Realty Credit Remains A Challenge
16-05-2012
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BIDV recently announced its decision to offer realty loans at 16% per annum, arguably the lowest of its kind at the moment. On April 20, BIDV unveiled VND4 trillion worth of loans for buyers of houses sold under projects financed by this financial intermediary. The duration of each loan can be up to 15 years and the value may reach 85% of a house. The interest rates fetched by realty loans in other banks remain high (18-19% per annum), but are already lower than the figures in previous months by two percentage points per annum. This rate of decrease is acceptable and interest rates are expected to drop by another two percentage points per annum.
Banks are clearly willing to offer long-term loans to homebuyers while remaining reluctant to lend to project developers. While the latter type of borrowers can still tap into some capital, the loans offered usually come with crushing interest rates. Financial intermediaries undoubtedly prefer projects whose products are in substantial demand.
A bold yet effective approach entails lowering house prices to a level that buyers find affordable. A price cut of 10-20% may not suffice. Doan Nguyen Duc, chairman of a renowned realty company, says that it is willing to slash house prices by up to 50% in some cases.
A broader perspective
Official data seem to indicate a fall in realty credit. According to the State Bank of Vietnam (SBV), loans for purposes other than production (mainly realty development and purchase) fell from 11.02% of the total debt in late 2011 to 10.77% at the end of February 2012. Prior to the first interest rate cut, enacted in March 2012, banks almost stopped providing realty loans. Still, realty debt did not slump as borrowers could not repay the loans. Some enterprises that are fortunate enough to have their debt restructured have actually had to borrow more as they had barely enough money to pay the interest charged. Apart from supplying new loans, several banks have been forced to lend more to existing customers to curb bad debt. It is therefore difficult to trim credit liabilities. Consequently, banks have favored homebuyers over project developers.
Such preference is justified. Realty loans account for a significant share of bad debt that is on the rise. Banks, meanwhile, dread both non-performing loans and liquidity problems. It is also abundantly clear that SBV will no longer pull out all the stops to support struggling banks. These shifts in mindset, which are under way in the banking sector, have been reflected in Vietnam’s credit profile since the start of 2012.
First-quarter credit plunged by 1.96% year-on-year since clients that banks highly regard did not accept high interest rates or accounted for only a small number. Competent enterprises are likely to shun loans with an interest rate of 20-25% per annum, and so as homebuyers. After all, such an interest rate causes the real price of a house to rise considerably. As a result, banks blessed with a capital surplus have chosen to purchase bonds and Treasury Bills, deposit the money at the central bank or pour the idle cash into the interbank market. This has translated into a drop in interest rates — the figure for overnight loans in the interbank market fell to 5% per annum at certain points. Banks deposited some VND60 trillion at SBV, which is much more than required. Bond interest rates dropped to below 11% per annum while Treasury Bills fared even worse. On April 18, 2012, the interest rate imposed on one-month Treasury Bills dwindled to 8.5% per annum. Just one week earlier, the figure had fluctuated between 10.5% and 11% per annum. Despite a capital surplus and falling interest rates, economic agents’ access to credit, especially in the realty sector, remains woefully limited.
Fueling demand for realty products is thus essential. The most efficacious tactic, as mentioned above, is to cut house prices. Of course, many realty firms cannot afford to do so and will have to shut down. Nevertheless, this will pave the way for a recovery as sufficiently low house prices prompt buyers to lend from banks. Only then can financial intermediaries really disburse capital. Until this scenario comes true, measures adopted by banks are merely first steps in a complicated solution to the problem.
