"Loopholes" for banks to invest in real estate

Recent public opinion has been divided in response to Saigonbank's statement encouraging groups and people to lease the bank's real estate. "Credit institutions are not allowed to engage in real estate business" if they are also credit institutions, according to Article 132 of the Credit Institutions Law (CIL) 2010, as revised and supplemented in 2017.

Credit institutions "trading" real estate

Significantly, a new draft modification to the Credit Institutions Law defines specific exclusions, enabling banks to continue to own, invest in, and possess real estate for use as company headquarters, workspaces, or storage facilities directly servicing credit institutions' commercial activities. This raises fears that it will open up chances for banks to "trade" in real estate.

According to Mr. Le Hoang Chau, Chairman of the Ho Chi Minh City Real Estate Association (HoREA), these "exceptional" provisions have given credit institutions the green light to expand their branch networks, workplaces, and storage facilities, particularly by constructing impressive office buildings that can serve as headquarters as well as for leasing real estate.

Furthermore, the clause "allowing the holding of real estate through debt handling" is a loophole for banks engaged in real estate industry, according to HoREA. The CIL 2010 permits banks to keep debt-related real estate for a maximum of three years before selling, transferring, or repurchasing it. This clause has already allowed financial institutions to engage in real estate transactions. The draft modification to the Credit Institutions Law now increases the holding time for real estate connected to debt management to 5 years, allowing credit institutions to function in the same manner as professional real estate firms.

According to Mr. Pham Lien, a lawyer at HTC Vietnam Limited Liability Company, who shares the same opinion, the nature of real estate assets is their fixed and less liquid character when compared to cash. As a result, when employing mobilized funds to engage in real estate developments, retrieving this capital in a timely manner would be difficult.

As a result, the law strictly prohibits commercial banks from investing in real estate, with the exception of investing in business headquarters to serve the bank's operations, handling bad mortgages from businesses, and leasing premises to ensure depositors' interests and the State Bank's orderly management.

"If exceptions are allowed, there is a high risk that banks will lose their ability to pay, affecting the legitimate rights and interests of customers and the public," said Mr. Pham Lien.

Potential large risks

Mr. Huynh Phuoc Nghia, Deputy Director of the Institute of Innovation and Creativity (University of Economics Ho Chi Minh City), citing the SCB bank instance, stated that capital buried in real estate affects the efficiency of capital utilization. When banks encounter dangers, the government must engage in their reorganization. As a result, encouraging banks to invest in and trade real estate is not recommended.

"The primary responsibility of credit institutions is to prioritize the provision of capital to businesses and the economy." If loopholes are created for credit institutions to rush into the real estate market, credit growth would suffer, especially since the real estate sector is prone to hazards and regularly has crises, and money will be 'frozen' in real estate," Mr. Nghia stated.

According to Mr. Le Hoang Chau, the State Bank must closely manage the situation of banks expanding networks, headquarters, branches, and storage facilities for real estate business, in addition to considering stricter regulations on allowing business activities, particularly leasing office real estate depending on the capacity of each credit institution.

Furthermore, HoREA suggests that the holding term for real estate be maintained at three years, as it is in the existing Credit Institutions Law, rather than five years, as recommended in the draft revision to the Credit Institutions Law. It is also vital to include a provision stating that revenue from real estate transactions should not exceed 15% of overall credit institution revenue.