Real Estate Debts to Be Tightened Further

The nearer the end of the year comes, the more anxious commercial banks get with the task of decreasing the rate of non-productive loans from 22 percent to 16 percent under the direction of State Bank of Vietnam (SBV). Only one and a half months remain for this difficult task.

 

One of the seven solutions that SBV has adopted to manage the financial market for the last months of the year is controlling loans for non-productive sectors, according to Directive 01/CT-NHNN.

 

The real estate market has been facing discount turbulence. Even the most optimistic forecasts do not project a recovery in the near future and a series of projects are going to be sold off. In the North, numerous defaults from hundreds to thousands of billions of VND were related to real estate. Meanwhile, in order to control risks, banks continue to tighten their capital flows, making the market more and more gloomy, the results of which return to banks: it is not easy to get back loans.

 

The SBV has required banks to report all loans related to real estate such as corporate bonds. According to new regulations, from 20October 2011, corporate bonds must be included in the loan balance. Many experts predict that the new regulations will make real estate loans of many banks increase sharply, while the deadline of keeping non-productive loans at the level of 16 percent must be met in just over a month.

 

For months several banks have stopped giving loans for real estate, concentrating on collecting debts to meet the requirements of management authorities. However, real estate or consumption loans often have long terms of maturity, so debt recovery negotiation is not easy. But the most worrying thing is that many enterprises are under having difficulties selling their products, a whole series of projects are behind schedule and enterprises cannot find capital to pay off debts for banks.

 

Figures of a unit of the SBV show examples of enterprises who are under an enormous debt pressure and are finding it hard to pay those off. Above all, banks know about this fact. Therefore, besides urging usual debt recoveries, banks must take into account the option of selling collateral to recover capital and interest.

 

Although the bollard of 16 percent has already visible before eyes, real estate prices have not yet shown any rise. If the worst thing happens, banks will have to access enterprises’ collateral to recover debts, which will not only make the real estate market sink deeper, but also sharply increase bad loans of banks.

 

Withdrawing part of capital from non-productive loans, especially loans for real estate to avoid system risks is a wise policy of the SBV, which has always shown determination and closely monitored commercial banks in implementing this policy. Real estate loans hold many risks in the system, therefore SBV’s management are resolved to strictly implement the government’s Directive 01 and Resolution 11.

 

At the deadline of June 30^th there was a bank which did not manage to keep non-productive loans at the level of under 22 percent of total loans and was not penalized by the SBV. Therefore some question, on December 31^st 2011, will the SBV strictly penalize banks who cannot keep non-productive loans at the level of 16 percent?

 

Some banks currently have a high non-productive loans rate. The only bank who did not manage to fulfil the requirements to June 30^th was VPBank. To June 31^st 2011, its loans reached VND 26,036 billion, but non-productive loans were VND 7,592 billion, accounting for 28.2 percent; to August 31^st, VPBank lowered this rate to 20.4 percent. To August 31^st, total loans of Vietnam International Bank (VIB) were VND 44,377 billion, but non-productive loans reached over VND 11,206 billion, accounting for 25.25 percent.

 

In large banks, although the proportion of non-productive loans was controlled at under 22 percent as of June 30^th, the absolute number of real estate loans was huge, showing a big worry when real estate bubbles were deflated.

 

It must be acknowledged that banks have strongly withdrawn capital from the real estate market, according to Bank Governor Nguyen Van Binh, after the implementation of Resolution 11 to date, the real estate loans rate has decreased from 15-16 percent. Strong capital withdraw is also a cause of the decreasing market, many enterprises do not have access to loans to complete their projects, having no ability to wait for the market to get better. From now to the end of the year, banks will recover debts even more heavily, bringing much more difficulties to the market.

 

Bad signals from the real estate market will not only “murder” enterprises, but also circle back to banks. Not only real estate loans, but also most bank loans are secured by real estate. It will be very difficult for banks to recover debts, with or without the will, they have to seize the collateral of bad loans and increasing bad loans. Meanwhile, banks are facing the task of restructuring and maintaining system stability. Managing policies in this period, more than ever, is a difficult task.