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Banks decide to come to the party   2008-12-21 - VIR

After a difficult year for Vietnam’s banking sector, local banks have tentatively resumed lending to property developers. In June, a steel company in the northern province of Haiphong had to borrow money from the unofficial credit market at sky-high interest rate levels just to cover electricity bills.

At that time the company still had possession of its building and warehouse, the traditional collateral for accruing bank loans.
“We had relations with around 10 banks, but no one accepted taking our assets as collateral at that time,” said a company official.

The problem was local banks were running short of capital according to Le Dac Son, VP Bank’s general director, so most banks nationwide pulled the plug on all loan services. “The liquidity of the property market was quite low, meanwhile, economic difficulties and high interest rates were pushing local enterprises to the brink of bankruptcy,” said Son.

“These factors also made local banks cautious.” In the last quarter of 2007, local lenders had accelerated lending to the property sector with 60 per cent disbursement in the property sector in 2007. Le Xuan Nghia, vice chairman of the National Committee for Financial Supervision, said that the situation for the whole banking sector, regarding credit for property, was not yet “alarming” but for certain banks the ratio of credit for property sector remained risky.

“Some banks have extended over 50 per cent of their total credit to the property sector,” he said. “Additionally, some are funding up to 60 per cent of property medium and long term projects with short-term mobilisation, a risky level.”
By the end of September, total loans for the property sector stood at VND115 trillion ($7.1 billion), making up 10 per cent of total credit in the banking sector.

The property market is now almost “frozen” and thus, property developers are finding it hard to convert their assets into cash to pay back bank loans. According to Ho Chi Minh City Real Estate Association chairman Le Hoang Chau, if local banks kept turning their backs on property projects, a deeper freeze followed by total property market collapse could be the next scenario.

Nghia also agreed saying that local banks should only select projects with the most potential before extending loans to property developers. “Once developers can complete a project, they can sell one to cover bank loans and fund others,” he said.

By the end of September, the local banking sector had recorded a temporary fund surplus of VND50,000 billion ($3 billion). Though there is still some debate on the accuracy of this figure, but regardless, since September some banks have resumed their lending on property sector. Additionally, the lending rate has been brought down to current 11.5-14 per cent, per year following a series of easing policies from the State Bank and lowering the lending rate cap via cutting the base rate to 10 per cent.

However, according to Nguyen Thi Kim Thanh, head of the State Bank’s Banking Development Strategy Institute, this was not enough to ‘defrost’ the property market. “If they could push funding for property developers, then the market would be once again liquid,” said Thanh.

According to Vo Thi Sanh from the Bank for Investment and Development of Vietnam (BIDV), the second largest lender in the country, the bank had never poured “too much” money into property sector. “However, since October, we have renewed some loans as property developers could not pay back the money and extended some new loans to property developers but not much,” said Sanh.

This term “renew” means the bank would extend a new loan with a value equal to original loans extended last year plus unpaid interest. Pham Xuan Duc, Hanoi Construction & Investment JSC’s chief executive officer, revealed that the company had borrowed nine-month loan from BIDV at 13 per cent, per year for funding a project in Hanoi.
On consumer credit, according to Son, local banks have “opened the door” again for house purchases.

“This should be considered as an indirect assistance to the property market as funding the ultimate property buyer could push demand and boost the liquidity of the market,” said Son. Asia Commercial Bank (ACB), for instance, stopped lending for personal house purchases back in June, but has resumed this service. In September-October alone, ACB extended up to VND500 billion for this service.

Dong A Bank, Eximbank, VietA Bank, VP Bank and Techcombank have also rolled out the welcome mat to house buyers looking to purchase property in instalments. However, a Techcombank official, said the bank had resumed their lending for the property sector but at a limited level.

“The problem is now the interest rate management mechanism of the State Bank as the interest rate cap is proving too low for local banks against the risk that they might have to bear,” said the official. So far, after a few base interest rate cuts, the maximum interest rate that local banks are allowed to lend is at just 16.5 per cent per year equal to 150 per cent of the base rate of 10 per cent.

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