Solutions to limit bad debt in real estate lending at Joint Stock Commercial Bank for Investment and Development

Real estate is a fixed commodity and cannot be moved in terms of location and it is influenced by factors of customs, psychology and tastes. Meanwhile, the psychology, customs and tastes of each region and each locality are different. Therefore, the operation of the real estate market is deeply local.

On the other hand, the real estate market is decentralized and spreads across all regions of the country. Real estate products with “excess” in this area cannot be sold in other areas. Besides, each market is local in nature with different sizes and levels due to uneven development among regions, regions, natural conditions and level of socio-cultural development- Different societies lead to different sizes and levels of development of the real estate market. The real estate market in urban areas with a high scale and level of economic development is more active than the real estate market in rural and mountainous areas.

The real estate market is governed by legal factors.

Real estate is a great asset of each country, a special commodity, and real estate transactions have a strong impact on most socio-economic activities. Therefore, real estate issues are closely governed and regulated by the system of specific legal documents on real estate, especially the system of legal documents on land and housing. This feature is especially true in our country because the tier 1 land market (primary market – land allocation and land lease) is the most affected by decisions of the State.

Governments around the world are interested in real estate and the real estate market, always adjusting policies on real estate and the real estate market to mobilize resources in real estate to serve socio-economic development goals.

– The real estate market is an imperfect market (incomplete information, lacking some market organization).

This feature comes from the specific characteristics of each region, subject to the influence of natural conditions as well as traditions and customs, tastes, and social psychology in the process of using real estate. Even in the process of using real estate. Local markets themselves, understanding of transactions are also imperfect, buyers and sellers often lack information regarding previous transactions. The influence of the State is one of the factors that make up the imperfection of the real estate market. Any State has intervention in the real estate market at different levels, mainly in land to realize common development goals. Real estate is different, market news is limited, land in the primary market depends on the decision of the State, so the real estate market is an imperfectly competitive market. On the other hand,Due to the non-renewable nature of the land, the real estate market is more exclusive and speculative than other commodity markets. The real estate market is closely related to the capital market. and finance. The development of this market affects many types of markets in the economy.

Real estate is an investment property on land, including the value of the land after it has been invested.

Real estate investment often uses a large amount of capital with a long time to form real estate as well as a long capital recovery. When real estate participates in circulation on the real estate market, the values as well as the rights to real estate are exchanged, bought, sold, traded, etc. solve money circulation problems, recover investment capital and bring profits to trading parties. This proves that the real estate market is an important output of the capital market. In contrast, a well-functioning real estate market is the basis for mobilizing large financial resources for economic development through mortgages and disbursements (According to statistics, in developed countries the amount of money banks lend over the world). mortgaged real estate accounts for 80% of the total loan amount).

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In addition, the real estate market also has a direct relationship with the construction market and thereby bridging the market for building materials and furniture, the labor market, etc. The fluctuations of this market have a spillover effect on the stable development of the national economy.

1.2 Real estate business lending

1.2.1 Characteristics of loans for real estate business

Real estate business is a specific type of business with real estate being a great value commodity. Due to the increasing population, the demand for housing is increasing, but the land fund is limited, especially in urban areas, so the real estate market is always in a state of greater demand than supply. Bank credit in the field of real estate is a credit relationship between a bank and a customer (natural or legal person) related to the field of real estate. Accordingly, real estate credit is the bank’s provision of capital to customers based on the customer’s loan purpose related to real estate. In this case, the bank gives loans to customers to: invest in real estate business, build houses for sale, repair and sell houses, build and complete infrastructure projects, buy houses on installments, build building offices for lease etc… Characteristics of business lending Real estate is a very long payback period due to slow capital turnover, there are types from 3 years to 5 years but some types last up to 10 years or 20 years. Due to the huge demand for investment capital, many credit institutions will participate in lending in the same project. The question here is when can the lending bank recover the capital? Organizations and individuals that borrow capital for real estate business often have to face a lot of pressure from the market such as rising material and labor prices. controllable, after-investment products such as apartments, low-rise houses or offices are difficult to find and reach customers who want to rent or buy. All of the above factors are the direct causes leading to the difficulty of paying bank loans on time. For long-standing banks, lending for real estate business is very conservative.cautious because these banks have many years of experience in credit activities. In addition, joint-stock banks that have just transformed their operating model or have just been established often expand lending because they are under pressure from the leadership or the board of directors to accept a lot of risks that arise in the process. Borrowing capital for real estate business from customers.

– Objects of loans for real estate business are very diverse, but the main customers are still construction enterprises and real estate businesses. These are large investors who play a particularly important role in creating a tangible form of real estate goods. In addition, individual customers also account for a certain proportion, which are considered, facilitated and given a lot of preferential loans by banks.

1.2.2 Loan method

Banks and credit institutions possess an abundant amount of capital, providing effective conditions for transferring idle money from people to investors. Due to the nature of business activities in banking and credit institutions, raising capital from this channel is quite easy and accessible, especially for small and medium enterprises.. In fact, the amount of capital invested in real estate in our country accounts for more than 60% of bank loans. Banks can provide direct loans to investors who have legal business registration for real estate investment and business in Vietnam and have a need to borrow capital for real estate investment and business, and have financial ability to guarantee loan repayment. Within the commitment period, there is a feasible and effective investment project, production, business and service plan or a life service plan in accordance with the provisions of law, when the project has been approved. The competent authorities approve and appraise the loan by the bank. This loan is mainly for expenses related to site clearance for construction preparation, costs of construction materials such as cement, iron and steel, etc. In addition, the bank may also consider lending to customers. with individual customers for the purpose of buying apartments,buy project land … in a short time about 1-2 years. Customers are Vietnamese citizens residing in Vietnam, foreigners residing in Vietnam with full financial capacity and clear sources of debt repayment. Customers will be supported to the maximum of their loan needs depending on their needs and ability to repay, and the loan procedure depends on the specific regulations of each bank. In addition, some banks also have a form for customers who have housing needs but do not meet the financial conditions, which is installment loans to buy houses. With this form, customers wishing to own a place to live are completely able to choose products that are suitable for their budget and purpose with a variety of products on the market.Customers will be supported to the maximum of their loan needs depending on their needs and ability to repay, and the loan procedure depends on the specific regulations of each bank. In addition, some banks also have a form for customers who have housing needs but do not meet the financial conditions, which is installment loans to buy houses. With this form, customers wishing to own a place to live are completely able to choose products that are suitable for their budget and purpose with a variety of products on the market.Customers will be supported to the maximum of their loan needs depending on their needs and ability to repay, and the loan procedure depends on the specific regulations of each bank. In addition, some banks also have a form for customers who have housing needs but do not meet the financial conditions as installment loans. With this form, customers wishing to own a place to live are completely able to choose products that are suitable for their budget and purpose with a variety of products on the market.purpose with a variety of products on the market.purpose with a variety of products on the market.

1.2.3 Developments of the real estate credit market

The real estate credit market undergoes two forms of development: the primary mortgage market (direct market) and the secondary mortgage market. In developed countries, the primary and secondary mortgage markets are both very developed, so loans for home buyers have low interest rates and can be extended for 20-30 years, thereby meeting the needs of people quite well. housing needs of the people.

Primary mortgage market (direct market) is a form of direct lending by credit institutions to buyers or borrowers. This credit service is secured by residential properties that have already formed or are certain to be formed in the future in order to create financial resources for consumption, purchase, repair or construction purposes. , buy housing (for individuals); or lending to enterprises for production and business, investment in fixed assets, supplementing working capital; or loans to carry out real estate investment business projects. During the repayment process, if the borrower is insolvent, the credit institution will sell the collateral to recover the loan principal and interest. In this market, there may be a liquidity risk for credit institutions when borrowers do not pay their debts on time.or when the financial institution needs money for other business purposes but the loans are not yet due, then the credit institution will be short of cash. In Vietnam, there is only a rudimentary primary mortgage market and a lot of risks due to lack of liquidity, insufficient legal support…so the real estate market develops very weakly, has poor purchasing power and products. too little and often there are price fluctuations and people’s housing needs are not met, investors can’t mobilize people’s idle capital into the housing market.products are too few and there are often price fluctuations and people’s housing needs are not met, investors also cannot mobilize people’s idle capital into the housing market.products are too few and there are often price fluctuations and people’s housing needs are not met, investors also cannot mobilize people’s idle capital into the housing market.

The secondary mortgage market is the market in which credit institutions can buy and sell primary mortgage loans to create liquidity for these credits in the form of discounting and rediscounting based on the outstanding loans. mortgage interest and the maturity of the mortgage debt of the property owner. The more developed the secondary mortgage market, the more abundant the financial resources for investment, business and marketing loans for housing products. Participating in the secondary mortgage market including financial institutions, housing funds, investment funds, banks, insurance funds, savings… Thus, the more developed the secondary mortgage credit market, the more developed the mortgage credit market. The more abundant and long-term financial sources for investment, business and consumption loans with acceptable interest rates, the more purchasing power of the market will increase,create a premise for housing production and development and the new State can solve the housing problem for the people.

1.2.4 Appraisal criteria for real estate business loans

In the world, real estate lending is one of the most popular financial services of banks. The banks that can lend money to real estate are usually banks with long-term deposits and a team of staff knowledgeable in the process of assessing property values and knowledgeable about real estate laws.

In Vietnam, the total number of current valuation standards is 12 standards applied to the valuation of properties including real estate. When appraising loans for real estate business, banks are usually based on the following criteria: + Target customers: individuals, business households, private enterprises, companies… civil act capacity, business reputation and credit history (never incurred overdue debts).

+ Purpose of loan: to supplement business capital, invest in projects, provide consumer loans or for other purposes not contrary to the provisions of law. For real estate investment projects, in addition to meeting the bank’s credit regulations, the project must also meet the provisions of the law on land, investment and construction.

+ Effectiveness of the loan plan/project: this is an important source of debt repayment for the project, the bank only considers lending for viable business plans with controllable risks.

+ Current and future financial capacity of customers, stable income source.

+ The loan term is determined by the bank in accordance with the production and business cycle, business characteristics, financing capacity of customers and the bank’s loan capital.

+ Collateral is real estate legally owned by the borrower or guaranteed by a third party and property formed from the loan. Collateral can be houses, factories, office buildings, land use rights, etc. The value of the collateral is valued by the bank or through an independent valuation agency. Depending on the customer policy, the bank will decide the ratio of the loan to the value of the collateral.

1.2.5 Loan products for real estate business

Although there is not a complete statistics on real estate credit products of banks today, there can be some basic types of real estate credit products as follows: + Loans for investment projects Residential real estate: this is the field of lending to businesses to invest in real estate projects to create houses such as: urban areas, residential areas, residential projects… + Loans for investment in commercial and production real estate Commercial loans include: loans for investment in factories, industrial parks, commercial centers, offices for lease… + Tourism real estate loans include: loans for investment in restaurants, hotels, resorts, resorts… + Loans for real estate trading (real estate speculation): the purpose of customers to borrow money to buy real estate and resell it is to enjoy the price difference from the expectation of an uptrend in real estate prices. 12 years. The main source of debt repayment comes from the sale of real estate.

+ Loans for production and business mortgaged by real estate: Enterprises mortgage real estate to borrow capital to supplement business capital or for other investment purposes.

1.3 Bad debt in real estate lending

1.3.1 Concepts

The definition of bad debt of Vietnam in Decision 493/2005/QD-NHNN dated 22/4/2005 of the State Bank is as follows: “NPLs are debts classified into group 3 (subprime), group 4 (suspicious). doubt) and group 5 (potentially losing capital)”. Specifically, group 3 or less includes debts that are overdue for payment of interest and/or principal for more than 90 days, and at the same time, Article 7 of the above Decision also stipulates that commercial banks shall base their accounts on the repayment capacity of customers. loans into the appropriate groups. Thus, bad debt is determined by two factors: overdue for more than 90 days and worrying ability to repay.

According to the definition of bad debt of the Statistics Office – United Nations, “basically a debt is considered bad debt when the interest and/or principal payment is overdue by more than 90 days; or unpaid interests of 90 days or more which have been principally refinanced, refinanced or delayed as agreed; or payments that are less than 90 days past due but there is solid reason to doubt that the loan will be paid in full.” Thus, bad debt is also basically determined based on 2 factors: overdue for more than 90 days and doubtful repayment ability, and when customers have bad debts of group 3 or more, it will be very difficult to be approved by the bank. loan for at least 5 years.

After classifying debts, credit institutions must make provision for risks according to the following ratios: + Group 1: 0% + Group 2: 5% + Group 3: 20% + Group 4: 50% + Group 5: 100% Amount Amount to be set up = setting up ratio x (principal balance – value of collateral for that debt)

Bad debt ratio /Total credit balance = total value of bad debts / total credit balance at the time of calculation (it is equal to the ratio of bad debt to total debt from group 1 to group 5).

Clause 1, Article 4 of the Law on Real Estate Business 2006 stipulates that “Real estate business includes real estate business and real estate service business”. From there, it can be defined that bad debt in real estate lending is group 3, group 4, group 5 loans with the main purpose of serving real estate investment projects and real estate services.

1.3.2 Causes of bad debt in real estate lending

Theoretically, bad debt occurs when the borrower’s ability to fail to perform or fulfill obligations towards the bank, causing losses to the bank. In other words, it is the ability of customers to fail to pay or not fully and on time pay both principal and interest to the bank. Bad debt in real estate lending occurs from many different factors such as the unstable legal and economic environment, which reduces the repayment capacity of customers or the weakness in management and control capacity. control bad debt of the bank itself. Bad debt can happen due to many reasons: – Objective reasons

+ Due to unstable economic environment

The process of global liberalization and international integration can cause bad debts to increase rapidly when creating an extremely fierce competitive environment, making businesses – customers of banks have to face the law. competition and risk of loss.

The recent high and growing bad debt affects Vietnam’s unreasonable and ineffective growth model, especially when the economic environment is more difficult.

The economic growth (GDP) is high and capital-based, while technology, and specifically management, has not kept pace, the more businesses borrow, the more difficult it is to effectively manage the currencies. that loan (or the business becomes more careless with easy capital). The difficult macroeconomic environment is also certainly reflected in the bad debt in banks. Therefore, when the economy declines, that difficulty is also reflected in the assets of enterprises, and it is inevitable that enterprises’ loans from banks are also difficult to repay, and bad debts increase.