Classification of Consumer Credit of Finance Companies Affiliated to Commercial Banks

The subsidiary has all the characteristics of the credit institution's credit union in terms of customers, loan size and quantity, credit interest rate, and distribution channel. In addition, based on the parent-child ownership relationship and the purpose of ownership of the subsidiary of the commercial bank, the credit institution's credit union has some differences compared to the credit institution's credit union, which are the advantages/limitations in business operations: business model, development strategy, risk appetite, ability to deploy diversified credit institution products, sharing of customer base, and risk management capacity...

a. Characteristics of consumer credit activities of financial companies

Consumer loan customers are mainly SMEs who have difficulty accessing loans from commercial banks.

Maybe you are interested!

The target customers of financial companies are mostly sub-prime individuals who have difficulty accessing loans from commercial banks. In fact, financial companies provide credit products to all individual customers who need loans but focus on sub-prime customers to clearly distinguish the strategic business segment between financial companies and commercial banks. Most commercial banks have specific regulations on loan conditions for customers, including: customers with full civil legal capacity, loan needs for legal purposes, feasible capital use plans and financial capacity to repay the debt. Thus, the condition of having financial capacity to repay the debt with specific proof in documents such as labor contracts, savings books, house rental contracts, etc. is a barrier for customers without stable income and who can prove access to commercial banks for loans. However, for financial institutions, the above evidence is not a prerequisite. Many financial institutions rely on ID cards, vehicle registration, household registration books, social insurance, etc. to make lending decisions to customers without requiring proof of income. Consumer loans have helped financial institutions overcome liquidity difficulties, allowing them to meet the increasing consumer demand, especially for financial institutions with average incomes who are not yet able to pay in full for an expense such as buying a TV, motorbike or mobile phone. This has helped financial institutions improve their quality of life and create social justice.

Credit amounts are usually small compared to those granted by commercial banks.

Originating from the basic consumption needs of the people and the value of consumer loans, the value of consumer loans is mostly much smaller than loans for long-term ownership purposes such as home loans. However, providing small value loans is a solution for financial companies to spread out the risks when lending to sub-prime customers.

Credit standards are often lower than those of commercial bank borrowers.

The phrase “subprime lending” is being used quite commonly and applied to the credit activities of financial companies. This is also the difference when positioning the credit activities of commercial banks with the credit activities of financial companies. Most customers who borrow from financial companies for consumption purposes do not have access to commercial banks due to lack of credit history, no collateral, and the inability to overcome the strict loan conditions and strict credit scoring system of commercial banks to be accepted for loans. The birth of consumer financial companies is an effective solution to help customers with low credit standards to immediately access loans with quick and convenient processing time, of course with the trade-off of much higher borrowing costs than borrowing from commercial banks.

Credit interest rates are often much higher than commercial bank credit interest rates.

Compared to the credit interest rate of commercial banks, the credit interest rate of financial companies is many times higher. The high interest rate is explained by several main reasons as follows:

Firstly, the target customers of consumer finance companies are often lower income consumers than those of commercial banks, with no or only limited credit history. Normally, commercial banks often consider these as non-standard customers and these customers have difficulty accessing commercial banks for loans. Therefore, the possibility of default is higher when lending to these customers. In addition, most consumer loans are often unsecured or secured by real estate sponsored by the finance companies themselves, such as motorbikes and household appliances. It is difficult for finance companies to recover the secured assets when risky events occur. Faced with such large risks of capital loss, lending interest rates are high to compensate for the risks that arise.

Second, the price structure of credit products is different from that of traditional banking products. Credit interest rates of financial companies are often very expensive due to the nature of lending activities. Credit loans often have small balances, short loan terms, fast loan processing times, and frequent and small-value periodic repayments. This increases the cost of managing credit loans of financial companies. Moreover, because there are too many small loans, financial companies can only manage the quality of loans well thanks to modern information technology systems. Instead of investing in a large number of employees to process and manage loans, financial companies often invest in information technology systems to be able to evaluate and manage customers, initiate

Create loans, monitor and collect a large number of small loans, helping managers to control credit activities well.

Third, the cost of capital mobilization of financial companies is often higher than that of commercial banks. Commercial banks can use money mobilized from the population to make loans while financial companies can only mobilize capital from organizations. Financial companies are limited by short-term mobilization sources of less than 12 months and mainly mobilize capital from their own capital, sources of issuing valuable papers with a term of over 1 year to credit institutions or borrowing capital from credit institutions.

Traditional distribution channels are different from commercial banks

Based on the time of formation and the level of science and technology, consumer finance companies can carry out business activities on many types of sales channels from traditional to modern, specifically as follows:

- Traditional distribution channels: the difference between the traditional distribution channels of commercial banks and financial companies comes from the needs and habits of customers. The traditional distribution channels of commercial banks are branches and transaction offices spread geographically. The traditional distribution channels of financial companies are service introduction points located at shopping centers, retail stores... of partners who have signed cooperation contracts with financial companies. Customers who come to buy goods will directly submit loan applications at these service introduction points. In addition, the distribution channel through credit consultants and telesales is also a big difference compared to commercial banks.

- Modern distribution channel: both commercial banks and financial companies have in common the digital distribution channel, the loan products are deployed on the website or mobile. The cooperation method with Fintech companies is deployed by commercial banks and financial companies to help customers pay through e-wallets directly linked to the core system of commercial banks and financial companies. The unique difference of commercial banks comes from upgrading branches and online transaction offices and applying robot technology and artificial intelligence so that customers can experience the service themselves, without the support of bank staff.

b. Characteristics of consumer credit activities of financial companies under commercial banks

Affiliated financial companies have all the operating characteristics of general financial companies mentioned above and have some specific characteristics leading to differences in business models, obligations and responsibilities with the parent commercial bank, and with borrowing customers.

The credit activities of affiliated financial companies are closely related to the brand reputation of the parent commercial bank.

The parent-child ownership relationship or dominant control is both an advantage and a disadvantage for financial companies under commercial banks.

Compared to independent financial companies, affiliated financial companies have an advantage in attracting customers to borrow capital thanks to the brand of the parent commercial bank, especially for customers who have used the services of the commercial bank and are satisfied with the quality of services provided by the commercial bank. In addition, new customers who have not used the services of the commercial bank but are familiar with the brand of the parent commercial bank are also more confident in using the products of affiliated financial companies than independent financial companies. Providing utilities to affiliated financial companies through the commercial bank system such as disbursement, debt collection, and support for issuing plastic credit cards all contribute to helping customers trust the operations of affiliated financial companies.

However, compared to independent financial companies, affiliated financial companies in developing credit institutions must go hand in hand with maintaining the brand reputation of the parent commercial bank. Therefore, in terms of risk appetite and risk appetite adjustments to achieve growth and efficiency goals, affiliated financial companies cannot be as flexible and quick as independent financial companies.

The consumer credit development strategy is oriented by the parent commercial bank to help affiliated financial companies develop in the long term instead of short-term benefits.

The difference between independent financial companies and affiliated financial companies is also reflected in the TDTD development strategy. Independent financial companies implement development strategies based on the personal experience of the Board of Members/Board of Directors. Development strategies can bring benefits in the short term due to profit pressure from shareholders but can be limited in long-term capital development. Affiliated financial companies have an operating strategy linked to the strategy of commercial banks. With the strength of operating in the banking industry and many decades of experience in organizing business models, commercial banks always build development strategies including both short-term and medium- and long-term visions to create effective sustainable growth. These strategies have a great influence on the operating strategies of affiliated financial companies, helping affiliated financial companies have a long-term development orientation instead of short-term benefits.

Subsidiary financial companies have the capacity to organize, develop and manage products thanks to the support of parent commercial banks.

Thanks to the support from the parent commercial bank, the affiliated financial companies have good capacity to organize, develop and manage products, so they can deploy a variety of consumer credit products right in the early stages of establishment, instead of focusing on developing one lending segment such as credit cards or installment loans as independent financial companies often choose to develop. Thanks to that, the affiliated financial companies can approach many needs of individual customers and satisfy the continuously arising consumer needs of individual customers to the maximum, resulting in growth in customer base, loan sales and lending market share.

Sharing existing customer base between parent bank and affiliated financial companies

Commercial banks themselves own a very large and quality customer base. Most of the customers who have accessed and used banking services are customers who have a certain understanding of financial services and have a history of account transactions or credit transactions with commercial banks. Although the majority of customers of financial companies in the world tend to be substandard and have difficulty accessing banking services, exploiting the standard customer groups of commercial banks by affiliated financial companies is a great advantage if exploited properly. One of the reasons why commercial banks often reject customers who want to borrow for consumption without taking into account the risk factor is mainly because the size of the loans is too small, while the costs incurred include human resource costs, loan assessment costs according to bank standards and debt collection costs are too expensive, leading to the benefits that commercial banks gain from their activities, although much higher than the benefits of lending for other credit activities, cannot compensate for the costs incurred. Exploiting this group of technology companies helps commercial banks exploit technology companies deeply, retain technology companies within the group and increase business efficiency by avoiding regulations on lending interest rate ceilings.

Credit risk management capacity is an advantage of the affiliated financial company, helping to control bad debt and ensure safety in operations.

According to international practice, risk management models according to international standards such as Basel II are prioritized by commercial banks to improve risk management capacity. Risk management models and implementation experience inherited by affiliated financial companies from parent commercial banks help strengthen bad debt control and ensure safety in credit activities.

2.1.3. Classification of consumer credit of financial companies under commercial banks

2.1.3.1. Based on the method of repayment

- Installment loan: is a lending method in which when a customer borrows capital, the financial company and the customer determine and agree on the amount of interest to be paid and the principal to be divided into several installments within the agreed loan term. This method is often applied to loans that cannot be fully paid off at once.

- Non-revolving credit: is a lending method in which when a customer borrows capital, the financial company and the customer determine and agree on the amount of interest to be paid and the principal to be paid in one lump sum within the agreed loan term. This method is often applied to loans that can be fully paid off in one lump sum.

- Revolving credit: is a lending method in which the financial company agrees in writing to allow the customer to use a credit card or checks to spend or spend more than the amount available in the customer's payment account within a certain period and limit. Only when the customer uses the credit card or spends more than the amount will the outstanding debt and interest arise. Unlike loans by installments or loans by installments, the customer is disbursed many times for different spending purposes within the loan limit and repays the debt within the limited loan period agreed in advance with the financial company.

2.1.3.2. Based on loan security measures

- Loans secured by assets: are loans granted by financial companies to customers in which the customer's debt repayment obligation is committed to be secured by the customer's own mortgaged or pledged assets or by a third party guarantee. With this type of credit, financial companies face less risk of losing capital because they can sell off assets to recover capital in case the customer is unable to repay the loan.

- Unsecured loans: are loans granted by financial companies to customers in which the customer's debt repayment obligation is not guaranteed by the customer's own collateral or a third party guarantee. Because this type of credit is quite risky, financial companies often select and apply it to reputable customers who meet specific lending criteria.

2.1.3.3. Based on disbursement method

- TDTD disbursed through a third party: is a loan indirectly disbursed by a financial company through the IPS payment intermediary service of affiliated partners.

- Direct disbursement of TDTD: is a form of consumer lending in which the financial company directly disburses the loan to the customer in cash or directly to the sales unit.

2.1.3.4. Based on product strategy and consumption purpose

- Basic consumer credit product groups: CTTC only provides basic consumer credit product groups for consumption purposes including cash loans, loans for purchasing vehicles, phones, electronics, other household appliances and plastic credit cards, specifically:

+ Cash loans: include unsecured cash loan products and secured cash loan products. Depending on the risk appetite of each consumer finance company, there are differences in the characteristics of unsecured cash loan products in the following aspects: maximum/minimum loan amount, loan term, loan age, application documents, unsecured or with collateral requirements. Loans are disbursed through the customer's account.

Open a bank account or receive cash directly at the payment units of the consumer finance company.

+ Vehicle loans: provided by consumer finance companies to customers who want to buy motorbikes, electric bicycles, trucks, etc. Normally, consumer finance companies will build and provide loan products with specific characteristics such as loan amount, loan period, etc. according to vehicle manufacturing partners such as Suzuki, Honda, SYM.

+ Durable goods loans: provided by consumer finance companies to customers who need to buy phones, electronics, household appliances or other needs such as furniture.... These are valuable and long-term items, so the loan type is usually in the form of installment payments in many periods according to the agreement between the finance company and the customer. The loan is disbursed directly to the seller who is a partner with a previous cooperation agreement with the consumer finance companies, not to the borrower.

+ Credit card: is a form of revolving consumer loan, in which the financial company agrees in writing to allow customers to use the credit card to make spending within a certain period and limit. Only when customers use the credit card will outstanding debt and interest arise. Unlike loans by installments or loans by installments, customers are disbursed multiple times for different spending purposes within the loan limit and repay the debt within the limited loan period agreed in advance with the financial company. Credit cards are issued to customers in the form of physical plastic cards. For plastic cards, when customers want to spend, they must rely on the card information printed on the plastic to provide to the sales unit to fulfill their consumption needs.

- Digital credit products group: CTTC provides digital credit products for consumption purposes including online consumer loans, virtual credit cards, e-wallets, peer-to-peer lending, etc.

+ Online consumer lending: the difference between online consumer lending and basic consumer lending products is mainly in the method of submitting applications, reviewing and disbursing loans through web/mobile data platforms, in which customers interact with consumer finance companies through these modern platforms without having to directly contact the staff of the consumer finance company to get a loan. Depending on the technological capacity and business/product strategy of each consumer finance company, there will be differences in the consumer lending products provided to customers.

+ Virtual credit card: similar in features to plastic credit cards but different in the form of issuance. Virtual credit cards have identical images and card information.

Plastic credit cards that can only be viewed and used on phone screens and other electronic devices that allow them.

+ E-wallet: is a form of cash loan for purchasing goods, in which the consumer finance company disburses the loan to the e-wallet and the customer makes purchases and payments via the e-wallet owned by the consumer finance company. Consumer loans with payment needs via e-wallet such as phone payment, electricity payment... Customers use credit card number/contract/contract code to pay for their expenses.

+ Peer-to-peer lending: Consumer finance companies act as intermediaries between lenders and borrowers for consumption purposes through a number of web/mobile data platforms.

- Mixed credit card product group: is a combination of traditional credit card and digital credit card, CTTC provides customers with credit card products belonging to the basic credit card group and digital credit card products.

2.1.4. The role of consumer credit activities of financial companies under commercial banks

2.1.4.1. For commercial banks

According to international practice, parent commercial banks often fully own or control consumer finance companies for the following purposes:

- Increase the position of the parent commercial bank thanks to the rapid growth of outstanding credit balance and efficiency (for commercial banks with small starting scale).

- Increase the efficiency of the parent commercial bank thanks to higher TDTD profits compared to the standard TDTD segment.

- Reduce pressure on managing substandard credit activities for all units under the risk management model in the parent commercial bank.

- Create flexibility and increase competitiveness for sub-standard credit activities with competitors such as financial companies, Fintech companies...

Depending on the purpose of each parent commercial bank, the affiliated financial companies will be deployed to operate and develop credit to meet the expectations of the parent commercial bank.

2.1.4.2. For customers

Customers benefit from the credit activities of financial companies in general and affiliated financial companies in particular as follows:

- General role of financial institutions towards customers: Customers are the ones who benefit the most and directly from the financial institutions' credit activities. In the past, people

Comment