Central bank responds to concerns about draft amendments to Circular No. 36 on real estate credit.
The State Bank of Vietnam (SBV) has said that the amended Circular No. 36 will not have any significant effect on the country’s real estate market but may be of concern to speculators and investors with poor financial positions.
Last month it published the draft amendments to gather public opinions, which are aimed at reducing the use of short-term funds and promoting medium- and long-term loans by financial institutions and foreign bank branches in Vietnam.
The main elements of the amended circular attempt to curb the risk of a real estate bubble reappearing and the possibility of certain companies and individuals overextending themselves.
In an official response to the public opinions dated March 8 the SBV said the question is how investors and traders can adapt to safety standards and loan conditions. It also said that the amended circular would affect weak financial speculators and investors - the two entities that may create a bubble.
The draft amendments drew attention from many who view it as having a significant effect on the financial sector and the ongoing recovery of the real estate market.
According to the draft amendments, banks and foreign bank branches should reduce the proportion of short-term funding from 60 to 40 per cent and from 200 to 80 per cent at non-bank financial institutions.
It also requires an increase in risk ratios for receivables from real estate activities from 150 to 250 per cent.
Since 2015, the central bank said, the real estate market has been in a period of recovery with the help of various support measures, including the VND30 trillion ($1.34 billion) housing credit support package and the reduction of the ratio of short-term loans to medium- and long- term loans from 250 to 150 per cent, thus allowing banks to extend medium- and long-term credit.
As at the end of 2015 outstanding loans for real estate trading and investment activities stood at VND393 trillion ($17.62 billion), an increase of 26 per cent against 2014. Together with company bonds for the real estate market, total outstanding credit was VND478 trillion ($21.43 billion), accounting for 10.3 per cent of the country’s outstanding credit and 22.2 per cent of medium- and long-term outstanding credit.
“The real estate market has gained momentum and it’s time to carefully implement a credit policy and tighten management of the market,” the central bank stated.
Moreover, the increase in medium- and long-term outstanding credit will put pressure on interest rates. The International Monetary Fund has warned Vietnam about its outstanding credit for real estate.
As long-term investment is needed for business and production activities, including bank operations, medium- and long-term loans must flow to safer purposes and follow the direction of the country’s socioeconomic development plan.
“We learned a good lesson about granting too much credit to real estate in the 2006-2010 period, which put the banking system, the market, and investors into a risky situation, with many banks facing difficulties, losses, and even bankruptcy,” the SBV noted in its response.
Over the last few years outstanding credit for real estate have has not fallen but increased, by 14 per cent in 2012, 15.4 per cent in 2013, 19.3 per cent in 2014, and 26 per cent in 2015.
The SBV said that as soon as the market recovers more investment from other sources will be needed and banking investment into real estate market should be cut, thus lowering the risk for banks and investors alike.
The increase in the credit risk ratio for real estate activities from 150 to 250 per cent will directly affect the capital adequacy ratio (CAR) of the entire banking system, which should be reduced from 13 per cent in 2015 to 12.1 per cent and even 9 per cent, with financial institutions able to grant VND650 trillion ($29.15 billion).