Vietnam's central bank controls loophole in consumer lending
The State Bank of Vietnam (SBV), the country`s central bank, has required credit institutions to strictly monitor consumer lending, concerning that some real estate and securities investment loans were hidden in consumer loans.
SBV statistics showed that the proportion of real estate loans in the total outstanding loans of the entire banking system is at nearly 6 percent, a safe level compared with the cap of 8-10 percent.
Under the SBV’s direction, credit institutions must avoid too much focus on real estate customers and maintain credit growth in the sectors within safe limits.
They must also keep a close watch on lending to the sectors, continuously review and assess the progress of realty projects and their developers’ financial condition, particularly as it relates to their collateral assets, and have measures in place to handle any defaults.
Besides evaluating and processing lending applications with scrutiny, the institutions must also monitor borrowers to ensure that they refrain from using consumer loans for investment in property or securities.
“Credit expansion should go hand in hand with strict supervision to ensure loans are used for their intended purpose and do not add to bad debts,” the SBV states.
As an alternative, commercial banks were asked to increase their lending to the manufacturing, production and business sectors, particularly those in need of capital for growth, such as agriculture, export, supporting industries and small- and medium-sized enterprises.
Consumer lending accelerates
However, after the SBV has told local lenders to tighten the valve on credit meant for the real-estate and securities sectors to better control bad debts for the past one and a half years, consumer lending has accelerated, much higher than that of real estate lending. It caused a concern that a significant amount of consumer loans could go to the real estate sector.
According to the National Financial Supervision Committee (NFSC), the growth rate of consumer lending last year was three times higher than the average credit growth rate of 18 percent to reach VND1.17 quadrillion (US$51.54 billion).
Notably, NFSC said, some banks could dodge SBV’s credit regulations by offering lending packages supposedly earmarked for “house repairs” or “house construction” to consumer credit customers. Loans for house repairs and construction last year soared 76.5 percent and accounted for nearly 53 percent of total consumer loans.
Currently, there is no legal regulation on classifying home repair loans and home purchase loans as consumer loans or real estate loans. Commercial banks said they currently classify home repair loans and home purchase loans as consumer lending so that lending is not restricted.
Experts said considering home repair loans and home purchase loans as consumer lending but not real estate lending is unadvisable as it can lead to an incorrect real estate credit growth ratio. This wrong reflection can cause difficulties for State management in the real estate industry.
If lending is not controlled well, with home purchase loans not based on real demand but for speculation, the country will suffer from a real estate bubble, causing bad debts to arise, the experts said.
Meanwhile, the capital limit in the real estate and securities sectors would help the banking system develop sustainably as banks would have to select feasible property projects to provide loans, avoiding non-performing loans in future.
Non-performing loans of all credit institutions, mostly incurred due to a slowdown in the country’s real estate market in the early 2010s, had been cut 9.5 percent at the end of last year, down from 11.9 percent at the end of 2016, according to the National Financial Supervisory Commission.
Real estate loans account for some 6 percent of the total outstanding loans.
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They must also keep a close watch on lending to the sectors, continuously review and assess the progress of realty projects and their developers’ financial condition, particularly as it relates to their collateral assets, and have measures in place to handle any defaults.
Besides evaluating and processing lending applications with scrutiny, the institutions must also monitor borrowers to ensure that they refrain from using consumer loans for investment in property or securities.
“Credit expansion should go hand in hand with strict supervision to ensure loans are used for their intended purpose and do not add to bad debts,” the SBV states.
As an alternative, commercial banks were asked to increase their lending to the manufacturing, production and business sectors, particularly those in need of capital for growth, such as agriculture, export, supporting industries and small- and medium-sized enterprises.
Consumer lending accelerates
However, after the SBV has told local lenders to tighten the valve on credit meant for the real-estate and securities sectors to better control bad debts for the past one and a half years, consumer lending has accelerated, much higher than that of real estate lending. It caused a concern that a significant amount of consumer loans could go to the real estate sector.
According to the National Financial Supervision Committee (NFSC), the growth rate of consumer lending last year was three times higher than the average credit growth rate of 18 percent to reach VND1.17 quadrillion (US$51.54 billion).
Notably, NFSC said, some banks could dodge SBV’s credit regulations by offering lending packages supposedly earmarked for “house repairs” or “house construction” to consumer credit customers. Loans for house repairs and construction last year soared 76.5 percent and accounted for nearly 53 percent of total consumer loans.
Currently, there is no legal regulation on classifying home repair loans and home purchase loans as consumer loans or real estate loans. Commercial banks said they currently classify home repair loans and home purchase loans as consumer lending so that lending is not restricted.
Experts said considering home repair loans and home purchase loans as consumer lending but not real estate lending is unadvisable as it can lead to an incorrect real estate credit growth ratio. This wrong reflection can cause difficulties for State management in the real estate industry.
If lending is not controlled well, with home purchase loans not based on real demand but for speculation, the country will suffer from a real estate bubble, causing bad debts to arise, the experts said.
Meanwhile, the capital limit in the real estate and securities sectors would help the banking system develop sustainably as banks would have to select feasible property projects to provide loans, avoiding non-performing loans in future.
Non-performing loans of all credit institutions, mostly incurred due to a slowdown in the country’s real estate market in the early 2010s, had been cut 9.5 percent at the end of last year, down from 11.9 percent at the end of 2016, according to the National Financial Supervisory Commission.
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