Financial leasing companies hard-pressed for foreign capital

The State Bank of Vietnam (SBV) have issued a document approving a transition of BIDV Financial Leasing Company. More specifically, it transferred from a subsidiary of Joint Stock Commercial Bank for Investment and Development of Vietnam to a joint venture company named BIDV- SuMi TRUST Leasing Limited Company with 49 per cent charter capital held by Sumitomo Mitsui (Sumitomo Mitsui Trust Bank - SMTB) and 1 per cent capital held by Sun Group.

Being one of the four largest leasing companies in the market but BIDV Leasing Company’s performance has not been positive recently. Therefore, the participation of SMTB—the largest trust bank—is expected to turn the company up-side down in terms of capital, customer base, experience, and business operation.

The parties signed a cooperation agreement in financial leasing in 2016. According to this agreement, BIDV will transfer 49 per cent of the chartered capital of BIDV Financial Leasing Company to SMTB, renaming it BIDV-SuMi TRUST Leasing Limited Company. At the same time, the company’s chartered capital will increase from VND448 to 896 billion ($19.6 to 39 million). This will turn BIDV Financial Leasing Company into the second largest financial leasing company in the market.

After the successful capital transfer, BIDV-SuMi TRUST Leasing Limited Company will be the first joint venture company between a domestic commercial bank and a foreign financial institution.

There is a chance that other financial leasing companies would follow BIDV-SuMi TRUST Leasing Limited Company’s model to increase their capital and restructure themselves. This trend has been used by some financial companies with relative success.

Banking specialists believed that with tight capital and limited operations, cooperation with foreign institutions would be the best way for these companies to recover. Dr Dang Thanh Dan from Ho Chi Minh University of Banking stated that cooperation will help financial companies strengthen their financial capacity, as well as help them gather experience and competitive advantages.

Transform or go bankrupt

Financial companies and financial leasing companies have been in the focus of restructuring efforts at the State Bank of Vietnam in recent years. Nguyen Van Hung, deputy chief inspector, said that the SBV will classify them to propose restructuring plans for each specific type. According to SBV statistics, there are 11 financial leasing companies, including three ones wholly-owned by foreign institutions, seven wholly-owned subsidiaries of domestic commercial banks, and Vinashin Financial Company.

Two thirds of financial leasing companies are operating with deficit, shouldering a high proportion of bad debts and low capital adequacy rate. One of financial leasing companies is on the verge of bankruptcy. VietinBank Leasing is one of the few financial leasing companies which operate effectively.

Pham Ngoc Long, general director of VietinBank Leasing, said that the company’s 2016 pre-tax profit was more than VND107.6 billion ($4.7 million), while its total assets and liabilities reached VND1.930 trillion ($84.5 million), increasing by 15 per cent on-year. Bad debts were only 1.87 per cent.

One of the factors blamed for the inefficient operation of financial leasing companies is their small scale. Eight out of 11 financial leasing companies on the market have a chartered capital from VND200 to 300 billion ($8.7-13 million). The three companies with chartered capital above VND500 billion ($21.9 million) are Chailease (VND580 billion, $25.4 million), Vietcombank Leasing (VND500 billion, $21.9 million), and Vietinbank Leasing (VND1 trillion, $43.8 million). After the capital assignment for SMTB, BIDV will be in the second position with approximately VND900 billion ($39.4 million).

In addition to their small scale, financial leasing companies are confronted by a lack of capital due to high interest rates and low credit limit to lend to customers. As a result, banking specialists believe that SBV should encourage capital assignments with foreign institutions and issue suitable legislation for these companies. The development of this model will allocate and utilize capital more effectively as well as support small and medium-size enterprises better.