Governor of the State Bank of Vietnam (SBV) Nguyen Van Binh gave the cold shoulder to the Ministry of Construction’s proposal for the establishment of a construction bank. To learn more about opinions of industry insiders, Vietnam Business Forum has an interview Mr Pham Sy Liem, Vice President of the Vietnam Construction Association and former Deputy Construction Minister. Anh Phuong reports.
Why did the Ministry of Construction want to establish a construction bank?
Financial markets were volatile in 2011 and early 2012 while the real estate market showed no clear signs of recovery after a long time being frozen. Therefore, the Ministry of Construction made positive moves in search of solutions to unfreeze the real estate market, mobilise capital for affordable housing development. Forming a specialised bank at the service of construction industry is a good and practicable idea.
Recently, the Governor of the State Bank explicitly disagreed with the establishment of a construction bank. What is your opinion about this?
The State Bank has given a number of reasons for its opposition to the proposal of the Ministry of Construction. This is not the right time for establishing a bank because the vital banking restructuring is in progress. Besides, Vietnam has many banks mobilising capital and funding construction projects like the Vietnam Development Bank (VDB), the Vietnam Bank for Social Policies (VBSP), the Vietnam Bank of Agriculture and Rural Development (VBARD), and the Asian Development Bank (ADB).
That is the argument from the central bank. But, in my opinion, the formation of a construction bank also has advantages because fundraising and lending are different from industry to industry. Particularly, banks (the lender) must thoroughly understand mechanisms for construction industry. In addition, in real estate investment, land is always used for collateral. Normally, real estate traders usually have only 20 - 30 percent of money for their projects or investment items and the rest is sourced from banks. And their loans are usually of long term (three years onwards). Long-term loans are potentially risky because of possible currency devaluations or economic crisis. Hence, interest rates on such loans are typically very high. Indeed, it is very difficult to do business with a high interest rate. They are forced to borrow short-term or medium-term loans to be subjected lower interest rates. They even have to swap debts (borrow new loans to repay old ones). For that reason, a specialised bank with deep industry knowledge is necessary and reasonable.
Could you tell more about land collateral with the bank?
This is also a construction industry-specific activity. How will banks deal with their collateralised land if borrowers fail to repay the loans? To grant a loan, banks must base on the value of the mortgaged land but this requires a very deep professional knowledge. After determining the land value, banks have to find out a suitable lending value for a given period of time. This is an extremely hard job for banking staffs while it is not for a experienced property specialist. Thus, a construction bank powered by expertise staffs is good for the market.
Do other countries in the world have construction banks?
In the past, Vietnam had a construction bank called (Credit Frocier Land Bank). Later, we also had development banks funding large projects, factories, real estate and infrastructure projects.
Besides, to my knowledge, South Korea and Taiwan are among those that set up land banks to support real estate business. These banks, usually State-owned, lend very large loans. Now, Vietnam has a lot of commercial banks but they lack deep professional knowledge in construction field; thus, to be safe, they often impose exorbitant interest rates. This will push up property prices.
So, if the bank is established, how will it raise money?
In reality, the main task of this bank will contribute to developing and implementing urban planning, especially infrastructure. Hence, the Government needs to get involved in this bank.
In addition, other banks may contribute capital. As other commercial lacks deep knowledge about real estate, they can contribute capital to the construction bank to ensure the safety of their money. The bank can also mobilise capital from businesses and individuals as a normal bank.
Do you think the formation of a construction bank is feasible at present?
In essence, the construction bank does not fund all borrowing applications related to land and housing. It will only finance profitable projects to its view. And, the presence of this bank is also a way to fill the gap to capital sources for enterprises.
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