Spectrum of opinion on credit moves

May 22, 2019 | 14:55

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A recent draft circular on safety limits for banking operations, which applies a credit risk ratio three times higher than the current ratio, has created controversy among real estate consultants, developers, and buyers. Bich Ngoc reports.

High-end properties are historically the first to suffer from any major jolts in market changes, Photo: Le Toan

According to the State Bank of Vietnam (SBV), a new legal document aims to limit loans for the high-end real estate segment to ensure the sustainable development of the market and safety of the banking sector.

In a statement, the bank said, “The SBV will continue to control all loans for individuals especially in the high-end segment of accommodation.”

The draft circular, however, has caused a shock to the whole market. It sets limits and a safety ratio for bank operations to apply a credit risk ratio of 150 per cent as from January 1, 2020 for any home purchasing loan worth more than VND3 billion ($130,430), three times higher than the current ratio of 50 per cent.

According to many experts, that increase of credit tightening for homes could undermine the real estate market. Banking expert Nguyen Tri Hieu said that this limit would have a very big impact on the market.

“If this draft circular is put into force, homebuyers will have to burden a very high interest from banks for their loans. This can have negative impacts on borrowers and it also decreases the liquidity of the entire market,” said Hieu.

“Loans for buying homes now are mostly for the mid- and long-term, from five to 15 years. At some banks. the period can be as long as 20 years,” Hieu continued.

“Therefore this credit squeezing will force bankers to increase long-term credit to restructure their capital resources. In fact, to minimise their risk, lenders will mostly have short-term credit at the banks. And, in a circular fashion, to attract long-term loans, banks will have to increase their saving interest and the loan interest therefore also must be increased.”

Considering the long-term

According to Nguyen Van Dinh, vice chairman of the Vietnam Association for Realtors, tightened credit in any segment would also impact the investment and transactions of the market.

“If this is long-lasting, it will impact the high-end segment at a time when Vietnam is on its way to making the infrastructure system more complete in both modern urban and residential areas,” Dinh said. “Therefore, the tightening for the high-end segment should be in the short-term only, in an aim to avoid negative impacts on the market, especially in cities like Hanoi and Ho Chi Minh City.”

A real estate developer who declined to be named told VIR that, with high-end apartment units starting from VND3 billion ($130,430) and villas being priced from VND7 billion ($304,350), the majority of buyers are using loans from banks, especially investors who buy the property and then re-sell it for profit or set up for lease.

This developer said that instead of limiting credit for buyers, banks should review all current loans for developers and wipe out discredit and incapable ones to avoid incoming credit risks.

Former Deputy Minister of Construction Nguyen Tran Nam agreed that credit limitation should not be applied at this moment. “The limit for loans worth more than VND3 billion ($130,430) is not reasonable, because only wealthy people can afford them and people should not be limited because they are incapable in paying loans,” Nam said.

Instead of limiting credit in homes, Nam said, the SBV should limit loans on land purchasing, since in most cases people are buying land plots and keep it for price hikes. Therefore, they bear much risk if their land cannot be sold and they would not be able to pay loans to the banks.

The solution to market control

Despite facing opposition on the draft’s details, banking experts also said that under the view of controlling the market, credit tightening is a must-need solution.

According to economist Vo Tri Thanh, if the limit is put into force, developers may be faced with obstacles in the short-term. However, businesses could be better off over time.

“We should not soon conclude that credit tightening into real estate would make only a negative impact yet. We must have close control on the market to avoid bubbling in the real estate market which will have a domino effect into the whole economy,” Thanh said. “This tightening may have temporary impacts to real estate developers but it will make the market more stable and healthy in the long-term.”

Nguyen Manh Ha, vice chairman of the Vietnam Real Estate Association, said that the credit squeeze on the high-end segment was significant because experience from previous crises in real estate shows that the high-end segment would be the most impacted. “Large units with high prices must be controlled because these are the foremost segments to be impacted when the market experience any turbulence,” Ha said.

Elsewhere, Nguyen Manh Khoi, deputy director of the Ministry of Construction’s Department for Housing and Property Market Management, said that the draft circular is expected to have positive impacts on the market, but it needs some time to prove the effects.

“The central bank’s tightening of credit for real estate will also be a chance for businesses to restructure their investment strategies and financial resources from other channels such as international partners or from issuing bonds or stakes in the security market, not to be too dependent on bankers,” Khoi said.

Draft circular on credit tightening

The State Bank of Vietnam is currently gathering opinions from the public on a draft circular about limits and safety ratio for bank operations in credit institutions and foreign banks, to replace Circular No.36/2014/TT-NHNN regulating prudential ratios for the operations of credit institutions and foreign banks.

Accordingly, a credit risk ratio of 150 per cent is to apply for any home purchasing loan worth more than VND3 billion ($130,430) as from January 1, 2020.

The central bank also plans to apply risk ratio of 50 per cent for loans which are deposited by house, land, and construction sites for the purpose of doing business; loans for individuals to buy social housing, and buying houses from projects supported by government; and individual loans worth below VND1.5 billion ($65,220).

It also expects to reduce the short-term funds used for mid- and long-term loans from 40 per cent by June 30, 2020 to 35 per cent from July 1, 2020 to June 30, 2021, and to 30 per cent from July 1, 2021 onward.

The aim is to limit loans for the high-end real estate segment to ensure the sustainable development of the real estate market and safety of the banking sector.

Apartments sold in the first quarter of 2019

Attributed to the government’s tightening of credit into real estate, in the first quarter of 2019, there were 4,423 newly-launched units in Ho Chi Minh City, a fall of 54 per cent on-year. In times of limited new supply, inventory is being absorbed very positively, evidenced through busy activities at recent sales events. There were 5,924 units that were sold in this quarter, 1.3 times higher than the new supply level.

Meanwhile in the first quarter of this year, the Hanoi condominium market recorded one of the highest number of units launched in a quarter. A total of 11,822 units were launched from 26 projects, up by 46 per cent as compared to the same period of 2018. An estimated 9,390 units were sold during the quarter, 36 per cent higher than that of the same period of last year.

Ben Gray - Director of Capital Markets Cushman & Wakefield Vietnam

The proposed adjustment to the risk weighting of residential properties will require a lender to carry a capital cushion relative to these loans of 1.5 times the loan amount. This mirrors Circular 36’s requirement for banks to increase their risk weighting for lending into the real estate sector and is a sensible move by the SBV to bring bank lending into the real estate sector under control, and in line with international standard for capital adequacy ratios (CAR).

In the short term, this may see bank lending to buyers of residential developers’ product slow nominally. However, the retail home buyer mortgage market accounts for a very low volume of primary sales made by developers as their projects are released to market. The penetration of retail mortgage debt into the market in Vietnam is very low at 4.7 per cent of GDP. Compare this to Singapore at over 52 per cent and Malaysia at 44 per cent of GDP, it can be seen that buyers in Vietnam do not borrow from banks at nearly the same level as our regional peers at present. Developers should therefore not see a significant impact on sales velocity in the short-term, and we feel that the banks need to increase lending into this market, so will be incentivised to ensure that their CAR are sufficient.

LE HOANG CHAU - Chairman, Ho Chi Minh City Real Estate Association

We suggest the SBV extend the application of regulations on banks’ maximum ratio of short-term funds used for medium- and long-term loans until the end of 2020 instead of June 2020 as expected.

We propose the rate should be reduced to 37 per cent starting from January 1, 2021, 34 per cent from July 1, 2021, and 30 per cent from July 1, 2022.

The moves were announced after the SBV released a draft circular stipulating that the maximum ratio of short-term funds used for medium- and long-term loans at banks would be reduced from the current 45 per cent to 40 per cent from 2019 to June 30, 2020.

Under the SBV’s draft circular, the rates of 37 and 30 per cent will be applied from July 1, 2020 and July 1, 2021, respectively.

This draft circular, if put into force, will damage the real estate market as property enterprises are in dire need of medium- and long-term loans. It has been explained that due to the large proportion of short-term capital in banks’ total mobilised capital, lenders will find it difficult to meet the demand of the real estate market.

Peter Ryder - CEO, Indochina Capital

The Vietnamese government is definitely tightening credit, which will make it more difficult for people to borrow. We are foreign developers who also depend on local credit. Typically, we invest around 50 per cent equity and then borrow 50 per cent from local banks, not foreign banks. This is because we want to match the revenue with the debt in VND. I think there is going to be an impact via these changes. Successful real estate developers will continue to be able to borrow from banks because they have track record and have feasible projects. So it won’t really impact too much on foreign developers compared to domestic ones. Especially, it may be more difficult for domestic developers who are inexperienced and have a poor borrowing track record. However, I think there will continue to be enough credit to support the developers.

The tightening also helps make the market become healthier because credit institutions and banks should be forced to be very careful and stay out of trouble.

If we look at the global financial crisis we can see that actions from banks can kill the economy. Many bankers were arrested for giving loans to developers with poor track records, and have to burden bad debts.

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