate caps if they perceive that the benefit of lower prices is high enough to accept reduced credit access for some consumers. 53
2. Since 2010, Vietnam has liberalized lending interest rates with regulations allowing interest rates to be agreed upon by credit institutions and borrowers. According to Circular No. 12/2010/TT- NHNN dated April 14, 2010 on negotiable interest rates, lenders determine and publicly announce lending rates based on market conditions, operational costs and clients’ creditworthiness. Circular No. 39/2016/TT-NHNN dated December 30, 2016 on lending activities of credit institutions and foreign bank branches replaces Circular 12 with an additional provision on lending rates stipulating that the State Bank of Vietnam shall place a cap on interest rates of short-term loans to preferred sectors and clients including agricultural sector, exporting sector, supporting sector, SMEs and hi- tech companies. Circular 39 also places limits of 10%/year for the interest rate on overdue interest payment and 150% of the contract’s interest rate on overdue principal payment. In addition, the 2005 Civil Code places a cap of 150% of the base rate announced by the State Bank of Vietnam. The 2005 Civil Code was replaced by the 2015 Civil Code with the cap of 20% per year. The Credit Institution Law and its implementing regulations issued by the State Bank of Vietnam, however, take precedence before the Civil Code if there are disputes about interest rates between the credit institutions and borrowers. Therefore, in practice, there is no interest rate caps for loans provided by credit institutions to individual borrowers, since the cap on short-term loans to individuals in preferred sectors is easily avoided by credit institutions by extending the term of loans. The interest rate cap imposed by the Civil Code is still applicable if lenders are not credit institutions. In those cases, if there are disputes between the parties involved, the benefits of lenders will be protected within the limit of the interest rate cap only. While interest rates charged by commercial banks, people credit funds (credit unions), microfinance institutions are normally considered reasonable, lending interest rates of consumer finance companies are quite high. During the last five years, lending rates of commercial banks were around 10% per year (except for interest rates of short-term loans to preferred sectors and enterprises which are subject to interest rate caps of 4-5% per year and interest rates of credit card balances of about 20-35%). Lending interest rates of consumer finance companies are much higher at around 30- 40%/year and can be as high as 70%/year. Compared to commercial banks, consumer finance companies serve higher number of lower-income customers with majority of their loans are unsecured so it requires higher costs to serve. Too high interest rates, however, create heavy financial burden for borrowers. Another related issue is regulations on loan fees and charges to avoid hidden prices. Certain types of fees and charges are allowed and must be disclosed. Furthermore, in many countries, lenders are often required to disclose standardized interest rates in the form of annual percentage rate (APR) which includes any fees and additional costs of loans in order not to mislead borrowers about the prices charged. In Vietnam, Circular No. 39/2016/TT-NHNN stipulates that before signing credit contracts, credit institutions must provide potential consumers with information on lending interest rates; principles, timing and formulas to determine variable interest rates (if applicable); interest rates on overdue principal balances; interest rates on overdue interest payment; interest calculation method; 54
3. and types and levels of fees and charges. If a loan’s interest rate is not an annual interest rate and/or interest calculation is not based on outstanding loan balance and the term of the balance, the loan contract must specify an annual interest rate (with a 365-day year). Those fees and charges are also agreed upon between credit institutions and borrowers and must be stated in loan contracts. The types of fees and charges allowed by the Circular include (i) prepayment fees, (ii) fees for credit lines, (iii) fees for arranging syndicate loans, (iv) fees for loan withdrawal commitment from the effective date of loan contracts to the date of first withdrawal, and (v) other fees stipulated in related regulations. Furthermore, consumer finance companies are required to report to the State Bank of Vietnam their lending interest rate ranges whenever the ranges are changed as stipulated by Circular No. 43/2016/TT-NHNN on consumer lending of finance companies and Circular No. 18/2019/TT- NHNN revising some articles of Circular 43. In addition to interest rate caps on loans, Circular No. 1729/QĐ-NHNN dated September 30, 2020 also places interest rate caps on short-term deposits. Credit institutions and foreign bank branches can only pay a maximum interest rate of 0.2%/year for VND transaction deposits and deposits with maturity of less than 01 month. As for VND deposits with maturity from 01 month to less than 06 months, the interest rate cap is 4.5%/year for people credit funds and microfinance institutions and 4.0%/year for other credit institutions and foreign bank branches. The effectiveness of the abovementioned regulations, however, heavily depends on the financial literacy and position of borrowers. Consumers of commercial banks are typically of higher income group and have better understanding of loan terms and conditions, and thus, can make better, informed borrowing decisions. Still, they sometimes have to accept additional prices in order to be able to borrow. One notable example is that borrowers have to accept loan insurance contracts although they are not compulsory, thus increasing borrowing prices. For low-income consumers with weaker position and limited understanding of loan terms and conditions, the problems are more pronounced. Because of poor financial literacy, less access to credit, more urgent need for loans, sometimes poor and low-income consumers take expensive loans from finance companies, or even loan sharks, without full understanding of the effective high prices they have to pay. The problem is even more serious with loan applications made via online lending apps. For example, when clients apply for loans on lending apps of finance companies, they have to automatically accept loan insurance plan before they can proceed to next steps. Furthermore, credit officials of the companies only provide limited explanations on loan terms and conditions. According to annual reports of Vietnam Competition and Consumer Authority (2018-2020), consumer requests, petitions and complaints in the field of finance, insurance and banking account for the highest proportion of the total number – 50.59% and 21.8% in 2018 and 2019, respectively. High and hidden prices are among one of the main reasons for customer petitions and complaints. The Authority, therefore, recommends that consumers should not borrow online from companies or individuals who do not clearly announce interest rates and other fees arising during the loan life or do not send credit contracts to consumers before signing so that they can understand the contracts thoroughly and make informed borrowing decisions. 55
4. 2. Over-indebtedness Countries often try to prevent over-indebtedness since it may make consumers unable to repay, causing problems for both lenders and borrowers. For low-income customers, borrowing more than they can repay often leads to undue hardship. Currently, in Vietnam, there is no regulation that directly aims at over-indebtedness. According to Garrido et. al. (2020), legal frameworks are imperative in tackling over-indebtedness with preventive measures (ex-ante tools) to contain debts at reasonable level, and reactive measures (ex-post tools) to resolve the problem of over-borrowing. Ex-ante tools are credit information systems, advice to debtors, and informal debt restructuring (including agreements to avoid insolvency). Ex-post measures for individuals and households include liquidation of assets or repayment plans in the cases of bankruptcy; and debt enforcement. Many of these measures are either absent or weak in Vietnam. Some Asian countries such as Malaysia, Korea, Singapore etc. have public or private institutions specializing in providing credit counselling to consumers while Vietnam has not established a similar body yet (Garrido et. al. 2020). This type of institutions or other specialized financial consumer protection authorities (which Vietnam also does not have) can also offers debt restructuring programs for consumers that help them to gradually repay debt. As for credit information system, National Credit Information Centre of Vietnam (NCIC) is the main and dominant source of credit information. According to Circular No. 03/2013/TT-NHNN on credit information activity of the State Bank of Vietnam, all credit institutions and foreign bank branches are required to provide credit information of their clients to NCIC. This regulation gives CIC a clear advantage over private credit information companies which collect information on a voluntary basis. Circular No. 16/2010/TT-NHNN guiding the implementation of Decree No. 10/2010/ND-CP on credit information activities gives the NCIC the role of supervising private credit registries. These create unlevel playing field between CIC and private credit information companies as well as potential conflict of interest when NCIC acts as both the competitor and supervisor of private registries. The government, however, recently resolve this problem by issuing Decree No. 58/2021/ND-CP in June 2021 which replaces Decree No. 10/2010/ND-CP and gives SBV the role of supervising credit information companies. Despite these problems, Vietnam’s credit information system, mainly dominated by NCIC, is considered good source of credit information. The World Bank (2020) rates the depth of Vietnam’s credit information index the highest (8/8), higher than the average level of East Asia and Pacific countries (7.1/8). NCIC covers credit information of 986,000 companies and 39.6 million individuals which account for 54.8% of adult population (Le Tuan Anh, 2021). Credit institutions and foreign branches can, with a fee, utilize NCIC’s credit information for creditworthiness assessment, risk management and other purposes. Credit information can only be shared with the consent of consumers. However, Decree 10 and Circular 110 guiding its implementation as well as Decree 58 do not specify a clear mechanism to implement the consent clauses (World Bank, 2015). Therefore, it is possible that consent to share information may not be emphasized during loan application process and consumers may not realize that they give the consent. The decrees also provide for one 56
5. free credit report per year for consumers. To encourage consumers to supervise their own credit information, NCIC allows them to get free credit reports many times per year. However, most of Vietnamese people, especially low-income people living in rural areas, perhaps do not even know about credit report. During 2015-2020 period, NCIC provided more than 100,000 credit reports directly to borrowers which is a small number compared with 39.6 million individuals covered by NCIC (Le Tuan Anh, 2021). Currently, nearly 200,000 people registered at NCIC’s web portal which account for a small percentage of the total number of individuals that NCIC covers. Although the coverage of NCIC’s credit information is good, how the database is used to avoid the problem of over-indebtedness is not clear. Vietnam has no regulation on responsible lending requiring lenders to give alert to a potential borrower about the risks of accepting the loan as well as other borrowing opportunities before contract signing. According to IMF (2020), ex-post measures to deal with over-indebtedness of households involve insolvency procedures, including liquidation of assets or repayment plans in the cases of bankruptcy; and debt enforcement. However, the regulatory framework for these procedures is very weak in Asian countries. In Vietnam, there is no law or regulations on individual or household bankruptcy. There is also no effective mechanism for lenders and borrowers to discuss and reach agreements about debt resolution. The lack of regulations makes it difficult for lenders to recover their loans as well as for debtors to have a fresh start. The World Bank (2015) lists a number of good practices in foreclosure of mortgaged or charged property, including (i) the bank should inform customers in advance of the procedures and the consequences to the customer, (2) the bank should inform customers about legal remedies and options available to them regarding the foreclosure, (3) if the proceeds from the sale of the collateral is not sufficient to fully discharge the loan, the bank should inform customer about its legal right to recover the balance, and (4) professional and legal means should be utilized by the bank to enforce the foreclosure procedures if no course assistance involved. Vietnam’s regulations on foreclose collaterals to recover debt also have shortcomings in protecting both customer and lender benefits. Circular 16/2014/TTLT- BTP-BTNMT-NHNN dated June 6, 2014 requires that lenders shall send documents to customers about the foreclosure of properties. Lenders, however, have no obligation to inform customers of legal remedies and options available to them regarding the foreclosure. While credit institutions usually inform customers about their legal right to recover the balance unpaid by the proceeds of collateral sale, a court order is normally needed when lenders want to take possession of borrowers’ property. Regulations, however, do not require lenders to employ professional and legal means to enforce the foreclosure procedures. Meanwhile, it is very difficult for banks to implement foreclosure procedures to recover loans due to weak legal and institutional framework. 3. Post-contract Exploitation 57
6. According to Garz et al. (2021), many problems may arise after customers sign contracts with financial services providers. These problems include abusive debt collection, services add-ons, additional fees and charges etc. Government measures to avoid these problems involve regulations prohibiting exploitation, dispute resolution, complaint channels and market monitoring, facilitating consumer learning and agent self-regulation etc. Good practices require that a bank, its agent or any third party should be prohibited from using abusive debt collection measures (The World Bank 2017). The loan contract should indicate if a debt collector can collect the loan on behalf of the bank. A debt collector is not allowed to contact any third party about a customer’s debt without informing the party about the collector’s right to do so and the type of information that the debt collector is seeking. In Vietnam, people are protected against abusive and violent activities by the law. According to the 2013 Constitution, “Everyone shall enjoy the inviolability of the individual and the legal protection of his or her life, health, honour and dignity and is protected against torture, violence, coercion, corporal punishment or any form of treatment harming his or her body and health and offence against honour and dignity”. With regards to debt collection, Decree 104/2007/NĐ-CP on debt collection business prohibits the business collection services: (a) made or through other persons performing the activities, infringement to life, health, honour, dignity, personal freedom, property rights and other rights of the debt, creditors and other private organizations concerned; (b) using information obtained from the service collection activities detrimental to creditors and debtors for the purpose other than authorized content or disclose that information for the Organization, the other individual unless otherwise specified by law; (c) performing the work, the behaviour beyond the rights recognized by law, or in excess of the range was the creditor or authorized debt; (d) represented simultaneously for both the creditor and the creditor to handle for the same debt. In practice, however, many financial customers complain about abusive debt collection practices of creditors and debt collectors, especially of consumer finance companies and illegal loan sharks. While illegal loan sharks are well-known for their violence in collecting debts, many problems have arisen in collection of overdue loans provided by consumer finance companies during the last ten years - the period of rapid development of these companies. Many customers complain about harassment and abusive actions while collecting debts owed, or not even owed, to finance companies. Customers, and their relatives and friends receive dozens of calls every day reminding, or even threatening them, to repay debts. Debt collectors also use other abusive tactics to collect bad debts such as sending threats, harassing relatives, disclosing borrowers’ debt status etc. While finance companies claim that they do not use abusive measures to recover loans, the problems lie with the fact that they commission, or even sell them, to third-party debt collectors. After selling the loans, the lenders relinquish their responsibilities for the loans, letting the collectors use abovementioned tactics to recover debts. The debt collectors were legitimate companies registered in accordance to Decree No. 104/2007/ND-CP. While the Decree prohibited debt collection companies to “infringe upon life 58
7. health, dignity, honour, personal freedom, property rights and other civil rights of debtors, creditors, and related individuals”, abusive collection practices were still used by the companies. Another related issue is protecting customers’ rights related to sharing their information. Similar to good practices, Decree No. 117/2018/ND-CP stipulates that credit institutions can share customer’s information with third-parties only if customers give consent in writing or in another form as agreed with customers. However, the regulation is not well enforced. For example, in the case finance companies commission or sell loans to third-party debt collectors, customers’ information will be used by the third-party without customers’ knowledge or consent. According to Vietnam Competition and Consumer Authority (VCCA 2018, 2019), consumers’ calls to consult on consumer credit services accounted for the highest proportion of total calls that the Authority received, 50.59% and 21.8% recorded and consulted in 2008 and 2009, respectively. 59
8. BOX 1: CASE OF MISTAKEN DEBT COLLECTION WITH THREATS AND HARASSMENT 1. Enterprises under investigation Banks, financial companies, debt collection companies, consumer lending companies and a large number of consumers. 2. Case Content VCCA received complaints from the consumers complaining that they were not involved in borrowing money but constantly being called or texted by debt collectors to harass, threaten or force them to repay an unrelated debt; though the consumers have repeatedly informed that they did not involve in any debt of those business. In some cases, debt collectors even used the images and information of consumers and their relatives to post publicly on social networks with distorted and fabricated contents in order to pressure consumers on repaying the unrelated debts. 3. Concern on consumer protection The activities of threatening or publicly posting images and information of consumers by some debt collected companies caused negative impacts on consumers in terms of their physical, mental health and reputation as well. Meanwhile, the consumers have faced difficulties in requesting related companies to stop their mistaken debt collection activities. 4. Investigation results VCCA coordinated and requested related companies to solve the consumers’ complaints; as well as published warning articles/notices on website. VCCA also sent information to the Banking Inspection and Supervision Agency of the State Bank to facilitate and handle. 5. Consumer recommendations For consumers about to sign any consumer credit contract, VCCA recommends: i. Clearly understand basic knowledge of loan contract, for example: interest rate, loan period, provisions on early repayment, penalty of late repayment etc. ii. Only sign contract when understanding clearly all information mentioned in the contract. iii. After signing the contract, request and keep a copy of the signed contract. iv. When a dispute arises, priority should be given to the use of contacting ways that leaves trace (evidence) like email or post. v. Obtain contact information of state management agencies to request the support if necessary. vi. For the cases of wrong debt collection, VCCA recommends that consumers should contact the credit companies about their mistaken debt collection. In case of continuous harassment from the credit companies, consumers should contact the relevant consumer protection agencies and consumer protection associations at central and provincial levels across the country for the assistance. Source: Vietnam Competition and Consumer Authority, Annual Report 2019 60
9. The abovementioned problems drew attentions of media, researchers, policymakers, regulators etc. and the regulation framework was revised for better protection of consumers and risk management of finance companies. Circular 18/2019/TT-NHNN dated November 2019 revised a number of articles of Circular 43/2016/TT-NHNN on consumer lending of finance companies. Notably, Circular 18 allows finance companies to remind borrowers about repayment no more than 5 times a day from 7am to 9pm. Finance companies are prohibited to contact organizations and individuals with no debt repayment obligations to them. In addition, finance companies must provide customers with draft credit contracts which specify rights and obligations of customers, measures to collect and handle debts if customers do not fulfill their obligations. Consumers must confirm that they are provided with the information as stipulated by this article before signing loan contracts. To control risk exposure, finance companies are required to gradually reduce the ratio of unsecured, higher-risk personal loans to 70% from January 2021, 60% from January 2022, 50% from January 2023, and 30% from January 2024. Furthermore, after a long debate, the National Assembly of Vietnam passed the amended Investment Law in 2020, choosing the option to ban debt collection businesses completely over improve debt collection practices. Thus, credit institutions can no longer commission or sell bad debts to third-party debt collectors. While these changes in the regulatory framework helps resolve several issues related to financial consumer protection, they also give rise to concerns about difficulties of credit institutions in collecting bad debts and increased default on loans by borrowers as well as competitiveness and ability to serve customers of finance companies. These, in turn, may lead to reduction in credit supply to retail clients, especially low-income people who normally cannot access to bank loans. As for dispute resolution and complaints channels, the Law on Protection of Consumers’ Rights stipulates that “the consumers have the right to complain and give comments to the business individuals, organisations concerning the price, quality of goods and services, manner of serving, method of transaction and other details relating to the transactions between the consumers and the business individuals, organisations”. However, different from good practices, there is no regulation requiring credit institutions to have written complaints procedure; timely send complainants written acknowledgement of their receipt of complaints, regular written update on the progress of investigation of complaints, outcomes of investigation; and maintain record of all complaints. In reality, most commercial banks establish customer services centres with 24/7 hotline. These are, however, not available at smaller credit institutions. Regarding formal dispute settlement mechanisms, the Law on Protection of Consumers’ Rights specifies 04 options to resolve dispute between customers and service providers: (1) negotiation, (2) reconciliation, (3) arbitration, or (4) lawsuit. Customers and credit institutions can negotiate and mediate disputes or use commercial arbitration. They can also fill a complaint with consumer protection organizations or a lawsuit at court. There are organizations that assist consumers to resolve dispute with financial services providers, including Vietnam Competition and Consumer Authority (VCCA), Vietnam Consumers Protection Association (the former Vietnam Standards and Consumers Association). Nevertheless, only small number of financial customers in specific and customers in general fill complaints about good and services providers every year. In 2020, Vietnam 61
10. Competition and Consumer Authority received only 133 consumer requests, petitions and complaints related to the finance, insurance and banking industry, accounting for 9.3% of total number of requests, petitions and complaints sent to the Authority (VCCA 2020). The reasons may be customers’ lack of awareness about their rights, limited understanding about the ways to protect their benefits, or difficulties to fill a complaint or a lawsuit. Picture 1: Numbers of calls to VCCA’s Consumer Support and Consulting Centre Source: Vietnam Competition and Consumer Authority, 2020 4. Fraud In the banking services industry, frauds can take many different forms and have severe impacts on customers. In Vietnam, some frauds involve internal corruption of bank employees stealing from customers or their banks. Bank employees understand the bank’ internal system very well so that they can easily find loopholes in the system and exploit the loopholes to steal customer’s deposits or disbursed loans. For example, they can fake customers’ signature to withdraw deposits or close deposit accounts, create credit contracts without customers’ knowing etc. Another common type of frauds that cause people profound distress is to help fraudulent relatives and friends by letting them use houses or apartments as collaterals to borrow from banks. When the relatives or friends fail to repay the loans, the houses or apartments will be foreclosed. With the rapid development of digital and electronic banking, many cyber frauds target people conducting online transactions by sending a link for victims to fill in a form, then their internet banking accounts will be stolen, leading to losses of customers’ money. It is very difficult to detect frauds, especially at the early stage. Once discovered, it is very hard and time-consuming for customers to recover their assets. In many cases, customers have to fill a 62
11. lawsuit at court. The Criminal Code is applicable for these cases which can take many years to resolve regardless of whether customers or credit institutions are at fault. Frauds in banking services industry are normally handled under “Article 174 – obtaining property by fraud” and “Article 175 – abusing trust to appropriate property” of the Criminal Code. Typical interventions of the government to protect customers from frauds include strengthening internal control systems of banks and banking supervision; developing consumer complaint and dispute resolution mechanisms which are similar to section 3; educating customers etc. 5. Discrimination Regulators are normally concerned about discrimination towards vulnerable customers such as low-income people, ethnic minorities, women etc. Discriminatory practices include lowering approval rates, charging higher fees and interest rates, discouraging from using financial providers’ services etc. (Garz et al. 2021). While discrimination based on creditworthiness is a common practice for customer selecting and risk-based pricing, the use of characteristics like race, age, gender, neighbourhood etc. in approval and price decisions are prohibited in many countries. In Vietnam, Article 16 of the 2013 Constitution states that “All citizens are equal before the law. No one shall be discriminated against based on his or her political, civic, economic, cultural or social life”. Similarly, one of the basic principles of the 2015 Civil Code is that “Every individual or legal entity is equal and may not be discriminated against for any reason; and is equally protected by law for personal and property rights”. Thus, discrimination is prohibited by the law. There is, however, no specific regulation with respect to preventing discrimination in the banking services industry. Empirical evidence about this issue is also scant and not much is known about the actual status of discrimination in the banking industry. Conclusion The paper follows the framework of Garz et al. (2021) and reviews five aspects of Vietnamese regulations on financial consumer protection and its effectiveness in protecting consumers’ benefits. We find that the regulatory framework is still weak with some regulations are not yet available or not compatible with good practices. The existing regulations are also not well enforced. These expose customers, especially low-income and vulnerable consumers, to various risks which may adversely impact their welfare. However, empirical studies need to be done in order to assess the effectiveness and welfare impacts of the regulations. References Demirgỹỗ-Kunt, Asli, Leora Klapper, Dorothe Singer, Saniya Ansar, and Jake Hess. 2017. “The Global Findex Database 2017: Measuring Financial Inclusion and the Fintech Revolution.” World Bank Policy Research Working Paper. IFC. 2014. “Responsible Finance in Vietnam.” IFC Vietnam 63
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