A series of new points in the bank’s operational standards were sketched by a management agency in a new draft published at the beginning of this second quarter, which is expected to replace Circular 36 and Circular 41 that once attracted attention.
Like previous regulations, one of the problems that management agencies focus on is forcing banks to have good risk provisions, but this time is higher than the previous period.
Specifically, the ratio of short-term capital for medium and long-term loans is expected to continuously decline to 30 percent, while the specific effective time for 2020 or 2021 is still open. The previous circular stipulates this rate to be 45 percent in 2018 and must be reduced to 40 percent from the beginning of 2019.
This ratio reflects the use of short-term capital to lend to medium and long-term projects in banks, causing many credit institutions to suffer headaches in the past. According to the State Bank of Vietnam (SBV), in the past, many credit institutions have not managed well the mobilised capital and usage. Credit growth is high while the capital to carry out is not enough, or at risk of maturity (taking short-term capital to mobilise long-term loans too much). In the absence of capital, credit institutions also directly affect the market such as borrowing from residential, business and banking markets with higher interest rates.
According to SSI Securities, by the end of 2018, the ratio of short-term capital for medium and long-term loans of commercial banks is 30.7 percent (banks with state ownership), 32.67 percent (private banking sector) and higher at some banks. On the other hand, the draft also adjusts the risk factor for loans.
Specifically, the risk factor with mortgage loans having outstanding of more than 1.5 billion dong will be raised from the beginning of 2020. With unsecured consumer loans, the risk factor can be up to 150 percent, such as loans for individuals buying houses, buying land with outstanding of over 3 billion dong. Risk factor is one of the factors that banks have to consider when lending because it directly affects the interest rate or the possibility of losing capital.
By adding more rigorous and new regulations, the management agency expects that the financial system will continue to be stable in the long term. However, the immediate implications, such as many experts and insiders are concerned, is that the credit line is tightened in the next period, the maximum ratio of capital short-term medium and long-term loans of about five percent each year will not significantly affect banks.
According to Dr Nguyen Tri Hieu, increasing the risk factor will limit credit activities for banks, while the borrowing costs of customers increase. Many banks have not estimated and assessed the impact of this new draft, but all concern that they must mobilise more capital from the market. This is even more difficult in the context that banks are racing to raise Tier 1 capital to meet Basel II standards applied in the near future.
According to SSI, the cost of capital of banks will increase, especially banks with the ratio of short-term capital for medium and long-term loans reaching 35-37 percent in mid-2020. “To maintain the similar lending structure, banks will have to increase the amount of medium and long-term deposits, which have higher costs than short-term and non-term deposits,” SSI reports.
Therefore, many experts believe that interest rates in the near future will continue to be maintained at a high level compared to 2018 (currently at seven to eight percent). Of course, the specific impact on each bank depends on many factors. There are some banks that have the advantage of cheap capital mobilisation but the others will have to struggle because the ratio of short-term capital for medium and long-term loans is high, forcing to mobilise more, or credit must be reduced, meaning growth is reduced.
Nghiem Xuan Thanh, Chair of Board of Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank), said: “The common interest rate level may be reduced or not but in priority areas, it may be reduced. For example, in five priority areas, Vietcombank only lends six percent per year because there are other sources to compensate”. Vietcombank announced the profit target of 2019 is 20.5 trillion dong, up 12 percent compared to the previous year. To further reduce interest rates for some business entities, Vietcombank reduced its profit target.
Although it is only a draft, it can be seen that the management mind set of SBV in the past few years is very clear: restricting credit with potentially risky areas such as securities, real estate or good consumer credit. Therefore, many experts re-evaluate the draft of new circulars as necessary for the market today, especially in the context of many provinces and cities have begun to appear land fever.
As HCM City Real Estate Association said, the implementation of the roadmap to limit credit in the real estate sector has caused immediate pressure on businesses, but it is healthy pressure, forcing the real estate project investors to seek other capital sources to gradually replace part of credit capital.
