Vietnam central bank defends plan to tighten real estate credit

Thanh Nien News

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The construction site of apartment buildings in Ho Chi Minh City. Photo: Diep Duc Minh The construction site of apartment buildings in Ho Chi Minh City. Photo: Diep Duc Minh


Amid concerns of a possible credit crisis, the State Bank of Vietnam has said its plan to tighten lending to the real estate sector will actually benefit everyone in the long run by eliminating bubble risks, local media reported on Wednesday.
The central bank was quoted as saying that its newly proposed credit rules are meant to require banks to be more cautious with real estate loans. That means only speculators and financially weak developers, both often responsible for creating housing bubbles, should feel worried about the changes, it said.
Capital flows to the sector will not be affected "considerably," according to the statement.
Many have been worried about one of the proposed changes that seeks to prohibit banks from using more than 40 percent of short-term deposits for medium and long-term loans, instead of 60 percent like now. However, the central bank said that should not be a concern considering that the current average ratio at banks is only 31 percent. 
It also addressed concerns that its plan to raise the risk weight of loans to real estate businesses from 150 to 250 percent will shut down banks' lending to the sector.
When the risk weight is increased to 250 percent, their average capital adequacy ratio will fall from 13 percent currently to 12.1 percent. That is still higher than the minimum requirement of 9 percent, which means banks can still lend more before they are required to stop. The ratio measures a bank's capital in relation to its risk exposures and the higher it is the better. 
The central bank said the draft revisions are its "policy of caution" about recent rises in real estate loans.
Outstanding loans to the sector grew nearly 26 percent year on year to VND393 trillion (US$17.42 billion) at the end of last year, according to its latest figures.
Vietnam's banking sector learned "a costly lesson" about boosting lending to real estate in 2006-10 when a property bubble had caused heavy losses to local banks, the bank said.
Although the bank promised to carefully consider the time frame to minimize any possible adverse effects on banking, real estate and other relevant parties, it called on local banks to stop placing all their bets on risky sectors.
It also urged property businesses to look for other funding options, instead of mainly relying on bank loans, if they want their sector to grow healthily.

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