March 25, 2016
The State Bank of Vietnam recently proposed a proposed Amended Circular 36 on limits and ratios ensuring stability and efficiency of banking system.
Some of the proposed amendments are related to bank financing to the property market, including lowering the ratio of using short-term capital for medium- and long-term loans, and increasing ratio of credit risk of property loans. Specifically, according to the proposed Amended Circular 36:
- Banks to decrease ratio of short-term capital used for medium- and long-term loans from the current level of 60% to 40%.
- Ratio of credit risk of property loans to increase from currently 150% to 250%.
(The current Circular 36 has been in effect since February 2015.)
The proposed amendment aims to continually improve risk management in banking system and encourage credit flow into other industries rather than property. As the property market is perceived to have been recovering, with supply and prices to grow again, the amendment also aims to lift off some of the support previously lent to the industry during a more challenging time.
Implications of applying the proposed Amended Circular 36:
- Banks would be forced to be more selective in lending to property sector as there will be less funding allowed to lend out to property sector. Access to bank financing therefore might be more difficult and take longer for players in the property market.
- Potential higher borrowing costs as properties would be imposed higher credit risks.Who would be impacted most:
- Developers / property developments that possess higher risks (such as projects targeting a special segment, or located in non traditional areas, or developers with little track record, etc.)
- Investors using heavy leverage
- Developers would be required to adapt through better product positioning, offering products closer to real demand, enhancing operational management through cost cutting & savings, and seeking finance through different channels.
The property market has been recovering over the past 15 months at a moderate, manageable pace, especially compared to the previous cycle’s peak. As demand, including residential and commercial, is still quite abundant, there is still room for supply to increase further.
Besides emphasizing on risk management, the proposed amendment might be part of a bigger macro economic policy where industries and sectors of development priorities might change over time depending on sector’s performance at point of policy review.
The proposed change in regulation would certainly have impacts to property developers. In a good way, the change would help restrain liquidity risk in the property market as well as in the banking system, especially in a potential rising interest rate environment. However, the change, if approved, would also create difficulties to property developers, investors, and buyers, especially as types of financing among local developers are currently limited largely to bank financing.
In order to balance between risk management and ensuring healthy growth of the property market, phasing the implementation of the two proposed changes might prove more beneficial to different stakeholders. Moreover, it might be necessary to take into account further the level of additional asset risk to impose on property sector, especially as the current level is already the highest level of all asset groups.