New regulations of the Law on Credit Institutions tighten lending to real estate businesses

The 15th National Assembly has just voted to approve the draft revised Law on Credit Institutions with 91.28% of the total number of delegates in favor. Accordingly, the Law on Credit Institutions (amended) related to handling real estate bad debts of banks may cause both banks and real estate businesses “to face difficulties”. Specific content is discussed below.

1. Current situation Bad debt in real estate business activities is high and skyrocketing.

According to statistics from the State Bank (SBV), as of November 31, 2023, outstanding credit debt for real estate business activities reached 1,022,532 billion VND, an increase of 28,614 billion VND compared to the end of October 2023.

Many banks with a high proportion of real estate loans such as Techcombank, MB or VPBank also face pressure of increasing bad debt. For example, at Techcombank, in 2023, this bank will set aside nearly 177,000 billion VND, equivalent to 35% of total outstanding loans for real estate businesses. This has contributed significantly to the increase in Techcombank’s bad debt ratio in 2023, reaching approximately VND 6,000 billion, double that of 2022.

2. Tightened legal regulations to prevent bad debt for real estate business activities in the future.

Faced with the situation of increasing and high credit debt, the Law on Credit Institutions (amended) with contents aims to tighten capital mobilization for real estate business activities. Accordingly, transfer of real estate projects as collateral for debt recovery is carried out in accordance with the law on real estate business and relevant laws. Specifically: transferred real estate projects need to meet the conditions specified in the Law on Real Estate Business: have been approved for investment by the authorities; There is no dispute over land use rights, no distraint to execute a judgment; The project is still under implementation; For the transfer of a part of the project, it must be ensured that the transferred part is independent of the other parts.

Many experts expect that with changes in the Law on Credit Institutions (amended), the bad debt ratio related to the real estate sector will significantly decrease, contributing to reducing risks for the banking industry.

According to experts from MB Securities, this new regulation helps banks have more options to handle large projects with a small part of them facing legal problems. “Thereby helping to clear the cash flow of real estate businesses and reduce bad debts for banks, especially the group of listed banks with high real estate lending rates such as Techcombank, MB Bank, VP Bank, SHB, HDB,” MB Securities said.

VNDirect experts also commented that changes in the transfer of collateral assets that are real estate help make clearer regulations on handling part of real estate projects, thereby speeding up the process of handling collateral assets to recover bad debts.

3. Influence of real estate businesses on changes in law.

Although experts have commented positively on the change in the Law on Credit Institutions (amended), on the contrary, there are many opinions that real estate businesses may be at a disadvantage before this new Law. Ho Chi Minh City Real Estate Association (HoREA) has submitted a request to consider amending the above regulations to create conditions for credit institutions to handle bad debts with real estate projects as collateral.

HoREA is concerned that Clause 3, Article 200 of the Law on Credit Institutions (amended) may lead to congestion in bad debt handling activities of credit institutions. “If the investor wants to transfer, it is necessary to have completed the project’s financial obligations regarding land including land use fees, land rent and taxes, fees and charges related to land (if any) to the State,” HoREA representative said.

Sharing with VietnamFinance, a lawyer specializing in real estate law said: “Basically, the Law on Credit Institutions (amended) is a way to tighten real estate credit. If the Law only allows the transfer of real estate projects after meeting many strict conditions, commercial banks will have to tighten lending standards and only disburse funds if the real estate project is eligible for transfer.

Meanwhile, real estate project investors need bank loans the most when the project has not yet met the transfer conditions, such as site clearance and financial obligations not yet fulfilled. Once they are eligible to transfer, they don’t really need bank loans anymore.”

Sharing the same opinion, lawyer Nguyen Van Dinh said that the Law on Credit Institutions “puzzles” banks in transferring real estate projects as collateral to handle debt. Are banks willing to accept mortgages on real estate projects to lend to investors when they know there will be congestion if they have to handle debt and real estate projects may continue to be “starved for capital” because it is difficult to meet transfer conditions, he is concerned.

4. Viewpoints of state agencies on changes to the Law on Credit Institutions.At the closing session of the 5th extraordinary session of the 15th National Assembly on the morning of January 18, 2024, presenting the reception and explanation report, Chairman of the Economic Committee Vu Hong Thanh said: “This is a Law project with many in-depth contents, having a great impact on economic, financial, monetary policies, and macroeconomic stability. The reception and completion of the draft Law has been done thoroughly and carefully, in accordance with guidelines and policies.” of the Party, the State and the 2013 Constitution. Up to now, the draft law has fully met the set requirements, ensuring the safety, health, transparency, stability and sustainability of the banking system and credit institutions, developing in accordance with market principles, socialist orientation and common international practices and standards, improving competitiveness, continuing to promote its role as an important capital channel of the economy.

See details of the Law on Credit Institutions No. 32/2024/QH15 here