Real estate credit risk becomes dispersed

26-Feb-2020 Intellasia | BizLIVE | 6:02 AM Print This Post

Real estate credit risk these days has become increasingly different, with new variants.

Recently, the event of Novaland Real Estate Investment Group (Novaland) sent a petition to the minister of Construction to attract attention in the market.

Regarding banking activities, the information in the appeal application has given specific details: the current difficulties and obstacles can cause a bad debt of nearly 50 trillion dong for the banking system.

Immediately, some analyses focused on Novaland’s financial statements. But, calculating all types, their outstanding loan by the end of 2019 was only nearly 35 trillion dong, unable to find the figure of nearly 50 trillion dong.

On the other hand, it can be understood that the scale mentioned by Novaland includes customers’ bank loans to buy their projects. The project is in trouble, the borrower who buys the project also has difficulty. “Nearly 250,000 protesting customers asked to return the houses and the money” was a noticeable point in the petition.

The above situation can be considered as a typical for real estate credit risk variation today, compared to the previous.

Many years ago, the banks focused on lending to investors. Credit risk was concentrated, collectively referred to as real estate credit. Part of it was also related to the mechanism: the previous interest rate ceiling stifled consumer credit.

After the ceiling interest rate mechanism was removed, the basic interest rate was silently disappeared, consumer credit in Vietnam entered the boom period so far, including the majority of real estate consumption credit.

Real estate credit which was previously mainly concentrated to investors now has a new variation: one is credit for real estate business activities; and second is credit for real estate consumption (individuals who buy or repair houses).

Firstly, the loans were offered mainly to the investors previously, credit risk was concentrated to the investors. The investors face difficulties or the capital is used for inappropriate purposes, the project is pushed into troubles.

However, these days, the structure has been shifted more to real estate consumer credit, the risk is dispersed into many individual small loans.

In addition to dispersing risks, loans of real estate consumers are also more actively managed by the banks on cash flow, in line with the progress of the project.

In particular, if the investors have a major revenue source from the project to repay the debt, individual loans have a more diversified cash flow. When the project is at risk, the investors may freeze the cash flow, but the borrowers still have the cash flow to repay debts from salaries and other incomes, even they can handle other assets and find other sources more flexible to repay debts.

Accordingly, the current real estate credit risk has shifted more to personal consumption credit which is safer than the previous loan structure focusing on real estate developers.

In fact, the current risk management mechanism of the banking system is also clearly defined. Real estate credit variants in consumer credit have a much lower level of risk.

Specifically, the investors, or the real estate businesses have a credit risk factor of 150 percent (some period up to 200%, even in a given situation, up to 250%), while an individual borrowing real estate consumption has credit risk factor of only 50 percent (the State Bank of Vietnam SBV recently sets the direction to increase the levels according to the size of outstanding loans).

Thus, the level of real estate lending risk in the current banking system has been different, dispersed and reduced according to the aforementioned new variation, with consumer credit accounting for the majority.

Elsewhere, if capital demand was primarily focused on bank credit, there were new variations in the last two years: real estate businesses have opened up and created a continuous increase in balance of corporate bond channel.

This new variant has a growth rate that the Ministry of Finance has recently assessed as being hot, as well as calculating tightening mechanism.

Before the Ministry of Finance completes the new mechanism and tightens it, in 2019 and early 2020 real estate business bonds have been strongly campaigning. But here, if there is exposure, it is not directly related to the banking system in terms of credit and bad debt as before.


Category: Finance, Vietnam

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