The caution steps

Many a bank has announced to make loans available for the real estate sector again after a long period of inflation-induced credit tightening. Liquidity, the availability of cash, has improved at banks, but it is still hard for real estate projects or home buyers to access bank loans.

Tumbling blocks

A drastic decline in liquidity in the second and third quarters of this year led to banks tightening credit interest rates were hiked to sky-high levels to attract public savings. Banks raised lending rates and set strict requirements for borrowers to ensure safety. With the real estate sector slowing down in line with the country's economic woes, lender banks were even more cautious. Customers from the property sector often need medium- and long-term capital while short-term capital is the lifeblood of banks. A banker says no banks want to take risk by using short-term capital to make long-term loans.

Ly Xuan Hai, CEO of Asia Commercial Bank (ACB), a leading domestic bank in term of capital, says medium- and long-term loans have been tightened at banks, but ACB issued VND4.5 trillion worth of bonds last year to create a stable source of medium-term capital to supply medium- and long-term capital with a term of up to 10 years.

Hai says the number of people having equity of VND500-700 million and needing to buy homes worth below VND1.5 billion each is big. However, the current lending rates are prohibitively high.

According to ACB, among 100 people in need of houses, 50 do not want to borrow from banks, 30 are undecided, and the remaining 20 people really are ready to pay high lending rates in the first year to buy houses. "Of these 100 people, ACB wants to give loans to only five of them," says Hai.

Another major lender, the State-owned Bank for Investment and Development of Vietnam (BIDV), is resuming lending to real estate sector customers but cautiously. The director of a transaction office of BIDV says his bank provides credit for clients to purchase but the requirements are strict. "Almost no people can borrow to finance home purchases due to high interest rates," he says. Lending rates for home loans are 20%-21% a year depending on who are borrowers.

An executive of Main Transaction Office 2 of the Vietnam Bank for Industry and Trade (VietinBank) says his bank has almost stopped lending to home buyers and is checking medium- and long-term loans. The bank is targeting projects in the final stages of development, not those in the initial stage of construction, to ensure its liquidity, he says.

The executive adds that banks have a careful approach toward proposals for loans to finance real estate projects.

"In the past, banks were ready to lend when the borrower's financial capability for repayment was rated 60%-70% of a loan. But the current figure should be up to 90%," he said.

Concern about bad debt in real estate sector

Vietnam's real estate market experienced a price fever from late 2007 to early this year. This was the period in which bank lending to the real estate sector was easy but lending rates were often revised up after every three, six or 12 months. Therefore, by late this year, there will be a big number of loans falling due and the payable interest rates will rise by eight to nine percentage points from late last year. It is feared that a lot of people cannot afford to pay loans due to high rates while property prices are declining sharply, by about 50% from early this year.

Borrowers may be forced to sell their properties at reduced prices to get money for loan repayment. The situation will worsen when property supply surges, causing prices to drop further.

Governor of the central bank Nguyen Van Giau said at a press conference in late September that the total outstanding real estate loans in the banking system by late September had amounted to about VND115.5 trillion, about US$7 billion, 9.15% of the total outstanding loans in the system.

The general director of a small joint stock bank in HCMC says he is worried about defaults on loans. His bank's real estate loans account for up to one-fourth of its outstanding loans.

Source: Saigon Times