Võ Trí Thành*

The State Bank of Việt Nam (SBV) has had to suspend the vigorous enforcement of some regulations on lending activities of credit institutions and branches of foreign banks, which, according to businesses, is making it hard to get bank loans.

Specifically, after the urgent request of the Prime Minister, the SBV on August 23 issued Circular No 10 to suspend the implementation of Clause 8, Clause 9 and Clause 10, Article 8 of Circular No 39 dated December 30, 2016 (has been supplemented according to Clause 2, Article 1, Circular No 06 issued on June 28, 2023). Circular 10 has been in effect since September 1.

The purpose of Circular 06 is to reduce risks caused by cross-ownership and subprime lending, especially to subsidiaries and affiliates of banks’ shareholders.

Currently, many major shareholders behind banks are still trying to find ways to inject capital into their own companies (commonly real estate) in the form of lending to contribute capital to buy shares, lending to implement projects, and lending to settle investment cooperation contracts.

Lessons from the past and especially from the case of the Sài Gòn Commercial Bank (SCB) and Vạn Thịnh Phát Group are probably the reason why Circular 06 was issued with several stricter regulations to prevent risky loans from banks and maintain banking system safety.

The Circular also aims to prevent the “too big to fail” situation in which a bank is so deeply ingrained in an economy that its failure would be disastrous to that economy, and the Government has to consider bailing out to prevent economic disaster; as well as to reduce the negative impact of moral hazard problem – a situation in which a party to a transaction decides to take risk knowing that the other party will bear the cost if things go wrong.

The harmonious combination of boosting growth and controlling risks in the banking industry is always likened to the coordination between a vehicle’s brake pedal and accelerator. The tight brake will restrain growth, but when the accelerator is too strong, it is necessary to use the brake to control the risk.

How to control the brake pedal while still creating momentum for growth is not always an easy job for policymakers. This is even more difficult, especially in the context that cross-ownership in Việt Nam is still complicated.

However, Việt Nam’s economic growth has been slowing down and is unlikely to reach the year’s target due to global headwinds, which leads to shrinking exports; declining domestic consumption demand; and a stagnant real estate sector – one of the key industries having a role in boosting growth. Smoothly dealing with difficulties in the real estate sector is an important factor contributing to getting the economy back on track.

In the context of economic volatility, all three regulations considered "special drugs" against cross-ownership mentioned above have been suspended. This is considered a temporary solution in the circumstance where the growth target needs to be prioritised.

The suspension has been particularly hailed by real estate businesses as it is a timely move to resolve obstacles for those in dire need of capital to access credit, thereby facilitating the recovery of the property market.

However, the “loosening strings” means that the central bank’s “brake pedal” control will be more challenging.

The Asian financial crisis showed that the main reason why many banks fell into default was lax lending standards, and too many loans for the real estate sector in the past when there was a lack of close supervision.

SBV Deputy Governor Đào Minh Tú repeatedly cited the lessons of SCB and the three commercial banks that had to be bought back compulsorily by the State to show that if conditions for lending are massively loosened, credit quality will decline and bad debt will increase. In the context of capital supply for the entire market relying on the banking system (including long-term capital as currently), the banks' risks are the risks of the entire economy.

In fact, bad debt stemming from the real estate sector has recently increased. The ratio of real estate bad debts in June 2022 was 1.53 per cent while the figure a year later was 2.47 per cent.

According to data from the SBV’s Department of Credit of Economic Sectors, credit for the real estate sector in the first six months of 2023 increased by 17.41 per cent, exceeding the growth rate of 10.73 per cent in 2022. Meanwhile, the credit growth of the whole market in the first seven months of the year was just 4.56 per cent.

This implies that credit to the real estate sector is focusing on a number of larger-scale projects, while the overall number of projects licensed and qualified for loan granting is decreasing. If current developments continue, it may cause a higher risk of bad debt in the future.

It should be noted that the suspension is just a temporary measure to help real estate enterprises get easier access to bank lending. In the medium and long term, it is necessary to create a sound foundation for the companies and commercial banks to restructure. 

From a broader view, while the above strict lending regulations cannot be immediately implemented, there should be drastic measures to remove legal obstacles for each property project, especially large ones, such as those related to land law, housing law and real estate business law, to regain the market’s confidence.

Loose monetary policy needs to aim at the overall development of the economy, however, in reality, the economy depends heavily on the real estate sector, so sustainable growth can only be achieved when policies and the business environment of the real estate sector are more transparent and fairer.

According to Circular No 10/2023/TT-NHNN, the following loan purposes are not prohibited: “8. Loans used for making capital contribution to, buying or receiving transfer of stakes of a limited liability company or a partnership, or shares of a joint-stock company that is not yet listed on the securities market or registered for trading on the UpCom system; 9. Loans used for making capital contributions under capital contribution contracts, investment cooperation contracts or business cooperation contracts for executing investment projects that are unfit for sale or for business operation as prescribed by laws when the credit institution issues its lending decision; 10. Loans used for financial offsetting purposes, except for those meeting the following conditions: a) The customer has used their own funds for paying costs incurred from their business project for a period of less than 12 months by the time of the grant of the lending decision by the credit institution; b) Costs paid using the customer’s funds for executing a business project are costs to be covered using the fund borrowed from the credit institution under the plan to use borrowed fund submitted to the credit institution when applying for a medium-term or long-term loan for executing that business project.”

*Võ Trí Thành is a senior economist at the Central Institute for Economic Management (CIEM) and a member of the National Financial and Monetary Policy Advisory Council. A doctorate in economics from the Australian National University, Thành mainly undertakes research and provides consultation on issues related to macroeconomic policies, trade liberalisation and international economic integration. Other areas of interest include institutional reforms and financial systems. He authors Việt Nam News column Analyst’s Pick.