Behind Banks’ Stimulus Package in Real Estate Market

The story can be simple if we think that real estate market is in a dire state, and that it is totally understandable when investors “shake hands” with banks to boost demand and attract more customers, with a view to helping increase liquidity for the market. Of course, the vulnerable in this strategy are businesses and investors when they have to shoulder customers’ loan contracts with favourable interest from banks.

However, if we study closely the history of these deals between banks and investors when real estate was in its peak and banks poured hundreds and thousands of billions of VND into projects, the story behind the stimulus package for the real estate market is more than first meets the eye.

Because of tremendous pressure?
After the State Bank of Vietnam decided to scrap the credit limit for the real estate sector in the early April 2012, many big commercial banks seemed to grasp the idea of relentlessly lending money to help people buy houses in real estate projects.

This move is highly appreciated by the public and especially real estate investors because the stimulus is like a precious source of oxygen which helps free the market from the capital thirst among both investors and customers for a long period of time.

However, regarding professionalism and appropriate conduct in the credit market, a flood of bank loan contracts to help buy houses can potentially violate conventions in the credit business. This is because housing loan packages advertised to have a 5-year, 10-year or even 20-year maturity are mainly short-term capital, of which only 30 percent at most can be used to lend in the medium and long term.

Dr Nguyen Tri Hieu, a financial expert, commented that he was opposing and very frustrated by the fact that banks in Vietnam use their short term capital to lend in the long term to help buy houses and invest in projects, while Vietnam has no credit insurance agency similar to that in the US and many other countries.

“Although relaxing credit tightening measures for the real estate market in some projects is according to Government guidelines, banks’ cash flow is short term in and of itself. So the more banks get involved in the real estate business, the harder it will be for them.”

 

If we pay close attention, we will notice that state-owned banks are the most relentless lenders of housing loan contracts with favourable interest. According to experts, this move can serve many purposes, the most notable of which is to improve credit growth.

This is because even for a big bank such as Vietinbank, in the first six months, credit growth decreases by 3.1 per cent, and everybody understands that 80 to 90 per cent of banks’ profits depend on credit growth.

Some people claim that the chief cause being businesses’ demand for capital is too low due to huge inventories and unfavourable loan contracts during the financial crisis, while demand for consumer credit (housing demand) is increasing when real estate prices have been dampened over a long period of time. Some people even hypothesize that this is a clever trick by banks to circumvent the law, because interest from loan contracts to consumers (home purchasing) is always much higher than that to businesses.

However, digging a little deeper we will find out that the real motive behind the relentless housing loan contracts is the willingness of both banks and investors to set free tens and hundreds of thousands of unsold apartments. This is possibly killing two birds with one stone, not to exclude the possibilities of self-help given the bad debt and buried investment money in projects with which banks have to deal.

Dr Nguyen Thi Mui of Vietinbank admitted that in the current dire situation in the real estate market, if banks do not carefully reconsider and filter out projects which are unworthy of additional capital injection, banks will “drown” with businesses and their projects.

The abovementioned experts’ opinions are not without merit, because going back in time, it is not too difficult to understand that the real owners of numerous real estate projects are commercial banks, big or small.
For example, the recent announcement by Viecombank to initiate housing loan contracts in a project of Ba Ria-Vung Tau House Development JSC (Hodeco) is not as simple as a “handshake” to boost demand in the real estate market. More than three years ago, together with Vietinbank, Vietcombank signed a contract to pour VND500 billion into Go Sao project, representing one third of total invested capital of the project. But, unfortunately for them, the real estate market has since entered a free fall.

Comparable to Vietinbank’s case is the multi-storey-apartment project at 102 Truong Chinh (Hanoi). This project is among the 31 projects that Vietinbank has just initiated housing loan contracts with favourable interest. More than a year ago, one of the branches of this bank lent a significant sum to Vietnam Mechanisation Electrification & Construction JSC (Meco) (VND310 billion, representing 30 per cent of total invested capital) in order to kick start the project. The possibility of return of future interest and principal payment are only known to Vietinbank and Meco.

And out of 31 real estate projects with which Vietinbank decided to cooperate on July 21, besides projects enjoying a favourable interest of 12 per cent a year in the “VND5,000 billion to build a dream house” program, many other projects are admittedly marked as “associated with Vietinbank”.

Offering his opinion on the relaxation of housing credit of banks, Dr Cao Sy Kiem, former Governor of the State Bank of Vietnam, said that the approach to increase housing loan contracts is appropriate for some real estate projects, but it must be directed to the right beneficiary, meaning that it must be directed towards people with real demand, low-income people.

However, according to him, it is dangerous if the housing loan contracts are connected with the past banks’ loan or invested capital in projects. Governing bodies need to find ways to prohibit such contracts.

 

According to Dr Nguyen Tri Hieu, assuming that banks’ invested capital is stuck in the projects, “shaking hands” with investors only makes the matter worse. In order to alleviate the problem, banks need to initiate short-term loans to quickly turn over the capital.

“Banks all over the world need to use new capital to save old capital, but this is dangerous. Therefore, an increase in banks’ housing loan contracts just to retrieve the previous invested capital is rather risky,” Mr Hieu said.

Also according to him, some big banks are under pressure to boost their businesses and credit growth in the face of surplus capital. Thus, they have to find ways to handle this issue.

This expert also warned that the fundamental aim of real estate lending with both businesses and individuals is to get the money back in the end. If, unfortunately, the economy continues to face problems, with businesses shutting down, getting the money back will be very difficult and greatly increase risks for banks.