Half of consumer loans in Vietnam are mortgages or related to house repairs, which raises fears about banks’ liquidity.

A labelling problem

According to Nguyen Thi Hong, Deputy Governor of the State Bank of Vietnam (SBV), the growth of outstanding loans in real estate has slowed down since 2016.

Property loans now account for only 8% of all outstanding debts serviced by banks. This is partly thanks to the SBV’s iron fist controlling credit risks and avoiding to use short-term funds for long-term debts.

Still, the National Financial Supervision Council (NFSC) said in a report that banks are trying to group some of their real estate loans into consumer credit. This is to create an illusion of lower property debts while they are in fact rising.

Consumer credit rose by 29.7% since 2016, half of which comes from loans for house repairs and mortgages. NFSC stated that if consumer credit for real estate was counted as real estate credit, the 8% figure would rise to 14%.

“This situation calls for close monitoring from SBV,” the report reads.

The fact that credit growth still needs to rely on real estate, a boom-and-bust industry, has worried many economic experts. Meanwhile, manufacturing and service are still going through a slow recovery.

About 62% of bank loans in Vietnam are taken out by homebuyers, while developers account for much fewer loans.

More problematic are property speculators, who borrow money to buy a string of real estate products. These profit-hungry speculators can easily create another property bubble, as shown in the recent land-buying craze in Ho Chi Minh City.

It is also extremely risky if bank owners lend to their own companies.

Treasury-aid liquidity

Currently, liquidity is quite solid as the loan-to-deposit ratio has dropped to 87% and interbank rates fell from 5% to 4.2%. In May, SBV brought in VND28 trillion (US$1.23 billion) via open-market operations.

However, it should be noted that better liquidity is not due to any improvements in banks’ financial health. According to NFSC, liquidity has been boosted by deposits from the Treasury Department.

As disbursements for state investments slow down, the Treasury has deposited VND122 trillion (US$5.37 billion) in banks between January and April.

NSFC also pointed out that the difference between outstanding credit and Vietnam’s GDP has been rising since the end of 2015. This rate, which is used as an early warning for liquidity risk, reached 11% in the first quarter of 2017. This is only slightly lower than in the recession period of 2011, when the difference stood at 13%.

VIR’s sources said that at least 13 Vietnamese banks still suffer from liquidity problems. The real amount of bad debt at these banks exceeds the official figure.

The ongoing bad debt problem is the sad result of Vietnam’s over-dependence on bank credit. As of the first quarter of 2017, financial institutions continue to provide 60% of the economy’s capital.

VIR