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Investors fear proposed ban   2009-05-28 - Viet Nam News

The likelihood that regulators will further restrict lending against securities collateral has many investors worried that such a move would derail the current stock market recovery.

Under the latest draft of the proposed Law on Credit Institutions, currently being circulated for public comment, domestic and foreign banks would be banned from lending money against such collateral for securities investments.

The law would be intended to ensure the security and integrity of the entire banking and financial system, as well as to prevent bubbles in the stock market as occurred in 2007, when bank loans gave investors a ready source of capital to play the market.

Banks are once again feeding the latest market rallies by allowing borrowers to put up stock holdings as collateral for more loans. It’s a steady stream of capital from the banking system into the stock market – one which the proposed law would cut off.

Many investors, stockbrokers, and independent analysts are convinced that such a move would send the newly revived market plunging again.

"The stock market has just begun to recover in the last two months," said Ngo Dung, a client of SME Securities Co. "The resumption of securities lending has given us more confidence and more money to join in the market. If banks stop lending, I am not sure whether I would be able to play the market any more."

Do Tu, an investor at Bao Viet Securities Co, said, "Why would the central bank forbid banks to lend their money? Banks, more than anyone else, know their own capacity, and they are more risk-averse than anyone else. They can decide for themselves whether to lend or not."

Indeed, many banks are quite cautious about making loans for securities investment. Each bank has a list of up to 100 high-potential or strongly performing stocks on both the HCM City and Ha Noi exchanges, as well as on the over-the-counter market. They will accept only those shares as collateral for loans.

"We consider very thoroughly every penny we lend," a head of one Ha Noi-based bank told Viet Nam News on condition of anonymity. "Securities investors receive only short-term credit on a limited basis under very strict conditions because lending against stock collateral is quite risky."

Some market observers wonder whether restricting such lending would be a disadvantage to the banks themselves, as well as to stock brokerages and investors, as it cuts off a ready flow of capital and interest income to the banks.

"I can’t understand why regulators would think about banning it. It’s terrible!" said Nguyen Linh, a representative of a Ha Noi-based securities company said. Cutting off these loans would not only lower the liquidity of the stock market but also the liquidity of bank capital, Linh said.

"This provision is just in the draft stage, and we welcome comments from the public to perfect the draft," State Bank Governor Nguyen Van Giau told Viet Nam News. "We know some countries encourage securities lending, some limit it and some forbid it. We are trying to draw lessons from those laws and then draft rules most suitable for the domestic market."

The central bank planned to submit the draft to the Government in June or July and the new law could be voted on during the final session of the National Assembly later this year.

Stockbroker Hoai Nam suggested a cap rather than an outright ban on such loans. "A cap would help the central bank supervise and ensure the safety of securities lending at banks. But any new cap should not be as strict as the 3 per cent of total outstanding loans put in place in 2007."

Securities depository accounts were another means to reduce risk to lenders. Providing an electronic accounting of all purchases and sales of securities (shares and bonds) by a particular investor, a securities depository account at a securities company would allow investors to invest more money than they actually have, paying up only when there’s a margin call. Such a system works well during a bull market but can be risky if share prices plunge suddenly.

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