Real estate credit increased unexpectedly
SBV just sent a report to the National Assembly and National Assembly deputies on the implementation of the National Assembly’s resolutions on interrogation activities, of which the agency said, as of September 30, 2019, the credit increased 9.4 percent compared to the end of 2018. Credit structure continued to have positive adjustments, in which credit focused on production and business, priority areas. Credit for risky areas was strictly controlled; foreign currency credit was controlled in line with the limit of dollarisation in the economy.
However, by August 2019, credit for real estate increased by 14.58 percent compared to the end of 2018 and accounted for 19.14 percent of the total debit balance of the economy. That meant real estate credit still increased at a relatively high rate, even nearly double the overall credit growth. In absolute terms, with the proportion of 19.14 percent, the current debit balance for real estate was about more than 1.5 quadrillion dong.
That was an unexpected result as in recent years, SBV repeatedly reminded credit institutions to focus credit in production and business sectors, especially priority areas according to the government’s policy, and strictly control credit in potentially hazardous areas such as real estate, securities, and so on.
Not only reminded, SBV even issued many technical measures to limit credit flow to real estate. For example, SBV reduced the maximum rate of short-term capital used for medium- and long-term loans to 40 percent from the beginning of 2019 and expectedly further reduced to 30 percent soon. Or the application of a risk factor of up to 200 percent for real estate loans also limits the flow of credit into this sector.
So what caused real estate credit to increase at such a high speed? In the Report to the National Assembly deputies, SBV also revealed a part of the reason when announcing the real estate credit growth, including loans for business and self-use purposes, which can be roughly understood as housing loans.
Separate home loan from consumption
According to SBV’s regulations, real estate credit was bank loans for real estate investment and profitability on that real estate. According to that regulation, banks had allocated loans for house purchase and home repair (not for sale or rent purposes) into consumer credit groups. Calculated according to this classification, the proportion of real estate loans accounted for only seven percent to eight percent of the total debit balance.
However, according to Nguyen Tri Hieua banking and finance expert, if including loans for house purchase and repair, the proportion of real estate loans would not be less than 20 percent of the total debit balance. The real estate lending under the consumer credit was considered as one of the main reasons for the strong growth of consumer credit over the past time and distorting the real estate credit picture, causing management agencies to evaluate the risk level of real estate credit inaccurately.
That was also the reason that by the middle of Q3/2018, the Governor of SBV issued Directive 04/2018/CT-NHNN, including a warning to conduct an unscheduled inspection of credit institutions with growth in real estate, securities, and consumption, accounting for a large proportion of the total debit balance.
However, later, consumer credit would be encouraged to limit shadow banking. Nevertheless, to avoid distorting the consumer credit picture, according to experts, separating home loans from consumer credit and moving to the real estate credit segment was essential.
However, according to Can Van LucChief economist of Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV), if converting all home loans into real estate credit and applying 200 percent risk factor would cause difficulties for banks, pushing up operating costs. Accordingly, interest rate level would increase. When the home loan was separated, it would also be necessary to simultaneously classify real estate loans into different groups to apply various risk factors, Luc proposed.
It seems that SBV was also following this direction when in the Draft Circular replacing Circular 36/2014/TT-NHNN, SBV proposed to apply different risk factors to loans for different life values.
Specifically, individual loans for customers who buy houses with the principal balance under 1.5 billion dong were still subject to a risk factor of 50 percent, while the personal loan for living needs had an original loan balance of 3 billion dong or more and had a risk ratio of 150 percent. The risk coefficient was adjusted to increase control to potentially risky areas, according to SBV.
