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Funding securities investments: Instruction 03 needs adjustment
In the world, only Vietnam and India put a cap on loaning for securities investments, according to Dr Le Xuan Nghia, Head of the Banking Development Strategy Department under the State Bank of Vietnam.
The State Bank’s instruction No 03 on controlling the scale and credit quality of loans given for securities investments has remained a hot topic for the last two months (commercial banks are not allowed to have more than 3% of total outstanding loans be loans to securities investors). Though aiming to control inflation and minimise risks for the banking system, the instruction has been continuously criticised for being the ‘culprit’ that made the stock market gloomy in previous months.
Mr Nghia said: “Every legal system in the world has defects. However, a strong legal system repairs its defects right after a crisis occurs. Meanwhile, a weak legal system only repairs its defects after a crisis has dealt a great blow to the economy.”
Vietnam seems to be a special case, where commercial banks are prohibited from having more than 3% of their total outstanding loans go towards securities investments. Do you think so?
In the world, except Vietnam, India is the only country which puts a cap on loaning for securities investments. The country stipulates that the loans for securities investments must not be higher than 5% of total assets of banks. Let me repeat, 5% of total assets, not 5% of total outstanding loans. 5% of total assets would be much bigger than 5% of total outstanding loans. Meanwhile, other countries do not prohibit banks from lending to securities investors. Commercial banks set up regulations themselves to decide whether to lend and how much to lend.
Which regulations, for example?
The interest rates on loans for securities investments must be higher than the rates applied for normal loans. In principle, banks always require higher interest rates on higher risk loans.
Moreover, commercial banks have the right to decide how much to lend after considering the quality of share items. For example, banks can lend the sum of money equal to 85% of the value of mortgaged assets if investors plan to buy a blue chip. In some cases, the maximum lending sum is 30% only.
Central banks can control the loaning for securities investments by requiring banks to set up risk provision funds. For example, banks have to put one dong into the provision fund for every one dong they lend to securities investors. In addition, central banks can make regular inspections of banks, and they can ask banks to stop lending if they find the credit quality not okay.
Is it true that the ratio of loans given to securities investors is very big and at risky level?
Our survey of 15 banks showed that the loans given for securities investments account for 10-25% of total assets.
I think Instruction No 03 should be adjusted this way. First, the State Bank should extend the deadline for collecting debts in order to give banks more time to reduce the outstanding loans given to securities investors. Second, the instruction compilers need to refer to international practice when setting up new regulations.
Dan tri
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