Banks for strict control of credit for real estate

(12/05/2022) - Several banks claim successful management of cash flow in risk areas, particularly in real estate, while companies dealing in real estate continue to depend heavily on banks for credit source.

Companies need capital, banks need profit

As set forth by the State Bank of Vietnam in 2020, the real estate risk index was raised from 150% to 200%, short-term loans were fewer for medium and long-term, and large-loan risk indices were also increased. Yet figures show that real estate companies still rely heavily on bank loans despite stricter measures in place. Recently, the Ministry of Construction released information about the housing and real estate market for the first quarter of 2022, mentioning the provision of credit loans for real estate enterprises. Based on the figures given by the State Bank of Vietnam, the Ministry of Construction said that credit debts in real estate activities by the end of March 2022 had reached VND 783,942 bn.

In 2020, 71 corporate bonds were issued, and in 2021, real estate companies issued VND 214,440 worth of corporate bonds, making up 36% of all the corporate bonds in the market, and increasing threefold from 2020. In the first quarter of 2022, the real estate sector continued to take the lead in terms of issued value, worth a total of VND 17,211 bn, making up 43.36% of the corporate bonds market. Corporate Bonds of a one-to-three-year term accounted for the highest figure and worth VND 10,004 bn. Real estate companies all seek credit loans, so they must raise funds from the corporate bonds market, and banks provide the most support for real estate companies in this sector. Figures show that up to 60% of corporate bond purchasers are banks and securities companies. Reports on issued corporate bonds also indicate that most of the corporate bond buyers are banks.

Real estate companies always attract banks, and it is obvious that real estate companies need cash and banks need high profit to report to shareholders. Banks use profits to increase charter capital and meet the capital safety criteria. By comparison, real estate companies are better at bearing interest than businesses in other economic sectors. Although real estate companies are in the higher risk sector and bear higher interest rates than companies in the business and production sector, real estate companies are often ready to take bigger loans. In the corporate bonds channel, rate of interest on corporate bonds in the real estate sector was between 8% and 13% per year in 2021, and only a few companies issued corporate bands at interest rates of 5% to 6% per year. In the same period, banks issued corporate bonds at interest rates of 2.4% to 6% per year. This is the reason why the supply can meet the demand.

Stricter regulations

The State Bank of Vietnam has issued several regulations recently, indicating that the central bank wants to tighten its grip on real estate credit loans, especially real estate investment, speculation, and trading activities. Several banks have recently taken stronger action. For instance, the Saigon Thuong Tin Commercial Joint Stock Bank (Sacombank) has asked its directors of regions, branches, and transaction offices, to not provide credit loans for the real estate sector, except for government officers, workers and people who take loans to buy, build or repair houses. At the Orient Commercial Joint Stock Bank (OCB) by late 2021, loans for the real estate sector made up 32% of the debts, of which 72% of loans were taken for buying houses and 9% for other projects. The leaders of several banks say that they will reduce real estate loans to below 8% for real estate trading activities. Several banks are tightening their grip by raising interest rates, and introducing stricter regulations on asset assessment and capital expense purposes.

One may wonder if a tighter grip on real estate credit loans would be effective as expected by government officials. This is a real concern. In general, the State Bank of Vietnam statistics shows that lending growth in the real estate sector decreased from over 26% in 2018 to about 12% in 2020 and 2021, and real estate credit loans made up 18% to 20% of the total debt in the economy. Statistics show such information while credit loans are still on an increase at several banks, making up a large amount of the total debt. Such loans are in the form of consumer loans or loans given to household businesses. Therefore, the total debts in connection with real estate activities could be much larger than the officially reported figures.

Banks said they would tighten the grip on credit loans for real estate trading activities and real estate companies would be in trouble, but reality has shown that stricter rules are still evadible. The State Bank of Vietnam follows a policy of a tight grip on bank credit loans so that cash would flow into production activities and other preferred areas for the purpose of a speedy recovery of the economy. Credit loans for real estate trading activities have been strictly controlled and will be even more strictly controlled in future. However, large amounts of loans are still provided for ordinary people to buy or build houses for themselves, and restrictions on loans are imposed solely to prevent speculation.

Therefore, instead of pumping cash into companies, banks will pump money into the market through individual channels. Banks will work with companies to provide loans for people to buy properties at such companies. The Ministry of Construction has also suggested a way to successfully manage loans to prevent double risks when loans for production and consumer purposes are used in the form of real estate speculation. This is to say that companies take loans for production purposes but put the cash in real estate trading activities, which used to be common practice.

Dr. Le Xuan Nghia, Director of the Business Development Institute, once mentioned a situation when loans from banks flowed into their own real estate affiliates. During the meeting season this year, bank shareholders said that groups of major shareholders or members from real estate corporations held all the key positions on the Board of Management at the banks. Dr. Nguyen Tri Hieu, a bank financial expert, believes that it is vital to stay highly alert to risks relating to this kind of relationship, because it is possible that funds raised at banks will be poured into business activities closely related to bank owners, instead of being used for production activities for the growth of the economy. When banks push credit loans into their affiliates, they generally provide favors and do not impose strict rules. They also often ignore risk management criteria with respect to assets and cash flow.

Đỗ Linh