I wrote a couple weeks ago about the interest rate cap on loans as applicable to P2P lending in Vietnam (see Interest Rates for P2P Lending in Vietnam) in which I discussed the problem we’ve seen with P2P lenders being accused of criminally exceeding that cap through the application of fees on loans. Another problem that is very much extant at the moment is how some of these P2P lenders have serviced the loans they’ve granted.

Last year a P2P lender based on the pawnshop model that I’ve discussed previously was raided by the police after a report in a local paper. The paper reported some heinous activity on the part of the lender, citing examples of harassment and abuse by the collection agents. The expose in the paper explained some of the most egregious examples and led to the police raid. Though the raid itself was launched not because of the collection activities of the lender but because they were deemed to be charging too much interest on their loans.

We have also been approached by various Chinese companies seeking to enter into a P2P lending model that would involve a mechanism for collection activities and see a great amount of interest out of that country for lending in Vietnam. What we’ve had to explain to them, especially as they’ve come to us this year, is that debt collection activities are no longer allowed as a business investment activity.

The new investment law passed last year and effective at the beginning of this year set out a short list of absolutely prohibited sectors for investment activities. That list included:

(a) Business in drugs;
(b) Business in prohibited chemicals and minerals;
(c) Business in specimens of wild fauna and flora exploited from nature and wild forest animals and certain plants;

(d) Business in prostitution;
(dd) Human trafficking; trading tissues, corpses, human organs or foetuses;
(e) Business activities relating to asexual human reproduction;
(g) Trading firecrackers;
(h) Debt recovery business services.

That’s it. Only eight sectors are absolutely prohibited for investment in Vietnam. And as you can see most of them are obviously bad and it is interesting that debt recovery businesses are included in this list. I don’t know the National Assembly’s motivations for this inclusion. Perhaps it is because the bulk of debt collection agencies then in existence were backed by Chinese investors or because they were deemed as abusive and deleterious to the good cultures and stability of society. Whatever the reason, they decided to include debt recovery business on the very short list of prohibited business sectors.

Ultimately, this may be in an effort to avoid the problems that plague the lower class in countries like the United States where payday loans and other short-term loan companies offer small amounts to the working class at exorbitant interest rates and then pursue them relentlessly when they don’t pay. Perhaps the view of the National Assembly is that if you allow for the collection of debt in this manner you are encouraging the practice of abusive loan making.

But the prohibition hasn’t stopped everyone completely. There remains some ambiguity around the transition between investment law regimes as the new law came into effect. Some companies involved in debt collection before January 1 have tried to remain in operation while others have sought to register adjacent or similar business lines with the local department of planning and investment in order to fudge the boundaries of the prohibition. This has proven an ineffective method for obtaining the desired ends and these enterprises are in danger of being prosecuted for a fraudulent investment registration as their activities are different from those activities which they have obtained permission to pursue.

The only legal method to collect debt at this point is to go through a law firm and have them sue the borrower for breach of contract and seek damages. This can be expensive, however, and as such it is only attractive when the amounts in question are reasonably large. This, too, supports my hypothesis that the National Assembly wants to prevent small loans and abusive lending practices that they have seen in other countries.

This prohibition against debt collection activities has also had a knock-on effect of damping the interest in P2P lending, at least those methods that involve small loans with the intention of collecting lots of interest. It does have one effect, though, in that it demonstrates a degree of sophistication on the part of the country’s legislators. That rather than prohibiting the loans themselves they prohibit the activity which enables the loans. In that way, there remain some means for pursuing P2P loans through legitimate channels and with the due diligence and credit analysis necessary to properly contract a loan.