Bank credit floods back into housing market

According to the State Bank of Vietnam, in the first eight months of the year banking credit grew at 10.23 percent compared to 4.33 percent a year earlier. It is expected to grow at 15-17 percent this year.

It might well be considered good news indicating the economy is on the mend.

But there are some worries, especially since a considerable amount of money has been lent to buy or develop property, one of the four categories of borrowers with the highest bad debts as of April 30, according to the National Financial Supervision Committee.

It had its genesis in the bursting of the property bubble in early 2008. By then a huge number of individuals and companies had borrowed money from the banks at interest rates as high as 25-27 percent to speculate in property.

When the inevitable bust came, no one was able to sell their properties and repay the banks. It also took down many property developers, who were caught in exactly the same trap – an irrational demand causing a scramble to build even if it meant borrowing at ridiculous rates.

As of April this year they together accounted for bad debts of 11.4 percent of total loans.

Analysts attribute the strong credit growth to the sector to its indubitable recovery and banks' efforts to support housing.

The Government has also come up with several policies to support the industry, one of which is to reduce the risk weight assigned to loans to the property sector from 250 per cent to 150 percent.

The central bank allows banks to use 60 percent of their short-term funds for medium- and long-term financing against only 30 percent before.

Enthused, most banks have been offering preferential credit for property projects and to home buyers.

There is also a lot of pent-up demand for buying houses, and with lending rates falling to around 7 percent, many are availing the opportunity.

But there are legitimate concerns that if the real estate market develops too strongly and into the realm of speculation, it could again cause a bubble.

Others dismiss these concerns saying a reprise of 2008 is not possible in the current context.

They point to the 2014 Law on Real Estate Business which requires housing developments to be guaranteed by banks to protect buyers. This means if a developer fails to hand over a unit as agreed in the sale or lease contract, the buyer or lessee could demand a full refund.

Incorporated in the law for the first time, the provision is intended to ensure that developers are financially viable and buyers get full security.

This also means the property market will be healthier and more transparent since lenders need to carefully scrutinise projects before providing guarantees.-VNA