Recently, the State Bank of Vietnam (SBV) was seeking public opinion for the Draft Circular replacing Circular No.36/2014/TT-NHNN, with some contents on tightening real estate business due to the application of higher risk coefficient for loans of over three billion dong. Concentrating on this content, we had an interview with the representative of the drafting agency, Nguyen Quoc Hung, director of the Department of Economic Credit of SBV.
Sir, SBV is implementing the amendment of Circular No.36 which has a tendency to tighten the real estate business. Many opinions think that this will have a negative impact on the housing market in the future. How do you rate this comment?
Nguyen Quoc Hung: The draft amendments to a number of regulations related to safety ratios of banks and foreign bank branches, including reduce the ratio of short-term funds for medium and long-term loans. Thus, this provision applies to loans invested in all sectors of the economy, not only apply to the real estate sector. With a roadmap of three phases up to 2022, the maximum ratio of short-term capital used for medium and long-term loans will be 30%. SBV will control liquidity risks to ensure system safety in response to changes in macroeconomic conditions, contribute to stabilising banking operations and support to promote sustainable economic development.
The draft circular stipulates that a loan to buy real estate with a debt balance of over 3 billion dong will apply a risk coefficient of 150%, from 1.5 billion dong to 3 billion dong applying a risk coefficient of 100%, under 1.5 billion dong and debts for buying social housing and houses under government support programmes applying a risk coefficient of 50%. This aims to direct real estate credit to the real needs of the people, promote the development of low-cost commercial housing and social housing (lack of supply). Therefore, the draft circular does not negatively affect the real estate market.
What do you think is the cause of the quietness of real estate market, especially high-end real estate in the first months of this year?
The real estate market operates based on the law of supply and demand. The quietness of the market firstly comes from a shift in supply and demand. Currently many investors carry out high-end apartments, tourist apartments and resorts, while the real demand of the people towards the affordable housing segment is in short supply. In addition, usually in the first months, days after the Lunar New Year are often less real estate transactions due to the consumption habits of the people.
In addition, all provinces have strengthened inspection and review of the real estate project approvals, leading to many projects not being on schedule for investment.
Another reason is that recently there have been many disputes in the management of apartment buildings because investors did not comply with the commitments, handing over the houses behind schedule, affecting the confidence of buyers.
The management and licensing of construction of real estate projects are not suitable to the needs of the people; the management of investment activities is not strictly leading to the spread of investment, weak financial capacity but large project investment, etc.
Accordingly, the responsibility of the agency managing the development of the real estate market during this period needs to be promoted, to handle the violations of investors to regain consumer confidence.
However, according to my assessment, this is a good opportunity for management agencies and real estate firms to re-evaluate the weak causes of market, redefine the long-term development orientation, improve financial capacity and restructure the product portfolio, improve product quality, regain the trust of home buyers.
Compared with the orientation of the government, what are the abnormalities of credit growth in the current real estate sector? Is the negative growth of real estate credit in the last quarter of the year worrying and negatively affecting the current and upcoming real estate market supply?
Firstly, by the end of 2018, credit for the real estate sector (including business and real estate purchase) increased by 31.76%. Therefore, credit growth in the real estate sector is in line with the government’s policy and the orientation of SBV. It is strictly controlling real estate credit and directing credit to effective projects, social housing projects, cheap commercial houses and real needs of people. This is also one of the targets that the draft circular aims.
Secondly, the capital structure of a project investor includes: Self-financed capital, borrowed capital, advance capital of borrowers and other capital sources. Currently, the investment capital of real estate enterprises depends heavily on the banking system. Banks not only directly finance investors and also indirectly finance loans to house buyers to pay advances to investors. Therefore, the capital source for real estate supply will include capital for serving from the demand side.
In other words, when calculating credit capital for real estate business, credit capital must be included to serve the housing needs. Thus, negative credit growth in the Q4/2018 did not reflect the lack of capital and the reduction of credit capital for real estate business.
Thirdly, in Q1/2019, credit for real estate sector increased by 3.29 percent compared to the end of 2018. This increase was still higher than the overall growth of the economy, so it was not correct to tighten the credit source for the real estate sector. SBV aims to closely control credit for real estate, but credit orientation serves the real needs of people.
Recently, Vietnam Real Estate Association (VNREA) had many petitions related to regulations in draft circular replacing Circular 36. Accordingly, VNREA stated that the contents of reducing the maximum ratio of short-term funds used for medium and long-term loans and increasing the risk coefficient for housing consumption loans was a measure of credit tightening and a reduction in real estate supply. How does SBV comment on this idea?
The recommendations of VNREA on the roadmap to reduce the maximum ratio of short-term capital sources used for medium and long-term loans were option that SBV planned to select. Accordingly, it would be reduced by three percent to four percent each year so that from July 1, 2022, the maximum rate of 30 percent would apply.
VNREA’s comments on increasing risk coefficient from 50 percent to 150 percent for life service loans with a principal balance of 3 billion dong or more were incorrect. The adjustment of risk coefficient of loans to real estate sector is consistent with the government’s policy on completing mechanisms, policies and laws related to the real estate market, ensuring the effective and sustainable development of the real estate market and the operational safety of the banking system.
The draft circular replacing Circular 36 only applies to foreign banks and branches that have not yet implemented Circular 41/2016/TT-NHNN dated December 30, 2016 (some banks are in the process of implementing mergers and acquisitions with financial difficulties). Accordingly, the impact of the above regulation on the real estate market is not great.
Besides, changing regulations will motivate real estate firms to improve their capacity and prestige, mobilise capital in the domestic and international capital markets, reduce their reliance on credit, in line with current international trends.
Currently the draft circular replacing Circular 36 has been widely consulted. SBV is adjusting accordingly, ensuring the ability of banks, foreign bank branches as well as borrowers.