INTRODUCTION
1. Rationale:
In the context of economic crisis recently, the Government has
implemented monetary policy and fiscal policy to encourage domestic
demands. Experience from the economic development of Vietnam and of
other countries around the world has shown that stable economic growth
should be based on the increase in domestic demand rather than the increase
in trade, especially import
Policy stimulating domestic demand, especially consumption demand, is
considered key economic development policy which helps reduce dependence
on imports. Therefore, the banking system - which provides channels to meet
the needs of the economy’s capital - will play an important role in providing
credit for consumer activities.
Also, under the situation of harsh competition in the context of
international integration, Vietnamese commercial banks must diversify forms
of credit in order to spread, limit, and control risks at the lowest level.
Although in recent years, the State Bank of Vietnam has paid
considerable attention to the field of consumer credit, this form of credit is
still underdeveloped, accounting for a modest proportion of total outstanding
loans. Therefore, to expand and enhance consumer credit growth, there is a
need to promote this type of credit.
After consulting my academic supervisor and taking everything into
consideration, I decided to title this thesis “Solutions to improve effectiveness
of consumer credit in Vietnam”.
2. Research purposes
Firstly, the thesis is aimed at generalizing basic fundamentals of
consumer credit.
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Secondly, the thesis targets to outline the overall picture of consumer
credit activities in VN.
Thirdly, based on the fundamentals and the situation shown, the thesis is

- Characteristics and benefits of consumer credit.
- Consumer lending process.
- Indicators to evaluation credit performance.
- Experience and lessons drawn from consumer credit situation in EU.
1. 1. General principles of consumer credit
1.1.1. Definition of consumer credit
Not so many decades ago, consumer credit was little known and
seldom distinguished from credits granted for business and related purposes.
Today it is recognized to be a special type of financing that greatly influences
the rate of expansion or contraction of consumer demand and hence the level
of business activity.
Consumer credit (or consumer loans, consumer lending) can be
understood in a broad sense including government, non-profit, and informal
credit-debt relationship. For example: student loans and money lent between
friends and relatives, government lending to people receiving state benefits,
people paying utility and telecoms bills in arrears. These too can be
considered forms of consumer credit. However, consumer credit is sometimes
defined in a narrower context.
One of the pioneers in the field, Rolf Nugent, defined consumer credit
in his book as credit extended to individuals to finance the purchase of
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consumer commodities and services or to refinance debts which had their
origin in such purchases
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.
Consumer credit can also be illustrated at the very end of the marketing
chain. According to Robert Cole and Lon Mishler, “consumer credit is the use
of credit as a medium of exchange for the purchase of finished goods and
services by the ultimate user”
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Steven Finlay (2009), Consumer Credit Fundamentals, Palgrave Macmillan, p.4, New York, US.
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agreement or the total payment at the end of agreement rather than the interest
rate charged on the loan.
Fourthly, income and education level have a close relationship with
customer’s demand for consumer credit. The higher income the customers
earn, the more likely it is that they will ask for consumer loans which they are
able to pay at the end of agreement. Both education and income levels do
materially influence consumers’ use of credit. Individuals with higher income
tend to borrow more in total and relative to the size of their annual incomes.
Those households in which principal breadwinner has more years of formal
education also tend to borrow more heavily relative to their income level.
Fifthly, the borrower’s main source of payment may be subject to
considerable fluctuation because it depends on the customer’s employment
history, skills, working experience, health, etc. Many of these factors change
over the time.
Sixthly, customers’ personalities and behaviors which are quite challenging to
define take a significant part in determining the debt payment. Normally, the
lender must be assured that the borrower has moral responsibility to repay a
loan on time.
1.2. Benefits of consumer credit
As for the bank, regardless of two drawbacks which are risk and high
cost, consumer credit covers significant advantages. Firstly, consumer credit
helps build up relationships with customer which might raise possibilities of
attracting capital for the bank itself. Secondly, consumer credit helps diversify
bank’s businesses which consequently help boost revenue and spread the
bank’s risks.
As for consumers, consumer credit provides a source of assistance in
times of financial stress. Thanks to this type of credit, they have opportunities
to enjoy conveniences even before they accumulate enough money for

and in the US it is 15 or 30 years. In Japan, terms as long as 50 years are not
unusual, with the debt being passed on to the next of kin if the original
borrower dies. When a mortgage has been fully repaid it is said to have been
redeemed.
b. Non-residential Mortgage Loan
A nonresidential mortgage loan is taken out to buy a new car; and
consumer durables such as a sofa, washing machine or a television. This type
of credit is also used to cover things such as household bills, travel and
entertainment.
1.3.2. Based on methods of payment
a. Instalment Consumer Loan
Installment consumer loan is a loan in which repayments cover both
principal and interest, with the debt having been amortized at regular intervals
during a fixed period of time and repaid in full by the end of the agreement.
This method of payment is applied for outstanding loans or in case customer’s
regular income cannot cover a lump sum payment (paid gradually over the
time).
b. Non-installment Consumer Loan
Short-term loans individuals and families draw upon for immediate
cash needs that are repayable in a lump sum are known as non-installment
loans. This type of loan is frequently used to cover the cost of vacations,
medical care, the purchase of home appliances, and auto and home repairs.
Such loans may be for relatively small amounts and include charge accounts
that often require payment in 30 days or some other relatively short time
period. Non-installment loans may also be made for a short period, usually six
months or less, to wealthier individuals and can be quite large.
c. Revolving Consumer Credit
A revolving loan, sometimes called a flexible loan or a budget account,
is a form of revolving credit. A borrower agrees to make a fixed monthly
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usually follows, giving the customer the opportunity to explain his or her
credit needs. The interview also provides a chance for the loan officer to
assess the customer’s character and sincerity of purpose. If the customer
appears to lack sincerity in acknowledging the need to adhere to the terms
of a loan, this must be recorded as weighing against approval of the loan
request.
c. Making site visit and evaluating a prospective customer’s credit record: In
case a mortgage loan is applied for, a loan officer often makes a site visit
to assess the condition of the property. The loan officer may contact other
creditors who have previously loaned money to this customer to see what
their experience has been.
d. Evaluating a prospective customer’s financial condition: If all if favourable
to this step, the customer is asked to submit several crucial documents the
lender needs in order to fully evaluate the loan request. Once all
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documents are on file, the lender’s credit analysis department conducts a
thorough financial analysis of the applicant, aimed at deciding whether the
customer has sufficient cash flow and backup assets to repay the loan.
e. Assessing possible loan collateral and signing the loan agreement: If the
loan committee approves the customer’s request, the loan officer or the
credit committee will usually check on the property or other assets to be
pledged as collateral. Once the loan officer and loan committee are
satisfied that both the loan and the proposed collateral are sound, the note
and other documents that make up a loan agreement are prepared and
signed by all parties to agreement.
f. Monitoring compliance with the loan agreement and other customer service
needs: The new agreement must be monitored continuously to ensure the
terms of the loan are being followed and all required payments of principal
and interest are being made as promised. A new loan customer’s
information is also saved as a customer profile to show and monitor a

290-300 points Extend credit up to $1,000
310-330 points Extend credit up to $2,000
340-360 points Extend credit up to $3,000
370-380 points Extend credit up to $4,000
390-400 points Extend credit up to $6,000
410-430 points Extend credit up to $10,000
(Source: Peter Rose (2001), Commercial banking management, Irwin
McGraw-Hill, p. 602)
The main downside of credit scoring is its reliance upon the information
from which the original credit scoring system was constructed. If there are
certain types of application that were not considered or not available at the
time the system was developed, these cases will not be assessed in an optimal
capacity. Often this will affect small groups within the population who are
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overshadowed by the characteristics of the majority. For example, most credit
scoring systems will give low scores to people who have not lived very long
at their address, have recently started a new job, rent instead of own, or do not
have some previous credit history. Credit scoring system is designed to work
in tandem with Judgment Method.
b. Judgment Method
Judgment Method is a method in which the bank carries out qualitative
and quantitative analysis and judgment of the borrower so as to limit the
number of non-performing loans. In each case the aim of the underwriter was
to come to a somewhat subjective view as to whether or not the individual
was creditworthy.
While credit scoring is the norm, there are always some cases that
require manual review. There are also some non-mainstream lenders,
particularly in the sub-prime and door-to-door market, who do not apply
credit scoring. Thus the role of the underwriter remains, albeit in a
specialist or minority capacity, and is likely to do so for the foreseeable

In the scope of the thesis, only key performance indicators will be taken
into consideration in order to evaluate and quantify effectiveness of consumer
credit.
1.5.1. Qualitative indicators measuring credit performance
a. Legal framework
Consumer credit activities are said to be well performed when they are
carried out in compliance with related legal documents which are issued by
the central banks. A loan is impossibly said to achieve efficiency if
regulations on the loan are violated. For example, the bank deliberately
provides fund for its customers to spend on items that are prohibited by law;
or the bank carries out debt refinancing. Those activities are considered to be
against the rule although they produce massive profit for the bank.
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a. The bank’s lending policy
Each bank draws up its own business strategy which is a critical
condition for the consolidation of lending operations and also earns the bank
maximum benefit. A so-called efficient loan is not only in compliance with
basic process of credit but also flexible according to each type of customer.
An effective lending policy will help the bank lessen unexpected risks.
b. Lending operations
Before providing fund, the bank should come to an agreement with its
customer about his or her using the fund, time to pay principal and interest on
the loan, solutions in unavoidable and unforeseen circumstances, etc. A loan
is said to perform well if the credit agreement is honored.
1.5.2. Quantitative indicators measuring credit performance
a. Outstanding loans
Outstanding loan enables the bank to increase its income. It is the
difference between the amount of loan and the amount of repayment in a
certain term of a credit agreement. Profit from lending activities is typically
the product of interest rate on the loan, term of credit agreement, and

bank depends closely on the following factors:
a. Lending policy
Each bank develops its own lending policy which is appropriate to
certain circumstances and certain period of time. The policies should be
designed so as to improve credit performance of the bank itself. The basis of a
lending policy is comprised of policy on customers; policy on size of loans
and line of credit; policy on term of agreement, interest rate and collateral.
- Policy on customers: There is a broad range of customers coming to
the bank for loans. Therefore, the bank should make a thorough analysis of
each customer’s characteristics in order to formulate proper policy for each
category of borrower. This will contribute to the bank’s better credit
performance and sustainable development.
- Policy on interest rate: Interest rate is the greatest concern when the
customer asks for a bank loan. Thus, an appropriate policy on interest rate
will help the bank attract a large number of customers as well as raise its
credit performance.
- Policy on collateral: The bank’s determination secured asset is based
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on credibility of the customer. Collateral helps the bank minimize the risk
caused by customer’s default or in case of customer’s unwillingness to repay
debts. The value of asset also plays an important part in the bank’s decision
on size of loans.
Lending policy basically exerts a considerable impact on the bank’s
credit performance. The gains in credit efficiency can only be only achieved if
the bank sets its own credit policy which is consistent with its characteristics
and certain economic conditions.
b. The quality of loans
The quality of a loan is evaluated in terms of customer’s ability to repay
principal and interest applied on the loan by the due date that is stated in the
credit agreement. In pursuit of huge profit, a bank possibly offers loans which

level of income usually need funding to cover basic necessities.
The development of science and technology also allows banks to
design proper lending policies for each group of customers. This minimizes
operating costs and time for credit assessment, raising accuracy of
information system which leads to improvement in credit performance.
1.7. Consumer credit in Europe and lessons applying for Vietnam
1.7.1. Overview on consumer credit in Europe
Consumer credit plays an important role in the EU economy. In Europe,
consumer credit came into being later than other kinds of credit. However, it
has met consumer’s demand in many developed countries and become
popular in Europe. This part therefore would describe briefly the overall
picture of consumer credit activity in European countries.
There is a variety of credit products which are in compatibility with the
development of the Western economies, namely the following types:
- Stock trading loans: provide fund for investors who wish to possess and
trade potential stocks in the stock market.
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- Guarantee: is service in which the bank guarantees consumption or
investment activities.
- Mortgage loans: provide fund for individuals in case of buying or
renovating assets of high value such as lands or houses.
- Consumer credit: covers the provision of goods and services, provided
to individuals to cover the purchase of basic needs.
At the end of December 2008, consumer credit outstanding stood at
884 EUR billion or 7 per cent of the EU GDP; and accounting for just over 17
per cent of household’s consumption expenditure. The size of the market for
consumer credit is estimated to be 1 236 EUR billion or almost 10 per cent of
the EU GDP if data reported by OFIs is also included. The true size of
the market is, however, likely to be larger, considering that the scale of
OFI activity is not known in all Member States. Europe’s six biggest

products aimed at addressing climate change.
• Consumer Credit Directive
The Consumer Credit Directive
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was adopted by the European
Commission in April 2008, with an ensuing date for completing the
transposition set for June 2010 for all Member States. This Directive
replaces the 1986 Consumer Credit Directive (and amendments made to
this Directive). The new Consumer Credit Directive aims to “facilitate
the emergence of a well functioning internal market in consumer credit” and
to ensure that all consumers in the Community enjoy “a high and
equivalent level of protection” of their interests.
The Directive focuses on transparency and consumer rights. It provides
for a comprehensible set of information to be given to consumers in good
time before the contract is concluded and also as part of the credit agreement.
In order to enhance the comparability of different offers and to make the
information better understandable, the pre-contractual information needs to be
supplied in a standardized form (Standard European Consumer Credit
Information), i.e. every creditor has to use this form when marketing a
4
John Lewis is a UK based department store (website: www.johnlewis.com).
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Precious Plastic 2008: Consumer credit in the UK. PricewaterhouseCoopers.
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DIRECTIVE 2008/48/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL issued on 23
April 2008 on credit agreements for consumers and repealing Council Directive 87/102/EEC.
Link: />20
consumer credit in any Member State. The Directive foresees in addition two
essential rights for consumers: they are allowed to withdraw from the credit
agreement without giving any reason within a period of 14 days after the

c. Market segmentation: In Europe, innovation in products is based on
identifying and targeting market segments. Such a process relies on the
identification of a specific population group and the development of
products and/or services that will meet the needs and wants of such a
group. This is one of the most important and useful experience for
Vietnam to develop its consumer credit activity in terms of quality.
d. Distribution channels: Consumer credit products can be offered to
consumers using direct (e.g. in branches) or indirect distribution channels
(e.g. at point of sale). Innovation in distributing credit products to
customers in Europe is much diversified, including: branches, mailing,
telephone, internet, point of sale, etc. There has been an increasing use of
the internet as a major distribution channel for consumer credit
products. In order to modernize banking system, Vietnam should develop
and apply Internet as well as other technological improvements to offer
new types of products and services.
e. Marketing and co-branding: Innovation in consumer credit markets can
consist of marketing campaigns and co-branding of consumer credit
products. It is worth highlighting the development of: i) co-branded credit
cards which can be associated with special services or advantages when
consumers purchase goods in specific stores or can be used as a
public transportation pass; and ii) co-branded affinity cards which are
credit cards offered in association with a non-commercial organization
(e.g. Sports club, charity organization etc). This is a trend of development
that Vietnam may apply in the future.
f. Problems of inadequate information: In EU, it appears that lack of
transparency relating to interest rate rises and fees and charges applied by
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lenders are the main areas of concern for consumers in several Member
States. However, not only consumers are less well informed than are
suppliers of financial services, creditors also have difficulty in accessing

Implemented in 2009
GDP growth rate 5.32%
Export and import turnovers
Export turnovers USD 56.6 billion
Import turnovers USD 68.8 billion
Trade deficits USD 12.2 billion
Total development investment (% of
GDP)
42.6% (VND 702.4
thousand billion)
CPI in December 2009 compared to
December 2008
6.52%
Total state budget revenue VND 390,650 billion
State budget deficit (% of GDP) 6.9%
(Source: The Government’s report on the Socio-economic situation in
2009)
Economic development growth rate: In 2009, although the economic
growth rate was lower than the growth rate of 6.18 percent of 2008, it over-
fulfilled the target of 5 percent. It can be said that it is the success in the global
economic recession context and many economies witnessed the minus economic
growth rate.
High inflation prevention: The Government has developed measures
drastically and consistently in order to prevent the return of high inflation, to
recover and stimulate production and business, especially in domestic market;
the Government had directed and governed fiscal and monetary policies, as a
result, the 2009’s inflation ratio was not too high.
Finance and monetary markets: Commercial banks were favored of demand
stimulus packages, in which, the 4 percent interest rate supporting package has
been recognized widely that it has successfully fulfilled its function in rescuing