Rotten property debts to erode banks

According to National Financial Supervisory Commission (NFSC) latest figures, banks’ property-oriented outstanding loans climbed to VND245 trillion ($11.8 billion) as of June 2011, accounting for 10 per cent of banks’ total outstanding loans. Bad property debts made up around 3 per cent of the total, tantamount to VND7.350 trillion ($355 million) with 40 per cent being fifth-group debt which faced losing investment capital.

Vietnam’s fifth-group debt rate is high compared to some regional countries such as 6 per cent in Thailand and 7 per cent in Malaysia.

According to Vietnam Institute of Economics head Tran Dinh Thien, Vietnam hosted vast numbers of banking entities of around 100 and several hundred financial organisations. Fierce lending competition among banking and financial entities was one of reasons behind the property sector growing bad debt rate.

Property’s inflated prices also put the banking sector at risk. Experts assumed inflated prices came on the back of restricted lending to property projects due the government’s credit tightening policies. This led to sharp declines in property transactions in the past months and worsened the property credit situation. Reality shows that property bad debt rose 37 per cent in the first six months of 2011 against late 2010.

According to a NFSC report, inflated property prices stemmed from a lack of property management transparency and not from speculators.

NFSC deputy chairman Le Xuan Nghia assumed current situation was critical as besides the high property sector loan rate, a number of banks continued to consider offering internal loans to their big shareholders who were also property project developers.

“Banks’ greatest risk is that they play both the lender and the borrower role,” said Nghia.