Vietnam’s central bank on November 15, 2019 replaced its previous circular on operational safety ratios for the banking sector with Circular No 22.
New circular to take effect on January 1 it focuses on two changes that will tighten banks’ lending to the property sector. Vietnam News Agency reports.
They are a reduction of the ratio of short-term funds that can be used for medium and long-term loans from the current 40 per cent to 30 per cent by September 2022 in four phases, and the increase in the risk ratios of mortgages from the current 50 per cent to up to 150 per cent and loans for commercial real estate to 200 per cent.
Analysts said the central bank’s moves are aimed at cutting off credit to high-risk sectors, especially property.
The central bank said limiting loans to the real estate sector is aimed at ensuring its sustainable development and the safety of the banking sector.
Market observers said the tightening could rock the property market.
The tripling of the credit risk ratio for loans to buy homes worth VND1.5 billion (US$126,000) and more to 150 per cent would push up lending interest rates, which would hit market liquidity, they said.
The market has already undergone many difficulties since the beginning of the year.
In the period many banks have hiked interest rates on medium- and long-term loans to buy properties to 10 per cent.
But with the real estate market not witnessing any unusual developments, experts said it is not necessary to tighten credit policy at this time.
So what is the central bank’s rationale?
Bank loans to the property sector in the first half of this year accounted for 7-8 per cent of overall credit. But according to the National Financial Supervision Committee (NFSC), this would rise to 40 per cent if it includes loans for buying homes.
This rate is too high since the property sector is always considered high-risk.
In light of the new circular, many experts said, while the credit tightening could have some impact on property developers and the market, it would help banks better control money flows, reducing risks and ensuring economic stability.
Banking expert Dr Cấn Văn Lực said not only developers but also home-buyers who need to borrow money need long-term loans, and so the central bank’s decision to reduce the ratio of short-term funds used for long- and medium-term loans would help lenders minimize risks possibly arising from stretching themselves too thin.
SBV Governor Lê Minh Hưng has ordered a strengthening of inspection of credit activities, particularly of lending to developers and home-buyers, to ensure safety and proper used in line with regulations.
Experts believe that the new credit policies would encourage banks to shift lending to individual home-buyers to hedge risks while at the same time not losing interest income.
For many banks, mortgages are key credit products.
Lenders have to carefully assess property projects before providing loans to home-buyers and take the initiative to work with developers to better manage risks, they said.
This article first appeared on The Realtor.