Central bank clamps down on corporate bond growth

The State Bank of Vietnam (SBV) has sent a circular to the commercial banks noting that investment in corporate bonds is laden with risk, but many banks have large proportions of their asset structure comprised of corporate bonds, and this has been increasing rapidly.

The circular said commercial banks can no longer purchase corporate bonds for the purpose of restructuring debts of issuing enterprises, and must also take post-lending supervision measures to limit bad debts.

A large proportion of the bonds have been also been issued to finance investments in the real estate sector, which the SBV considers risky because of its inherent instability and many difficulties still faced by businesses in the sector.

According to the Hanoi Stock Exchange (HNX), the value of corporate bonds issued in the first half of this year reached VND89.48 trillion ($3.86 billion), up 34 percent year-on-year. Securities firm MBS Securities reported that 42 of this were issued by banks, and 30 percent by businesses in the real estate sector.

Real estate firms have also been issuing bonds at higher interest rates, averaging around 11-13 percent per annum, sometimes as high as 14.5 percent, compared to average bank bond yields of just 7-8 percent a year, MBS said.

Bond growth was spurred by a new regulation released in December last year that removed or eased many of the conditions for private bond issues, and tightening credit policies on real estate lending have been forcing real estate firms to seek alternative sources of finance, according to the Ho Chi Minh City Real Estate Association (HoREA).

However, economists have warned that the high interest rates also raise the risk of default, and lower transparency requirements mean investors have to be more careful.