Real estate lending disguised as consumer lending

Real estate credit is higher than the initial estimates

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True volume of housing loans

According to the State Bank of Vietnam (SBV)’s Deputy Governor Nguyen Thi Hong, the growth of the credit balance in the real estate industry has slowed down compared to 2016, thanks to SBV’s efforts to control credit risk, balance out funding sources, as well as interest rate in the short, medium, and long term, and loans in risky fields like real estate and build-operate-transfer (BOT) transportation projects.

Not only credit balance growth, but the proportion of real estate credit in the total credit balance also decreased to eight per cent.

However, a recent report released by the National Financial Supervisory Commission (NFSC) reveals that this proportion is higher than 8 per cent.

In particular, according to the report, as of the end of May 2017, consumer lending was estimated to have increased about 29.7 per cent compared to the end of 2016. Of the total, housing repair loans and home loans increased by 38.4 per cent and this amount accounted for 52.8 per cent of the total consumer lending. At the end of 2016, the amount of housing repair loans and home mortgages accounted for 49 per cent of total consumer lending.

Currently, consumer lending accounts for about 12 per cent of the total credit balance. Thus, by the addition of real estate consumer loans, the proportion of real estate credit will be 14 per cent, not 8 per cent as reported.

A previous report published by NFSC made the same assessment and warned, “Consumer lending sharply increased, and about 50 per cent of it went into real estate. Real estate credit should be closely monitored and assessed.”

The form of lending to the field of real estate are changing. At present, 38 per cent of total real estate loans were taken up by developers of real estate projects, and the rest by homebuyers.

The fact that real estate credit is increasing while manufacturing and business credit are recovering only slowly raises concerns for experts.

State treasury pushing up liquidity

Currently, the liquidity burden on banks’ has been lightened, as demonstrated by the loan to deposit ratio. As of May 2017, the ratio of the whole banking system was about 87 per cent. Interbank interest rates also declined to 4-4.2 per cent, instead of the 5 per cent in previous months.

Nevertheless, high liquidity in this case does not mean that commercial banks’ liquidity has been strengthened. According to NFSC, the higher liquidity was brought about by the sharp growth of VST deposits. This supported commercial banks’ liquidity, especially when the disbursement of public investment was slow. As of the end of April 2017, VST deposited about VND122 trillion ($5.4 billion) in banks, an increase of 28.4 per cent compared to the beginning of 2017.

In addition, the credit to GDP gap (the indicator of risk in the banking system) has been on a continuous upward trend since the fourth quarter of 2015, climbing to 11 per cent in the first quarter of 2017. This was the second highest gap during the last nine years, slightly behind the record high of 13 per cent in the first quarter of 2011, the period when the whole Vietnamese banking system was in a liquidity crisis.

A source of VIR revealed that at present, some commercial banks are having trouble with liquidity and their bad debts are much higher than reported.

Real estate loans will not be a concern if they can meet actual needs. However, according to some experts, the increasing loans can cause a real estate bubble. Thus they forewarn of danger, for example, for the unusually high demand for real estate in Ho Chi Minh City. Additionally, commercial banks’ practice of finding loopholes to increase their real estate loans contains too many risks.

Currently, Vietnam’s growth model is based too much on credit, a problem which is hard to solve. By the end of the first quarter of 2017, the banking sector was the main source of capital for the Vietnamese economy, accounting for nearly 60 per cent of the total capital supply.