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If real estate developers ‘die’, banks will suffer   2011-07-08 - Dien Dan Doanh Nghiep

The real estate credit now accounts for 10 percent of the total outstanding loans of the banking system, according to the Ministry of Construction (MOC). In the last two years, when banks’ credit grows rapidly, the loans poured into the real estate sector also increase accordingly.


Banks asked to rescue real estate sector

 

MOC has sent a document to the State Bank of Vietnam, asking the central bank to apply a flexible mechanism in funding real estate projects instead of closing the doors to real estate developers.



The information has lifted the spirit of many real estate developers, who have been pushed against the wall due to the lack of capital. If the proposal is accepted, this will serve as the “lifebuoy” to the developers. Many investors believe that the real estate market will be rescued in the near future, rushing to draw up business plans.



Huynh Van Minh, Chair of the HCM City Business Association said that by June 2011, a lot of “big guys” in the real estate sector had fallen into the dangerous and pressing situation. Since banks have stopped providing loans, real estate developers do not have capital to run their projects, while they also cannot sell products, because sellers cannot buy the products without credit sources.



According to Minh, two scenarios would happen if real estate developers cannot get the “blood transfusion”. In the first scenario, the assets of many real estate firms would fall into the hands of banks when banks distrain upon the firms.



In the second scenario, the assets will, sooner or later, fall into the hands of foreign investors.



In all economies, there always exists a close link between the real estate market and the banking system. From 2006 to 2010, the real estate credit had always been associated with the banking system’s credit growth. In 2009, the credit growth rate of the whole banking system was 37.73 percent, while the real estate credit growth rate was 41.74 percent, while the figures were 27.65 and 27.2 percent in 2010.



MOC has affirmed that 10 percent of total outstanding loans have been poured into the real estate sector. This is really a high figure, if noting that all business fields in the national economy have been relying on bank loans.



Will banks provide lifebuoy to rescue real estate firms?


In an effort to help banks reduce risks and curb the credit growth to fight inflation, the State Bank has ordered commercial banks to reduce the percentage of outstanding loans to non-production sectors, including real estate, to 22 percent of total outstanding loans.



As there will always exist a close link between banks and the real estate market, people have doubts that banks would “play tricks” to reduce the percentage, while in fact, the percentage would still be kept at a high level. Meanwhile, real estate developers also believe that a lifebuoy would be given in time to rescue them.



The developers have every reason to believe that they would be rescued: if real estate firms collapse, banks will suffer.



Dr Le Tham Duong from the HCM City Banking University, thinks that only a “miracle” can help banks reduce the percentage to 22 percent.



By mid June, 23 banks still reportedly had the outstanding loans to the real estate sector accounting for 23-50 percent of total outstanding loans, of which 18 banks had had the percentages at 31-37 percent and one 50 percent.



Huynh Buu Son, a well-known economist, has also stressed that the thing that needs to be done now is to extinguish fire on the real estate market, and not to allow real estate firms to get bankrupted in masses.



If too many real estate firms get bankrupted, the bad debt ratio of banks would become uncontrollable, while bank liquidity would get exhausted. Once a bank gets bankrupted, this will badly affect the whole banking system and the whole national economy.



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