The State Bank of Vietnam (SBV), the country’s central bank, has decided to tighten lending to real estate projects by announcing a three-year roadmap to gradually decrease the maximum ratio of short-term capital used for mid- and long-term lending.
SBV has released Circular 22/2019 regulating safety proportions in banking activities at local commercial banks and foreign bank branches, including a road map for the 2020-2022 period.
The proportion will be reduced from the current 60 percent to 40 percent on January 1 next year, according to the State Bank of Vietnam (SBV).
Specifically, such ratio would be set at 40% from January 1, 2020 to September 30, 2020, 37% from October 1, 2020 to September 30, 2021; 34% from October 1, 2021 to September 30, 2022 and 30% from October 1, 2022 onwards, with an aim to enhance safety in the banking system.
The SBV said most medium- and long-term loans are given to property investors, and this is risky because of the inherent instability and many difficulties still faced by the sector.
The information was revealed in the SBV’s Circular No.22, which was issued on November 15 stipulating limits and prudential ratios for operations of credit institutions and branches of foreign banks in Vietnam.
"The reduction would help mitigate liquidity risks and safeguard against changing macroeconomic conditions, ensuring the stability of the banking industry, it said.
In the past, the ratio of short-term capital used for mid- and long-term lending had been set at 30%, but since 2014, the ratio has been increased to 60% and now is on a roadmap to gradually decrease.
Since 2016 the SBV has been tightening lending to risk areas, which include real estate, securities and BOT infrastructure projects, by increasing interest rates and imposing stringent conditions, leaving more funds for lending to priority sectors such as manufacturing, technology and exports.
Aside from reducing the ratio of short-term funds used to offer mid- and long-term loans, the central bank also raised the risk ratio of loans for the real estate sector from 150% to 200%.
The risk weight of 50% will be applicable to property loans whose collateral are houses (including ones being built in the future), land use rights certificates and the land-attached assets of the borrower.
For home loans worth VND4 billion or more, the risk weight asset ratio will be 120%, taking effect from January 1, 2020, to December 31, 2020, and the figure will be raised to 150%, starting January 1, 2021.
Property investors have been turning to the bond market to raise funds, issuing bonds at coupon rates of 11-13 percent, sometimes as high as 14.5 percent, Military Bank Securities said. In comparison, bonds issued by banks average 7-8 percent interest.
The circular also set the loan to deposit ratio at banks and branches of foreign banks at 85%.
Meanwhile, branches of foreign banks that have not met the capital adequacy ratio under Circular No.41, one of the regulation documents for Basel 2 criteria stipulating that banks and branches of foreign banks must regularly maintain the CAR determined based on their financial statements of at least 8%, must submit explanation to the SBV, as well as a roadmap to ensure full compliance with Circular 41 on January 1, 2023 at the latest.
Economists warn that the high interest rates on property companies’ bonds come with the risk of default, and lower transparency requirements mean investors have to be even more careful.
The central bank responded in August by directing banks to stop buying corporate bonds to minimize their risks and tighten control over real estate sector borrowings.