Rush into lending has selfish motives

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Banks focused on getting out of the hole they dug themselves

A man walks past uncompleted villas at a new urban zone in Hanoi. Vietnam's real estate market has hit a downturn this year with market demand expected to remain low until 2013. Photo: Reuters

As soon as the government eased restrictions on property lending in April, banks rushed to attract customers, offering several incentives including zero percent loans for limited terms.

However, experts say this was not so much the result of real estate investors supporting customers in a bid to spur consumption and reinvigorate the stagnant market as it was of banks trying to save themselves, after pouring large investments into property projects or piling up bad debts caused by unmarketable projects that they had lent money to.

Vietcombank, Vietnam's third largest lender, have offered customers of Indochina Plaza Hanoi zero percent interest for the first year on their loans, while buyers of Hanoi-based Ecopark project could get loans at 8 percent, much lower than the normal rates of 15-16 percent.

The country's second largest lender, BIDV, offered customers of the capital city's Dream Town project loans at 12 percent per annum for the first six months.

Economist Bui Kien Thanh said the lending for property projects could serve several goals, including increasing credit growth, which has been low since early this year. In Vietnam, some 80 percent of banks' profits come from lending.

Vietnam's lending grew 0.93 percent at the end of July, compared to the end of 2011, the government said Tuesday.

The head of a Hanoi-based bank who did not want to be named said, "Most banks want to boost personal and home loans as credit growth has not been as high as expected."

Thanh said banks are also boosting lending to rescue themselves, as they had earlier lent money to developers of many projects that are now going nowhere.

"Lending to customers can help increase sales of these projects and open up opportunities for banks to recoup loans that are now considered bad debts.

"If banks do not expand property loans, many of them may face difficulties caused by the large proportion of bad debts," he said.

The latest lending expansion also aims to help revive banks that had directly invested in many real estate projects but were not able to recoup their capital because the market was sluggish, said an industry insider.

Thanh said the move, while understandable, could also expose banks to the risk of piling up more bad debts if the property market does not recover soon.

"Banks should carefully consider (the risks) when offering new loans, as the property market has not showed signs of rebounding," he said. "Real estate prices, despite being cut many times over the past few months, are still high. Buyers now are mainly speculators."

Cao Sy Kiem, former governor of the State Bank of Vietnam, said eliminating property lending restrictions was the right policy, but banks should lend to people with real demand, instead of speculators.

He even said that expanding lending to temporarily rescue banks from their property project debacles could threaten the safety of the whole banking system, so it should be closely monitored.

Kiem said that banks, under pressure to increase credit, had in the past offered very large loans to property projects, and they were now struggling to recoup that capital. Therefore, they should lend only to good projects and avoid the risk of bad debts rising even higher if economic conditions do not improve.

Thanh said banks should improve their risk management. Many of them have been using short-term deposits to offer long-term property loans, he noted.

He reiterated that the latest lending expansion is not likely to have big impacts on the recovery of the property market, as prices are still too high.

Because many people expect that prices will continue to fall, market demand is still low, he said.

Furthermore, the incentives offered by banks are as yet insufficient to attract both individuals and enterprises, and those who do want to borrow have no collateral, he said.

Chairman of the Hanoi Property Club, Nguyen Huu Cuong, said many property investors have sold parts of their projects, or mortgaged their assets to take out bank loans in the past two years. These firms have no further assets to mortgage, so they are stuck, despite lower interest rates and loosened requirements.

The director of a real estate firm in Hanoi said that the interest rates, despite falling to 15-16 percent, are still too high for property developers.

He felt that the market would not recover until at least early next year.

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