Banks for strict control of mortgage loans | Business
Although companies need capital and banks want to see their profits increase, the State Bank of Vietnam is now focusing on introducing stricter measures to control lending to real estate companies.
Companies need capital, banks need profits
As reported by the State Bank of Vietnam in 2020, the real estate risk index increased from 150% to 200%, short-term loans were less for medium and long term, and the risk indices for large loans also increased. Yet the figures show that property companies are still heavily dependent on bank loans despite the stricter measures in place. Recently, the Ministry of Construction published information on the housing and real estate market for the first quarter of 2022, mentioning the granting of loans to real estate enterprises. Based on figures given by the State Bank of Vietnam, the Ministry of Construction said that credit debts in real estate activities at the end of March 2022 had reached VND 783.942 billion.
In 2020, 71 corporate bonds were issued and in 2021, real estate companies issued 214,440 VND worth of corporate bonds, which represents 36% of all corporate bonds in the market and tripled to from 2020. In the first quarter of 2022, the real estate sector continued to take the lead in terms of value issued, with a total of 17.211 trillion dong, or 43.36% of the corporate bond market. Corporate bonds with terms of one to three years were the highest figure and were worth VND 10.004 billion. Real estate companies are all looking for loans on credit, so they need to raise funds from the corporate bond market, and banks provide the most support for real estate companies in this sector. Figures show that up to 60% of corporate bond buyers are banks and securities firms. Reports on corporate bonds issued also indicate that most buyers of corporate bonds are banks.
Real estate companies always attract banks, and it is obvious that real estate companies need cash and banks need high profits to be accountable to shareholders. Banks use profits to increase share capital and meet capital security criteria. In comparison, real estate companies bear better interest than companies in other economic sectors. Although real estate companies are in the high-risk sector and bear higher interest rates than companies in the business and production sector, real estate companies are often willing to take on larger loans. In the corporate bond channel, the interest rate on corporate bonds in the real estate sector was between 8% and 13% per annum in 2021, and only a few companies issued corporate bands at interest rate of 5% to 6% per annum. During the same period, banks issued corporate bonds at interest rates of 2.4% to 6% per annum. This is why supply can meet demand.
The State Bank of Vietnam recently issued several regulations, indicating that the central bank wants to tighten its grip on property lending, especially property investment, speculation and trading activities. Several banks have recently taken stronger action. For example, the Saigon Thuong Tin Commercial Joint Stock Bank (Sacombank) has instructed its directors of regions, branches and transaction offices not to provide loans to the real estate sector, except for civil servants, workers and people who take out loans to buy, build or repair houses. At the Orient Commercial Joint Stock Bank (OCB) at the end of 2021, loans to the real estate sector accounted for 32% of debt, of which 72% of loans were taken out for the purchase of houses and 9% for other projects. The leaders of several banks say they will reduce home loans below 8% for real estate trading activities. Several banks are tightening their grip by raising interest rates and introducing stricter regulations on asset valuation and capital spending.
One wonders whether a tighter grip on mortgages would be effective as expected by government officials. It is a real concern. In general, statistics from the State Bank of Vietnam show that the growth of loans in the real estate sector fell from over 26% in 2018 to around 12% in 2020 and 2021, and real estate loans accounted for 18% in 20 % of total debt. in the economy. Statistics show such information while credit lending is still increasing in several banks, accounting for a large portion of total debt. These loans take the form of consumer loans or loans granted to family businesses. Therefore, the total debts related to real estate activities could be much higher than the officially reported figures.
Banks have said they will tighten their grip on credit lending for real estate trading activities and real estate companies will be in trouble, but reality has shown that tighter rules are always avoidable. The State Bank of Vietnam follows a policy of strict control of bank lending so that cash flows to production activities and other favored areas for the purpose of a rapid recovery of the economy. Loans to real estate trading activities have been strictly controlled and will be even more so in the future. However, large amounts of loans are still given to ordinary people to buy or build houses for themselves, and restrictions on loans are imposed only to prevent speculation.
Therefore, instead of injecting money into businesses, banks will inject money into the market through individual channels. Banks will work with businesses to provide loans to people wishing to purchase properties in those businesses. The Ministry of Construction has also suggested a way to manage loans successfully to avoid double risk when loans for production and consumption purposes are used in the form of property speculation. That is, companies take out loans for production purposes but put the money into real estate trading activities, which used to be common practice.
Dr. Le Xuan Nghia, director of the Institute for Enterprise Development, once mentioned a situation where loans from banks were flowing to their own real estate subsidiaries. During this year’s meeting season, bank shareholders said large shareholder groups or members of real estate companies all held key positions on the banks’ board of directors. Banking finance expert Dr. Nguyen Tri Hieu believes that it is essential to remain very alert to the risks associated with this type of relationship, as it is possible that the funds raised from banks will be invested in commercial activities closely related to the owners. of banks, instead of being used for productive activities for the growth of the economy. When banks provide loans to their affiliates, they usually give favors and do not impose strict rules. They also often ignore asset and cash flow risk management criteria.