Credit policy plays an important role in the long-term development of the real estate market in Vietnam

Commercial banks of all types, big and small, are trying to reduce credits for real estate, but this proves to be a difficult task. Indeed, most of the deposits mobilized by banks are just short-term deposits of less than 12 months. For example, short-term deposits had made up about 40% of the total deposits mobilized by Vietnam Eximbank by the end of 2010. The ratio at Sacombank, another big commercial joint-stock bank, is 65%, while the ratio at State-owned commercial banks ranges between 30% and 50%.

While deposits for one and three months are the most popular, those for the medium- and long-term are few. One reason for this situation is the interest rate policy. Over the past few months, the interest rate for savings deposits offered by banks has reached the maximum rate of 14% per annum for all terms. Therefore, all depositors, both individual and corporate, opt for the short-term. This way, they can withdraw both principal and interest in a short time, and then re-deposit the amount and earn better gains than those for medium- or long-term deposits.

Since most capital mobilized is from short-term deposits, banks can only offer short-term loans, mainly less than three months. For example, up to 87.7% of the total loans that Sacombank offered to customers by the end of 2010 are short-term credits of less than three months. Some banks offer loans for three months, but review the credit agreements every month. Indeed, banks cannot do otherwise as they must ensure liquidity and avoid interest rate risks.
 
Real estate mortgaging

The economy and real estate companies in particular cannot embark on developments with such short-term money. “Our project takes years to develop. How can we proceed with such short-term loans and have time to deal with revision of credit agreements every month?” a finance director of a real estate company said. However, banks cannot do otherwise, as they find it hard to attract depositors. “It’s tough to persuade clients to re-deposit their money these days. They demand higher interest rates, hinting at higher rates offered by other banks,” a banker said.

Real estate credits usually make up about 20% of total outstanding loans of the banking system. The credits for real estate in the first quarter of this year are estimated to increase by VND20-22 trillion, or 4.8% higher than the same period last year, to a total of some VND110 trillion. Last year, the total loans for non-production sector, mainly real estate, reached VND431 trillion.

A problem for banks is that most collaterals for loans are real estate, in addition to other assets like machinery, equipment, plants, precious metals, raw materials and valuable papers. According to the financial report of VietinBank, the total value of collaterals at the bank by the end of 2010 is more than VND426 trillion, of which houses and land make up more than VND265.8 trillion or 62.4%. In the current frozen real estate market, it’s a tough business for banks trying to sell the mortgaged real estate to recover loans.

In such a situation, the only way out for the real estate market and relevant stakeholders is the reduction of real estate prices. The prices must be reduced to a level that is attractive enough to buyers so that real estate developers can sell their products and have money to repay bank loans. However, it takes time for the reduction to become a reality while most of the loans must be repaid in due time. If borrowers fail to repay the loans, banks will face risks as well.

Other News

• Ha Noi approves land right auction for 62 new projects [06/05/2011]