Property industry insiders said the State Bank of Vietnam’s decision to tighten credit would mean pain in the short term for developers but help the sector develop sustainably over the long term.

Analysts said the central bank’s moves would significantly cut off credit to high-risk sectors,
especially property.—  Photo vietnambiz.vn

Dr Su Ngoc Khuong, director of Savills Vietnam, said while the central bank has tightened credit to the property sector, developers who have good projects would still be able to raise money from banks, home buyers and partners.

“Limiting loans to the real estate sector will not create difficulties even for new developers if they can develop their projects professionally.”

The central bank replaced a previous circular on operational safety ratios for the banking sector with Circular No 22, which came into effect on January 1 this year and focuses on two issues that tighten bank credit to the property sector.

They are a reduction of the ratio of short-term funds that can be used for medium- and long-term loans from the current 40 per cent to 30 per cent by September 2022 in four phases, and an increase in the risk ratios of mortgages from the current 50 per cent to 150 per cent and loans for commercial real estate from 150 per cent to 200 per cent.

Analysts said the central bank’s moves would significantly cut off credit to high-risk sectors, especially property.

But surprisingly, though the credit tightening would bring new challenges for property developers, many of them are supportive of the policy.

Ngo Duc Son, general director of DRH Holdings, said his company has been using leverage a lot in recent years, mobilising funds from customers and commercial banks to develop projects.

Using high financial leverage ratio was the only resort left to the company because cost of capital that the borrowers like his company are paying for was very high, averaging between 12 and 14 per cent per year, he said.  

Leverage refers to the ratio of debt to equity. An excessive amount of financial leverage increases the risk of failure, implying the borrowers facing more difficulties to repay the debt.

Also known as gearing, high leverage ratios have hit property developers’ competitiveness and pose risks to banks that lend to them.

Son said thus when banks tighten lending to the property sector, both sides would benefit from a reduction in risk.

The property market would adjust to the new situation and develop more sustainably, he assured.

Many property enterprises have made plans to ensure funding for future projects.

DRH Holdings plans to reduce the pace of development, Son said.

An executive at a company developing a real estate project in HCM City’s District 9 said in the past, his company used to develop at least five projects simultaneously, but plans to reduce that to two.

Nguyen Hoang of DKBA Vietnam said in the immediate aftermath of the central bank tightening credit, many developers found it difficult to raise funds. But many have since started diversifying their funding sources and no longer rely too much on bank loans, he said.

Many have opted to issue bonds, he said.

He stressed the need for the Government to create a credit rating system to assess bond issuances by property firms to ensure transparency and safety.

Economist Can Van Luc said the central bank wants money to flow into housing segments with actual rather than speculative demand, and so the new policy is likely to have a positive impact on the market.

Duong Thi Thanh, deputy director of the SBV’s monetary policy department, said before issuing Circular 22, the central bank had outlined a roadmap for banks to adjust their capital structure to ensure safe credit growth while ensuring credit flows to enterprises including in the property business.

Some analysts said the credit tightening should have been done much earlier to prevent bubbles and help the real estate market develop in a sustainable manner.

Bank credit growth quotas: should they be scrapped?

On January 3, the governor of the State Bank of Vietnam (SBV) issued a directive on the implementation of key tasks in the banking sector this year.

Under it, the SBV will allocate credit growth limits for individual banks this year too to meet the overall 14 per cent growth target set for the sector.

The target is equivalent to those in 2018 and 2019. Also like in previous years, the credit growth quotas will be assigned on the basis of assessing each lender’s operations and ability to ensure the credit growth safely.

The allocation of quotas has in past years enabled the central bank to closely monitor the banking sector’s credit growth, helping stabilise the economy.

How have quotas affected lenders?

Most banks constantly want higher quotas since their profits depend heavily on interest income.

Many manage to increase their quotas after using them up before the end of the year.

Some resort to repurchase (repo) agreements to meet their customers’ demand for credit.

The repo strategy helps banks circumvent the SBV’s credit growth ceiling and benefits both buyers (who lack credit quotas) and sellers (who have leftover quotas), experts said.

But over the past few years, the SBV has had to expand credit limits for banks based on their credit quality and the state of the economy. Last year, for instance, it made adjustments to credit limits three times.

But banks said that though they had credit growth limits be expanded but they could not take the initiative to disburse loans, thus affecting their credit growth.

One question that has cropped up often is “Is it time for the central bank to remove credit limits for banks?”

The central bank began the quota allocation in 2012 after many banks increased their lending by up to 50 per cent, causing a sharp rise in non-performing loans.

According to the SBV, the allocation is aimed at both ensuring there is adequate credit to serve the economy’s needs and controlling its quality, thus precluding bad debts.

The Vietnamese economy still relies heavily on credit from the banking sector in the absence of other sources, and so the central bank needs to closely monitor lending to minimise bad debts.

But analysts said there are other ways for the central bank to monitor banks’ lending and minimise bad debts and there is no need to limit their credit.

One of them is to control their capital adequacy ratio, they said.

The risk ratio for loans given to fund real estate projects has been increased from 150 per cent to 200 per cent and for personal loans for home purchase from 50 per cent to 150 per cent, which would help reduce lending to the two high-risk segments, they pointed out.