Tightening Real Estate Loans

2:17:04 PM | 4/8/2019

Commercial banks can only use at most 40% of short-term deposits for medium and long-term loans, including real estate. This is forecast to cause a considerable impact on real estate businesses. Seeking ways to reduce dependence on bank loans is currently a hot topic of discussion among economists.

According to regulations in real estate development, the project investor must have at least 15-20% of investment value and rest may be raised through bank credit or from customers. From 2018, commercial banks could use only 45% of short-term deposits for medium and long-term loans, including real estate. This limit was lowered to 40% from January 1, 2019, under Circular 16 of the State Bank of Vietnam (SBV). Property loans accounted for 7.5% of the total credit balance.

In early 2019, many banks reduced lending rates for priority areas such as agricultural and rural development, exporting and small and medium-sized enterprises (SMEs). Real estate did not belong to priority areas. Hence, real estate credit tightening has affected many businesses and markets and hardships may continue in the coming time.

Mr. Le Hoang Chau, Chairman of the Ho Chi Minh City Real Estate Association (HoREA), said, “What is tough for property companies is that collateral is valued lower. Although the risk factor is kept at 200%, banks have reduced their lending value. For example, a property worth of VND100 billion earlier is now valued for 60% or VND60 billion. Then, they lend 60% of the asset of VND60 billion or VND36 billion. Currently, collateral is valued at just 50% of the original value and the lending value is equal to about 50% of the collateral assets. That is to say we can borrow VND25 billion if we have a property of VND100 billion placed as security.”

This year, credit growth limit is set at 14%. Thus, credits for the economy and the real estate industry will be squeezed.

Dr. Nguyen Tri Hieu, a finance and banking expert, said, as deposits in the banking sector are mainly classified short-term, a high share of medium and long-term loans will lead to liquidity risk. As a result, capital shortage will be hard to avoid, not only for property loans but also for home loans.

He added, as home loans are mainly medium- and long-term, usually 5-15 years or even 20 years. Therefore, when the upper limit is lowered, lenders are forced to mobilize longer-term deposits to restructure their capital base. In fact, on fears of risks, depositors mainly want to place money at banks in a short term. To attract long-term deposits, interest rates must increase, which give rise to lending rate hikes.

Finding ways to gradually reduce dependence on bank loans is a topic of discussion among many economic experts. For example, real estate businesses can raise funds by issuing bonds and shares and joining hands with foreign investors. HoREA recommended enterprises even consider issuing bonds to get funds.

However, according to Dr. Dinh The Hien, a banking - real estate specialist, raising funds by issuing shares and bonds or cooperating with foreign partners in project development is a hard job, because share issuance is only for listed companies while many property developers are unlisted. Vietnam is yet to have a bond market that is operated as a stock exchange. Companies will find it difficult to issue bonds if they do not have a close relationship with banks. Besides, listed companies will have better chance of success of bond issuance.

Cooperation with foreign countries is not easy either because they must have available projects, land and good financial health. In fact, many capital-seeking companies have not legally established their projects or finished accumulating land for their projects. Worse still, they even lose their right to decide their projects after cooperating with external partners.
Hence, they should have active solutions and plans. If their good products bump into overdue debts, they must quickly work with banks to settle such debts and find an optimal solution. Companies also need to learn how to tighten their funds with the support of banks, work out detailed spending and collection plans and quickly complete their projects.

Quỳnh Chi