Vietnam should not be too worried over real estate loans
07-OCT-2008 Intellasia | 03/Oct/2008 Thoi Bao Kinh Te Vietnam
Oct 7, 2008 - 7:00:00 AM
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Total real-estate-mortgaged loans are now relatively large, accounting for some 55% of total outstanding loans; however, their risks remain controllable, according to Le Xuan Nghia, director of the central bank's Banking Strategy Department. He had a talk with newspapers about real estate lending activities of banks at present. Excerpts:
Could you please let us know the real situation of real estate lending activities of banks at present?
Currently, total direct loans to real estate are some 115 trillion dong, making up 9.5% of total outstanding loans of commercial banks. Such a figure is not too large. However, what is important is that banks all have strict lending requirements. Thus, secondary risks for real estate loans are not high. Nevertheless, countries with a market economy believe that real estate is the foundation of the financial system and the economy because when real estate is capitalised or real estate loans are securitised, real estate will account for a very large ratio among total assets of commercial banks. As for Vietnam, as far as I know, the real estate lending ratio of banks is some 500 trillion dong, accounting for about 55% of total outstanding loans.
However, what is notable is that real estate in Vietnam sees dissimilar decrease in prices. Price of small real estate in the inner city reduces by only 20% while prices of big projects in suburb may climb by up by 35% -40%. Therefore, current difficulties of the real estate market are attributed to those big projects but not real-estate-mortgaged consumer loans of residents and businesses because prices of those mortgages do not reduce much and real estate demand remains high. According to real estate investors, the current difficulties are not attributed to the reduction of real estate prices but are attributed to commercial banks' stopping real estate loans. Particularly, investors said that while the State Bank of Vietnam is employing monetary tightening policy in order to rein in inflation, the central bank should also restructure the real estate market, selecting projects that have the best completion levels, which will be good for both banks and investors.
In my opinion, in order to have stable economic growth, the real estate market must have high liquidity, which means that the large transactions and procedures must be clear, transparent and simple and avoid heavy reliance on decisions of local authorities. If the market collapses, the financial system will surely meet various difficulties. Only two thirds of total direct loans will become non-performing loans and will significantly affect the state budget as well as intervening capacity of the central bank. However, according to the State Bank of Vietnam, real estate lending will remain a normal activity of the banking system and the government will not prevent it.
Why do banks stop real estate loans?
It is true that the government as well as the central bank do not have any official documents banning commercial banks on offering real estate loans. However, commercial banks have their own measures when real estate prices fall. One of the simplest measures is stopping offering real estate loans. Some commercial banks issue their own resolutions on stopping real estate and consumer loans. This is a restriction of banks because while the central bank has not yet changed the basic interest rate of 14% (the ceiling lending interest rate is 21%), real estate and consumer loans with the lending limit will be able to compensate for corporate loans. This also presents more difficulties for businesses while banks will loose opportunities to restructure interest rates on a risk basis. Real estate credit risks are not high.
With such high real estate mortgaged lending ratio, whether is this risky?
Currently, in the world, real estate-mortgaged loans are key loans. If in Vietnam, real estate loans account for 55%, in the US and many other countries this figure is 70%. Therefore, this ratio of Vietnam should not be too worrying. The collapse of the US's banking system is attributed to that country's own special features. Up to 67% of the people in US are involved in real estate trading; hence, the US's real estate market is closely linked to the finance system and residential life. Therefore, when the real estate market falls into crisis, it significantly affects investment banks. This is an error in speeding up capitalisation and securitisation for the real estate market while the supervising system fails to catch up with it. Vietnam does not have securitisation of real estate loans. Thus, there are no impacts of the real estate market on investments and commercial banks. It can be said that real estate credit risks in Vietnam are not high and can be controlled. Therefore, we should not be too worried over real estate credit.
Nevertheless, in some countries, commercial banks are not allowed to offer direct real estate loans but only real estate mortgaged loans. While Vietnam permits commercial banks to offer direct real estate loans. Therefore, banks may meet risks from these direct loans when real estate prices fall. Additionally, unlike in other countries, the accounting standard system in Vietnam fails to reappraise value of mortgaged assets, real estate on a monthly basis. Thus, we cannot well understand non-performing loans of the real estate market for supervising. However, unlike the US where banks offer mortgaged loans valued as much as real estate prices, Vietnam allows banks to offer loans worth only one third or a half of real estate prices in the market.
How do you see real estate credit at banks in the future?
As far as I know, many commercial banks are reconsidering their real estate lending policies by restructuring loans. For good projects, banks may offer more loans. According to experts, in the future, foreign direct investment and exports may come down. However, there may be an investment wave into the Asian markets including Vietnam.
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