Capital injection in property market calls for comprehensive measures

The Vietnamese central bank's recent lowering mobilisation rate could hardly result in an immediate decline in lending rate. Many commercial banks admitted reluctance to further finance real estate projects despite their ample room for credit growth.

Reluctance to loan despite surplus room for credit growth

Over the past three months, banking sector's liquidity has significantly improved, which would facilitated lending rate relaxation. Moreover, the recent credit loosening for property sector has raised hope for loan extension and rollover so as to put an end to pending projects. Yet, commercial banks have learnt bitter lessons of bad debts as a result of frozen property market. Therefore, many lenders are still hesitant to pump out capital into the market given the high-risk nature and fairly weak liquidity of realty market.

In essence, banks themselves are enterprises that specialise in money-trading making operational efficiency and likelihood of debt collection one of their concerns. Therefore, financially unhealthy borrowers that fail to meet loan eligibility would not be loaned, which could otherwise result in increased bad debts, then downgraded credit ratings and eventually hit other areas of business.

Consumption loan stimulus

The softer loan conditions for consumption and home purchasing particularly debt repayment by various income sources instead of merely wages as previously are anticipated to generate demand. As such, not only buyers of real housing demand with stable income mainly from salaries but real estate speculators with abundant money and different sources of unusual income would be beneficial.

In the previous years, bustling real estate market was principally driven by speculation whereas residents of real housing demand have hardly approach home loans, according to Truong Dinh Tuyen, senior advisor to prime minister. Yet, real estate speculators have suffered from frozen market over the recent years, hindering deeper involvement in the context of weak consumption and potentially bearish property
price.

Therefore, home loans are expected to reach buyers of real demand upon flexible consumption loan conditions for the time being.

Comprehensive measures

Admittedly, it is important to loosen credit to property sector, yet what matters is the market demand. Demand stimulus would not only be facilitated by commercial banks but the government and the state bank as well. The government's scheme no.254 enables government and the central bank to buy back several real estate projects for social security purposes such as resettlement housing and dormitory.

The state budget could hardly cover all real estate projects, yet purchasing merely three out of ten is likely to not only open up a new channel of capital for these three projects but also boost up liquidity for the remainders, which would then restore market confidence and therefore encourage further capital injection into this market.

As such, real estate market's warming up would call for a comprehensive remedy package concerned with the government as well as ministries and branches rather than merely credit from commercial banks.

If lowering mobilisation rate could pull down input costs, which would enable commercial banks to purchase government bonds at high interest rates, said Dr Le Dat Chi at HCM City Economics University. These G-bonds would then be rediscounted in open market so as to make profit, which would mean no further capital pumped out into the economy, he added.

For instance, with the mobilisation rate of 12pct pa, obtaining G-bonds with yield of 13pct pa that would then be rediscounted via OMO at 11pct pa would be profitable.

Hence, in addition to lowering mobilisation rate, the central bank should cease pumping in capital and refinance commercial banks. - Source: Vietbiz24