Under Decision No 3 dated May 28, 2007, the outstanding loans given to securities investors must be no more than 3% of the total outstanding loans of credit institutions. It was interesting to note that the decision was enacted at a time when the market began a periodic gloomy time.

3% – overly strict and unreasonable threshold

The 3% barrier must be implemented by commercial banks prior to December 31, 2007, which means that the impact of Decision No 3 on the stock market will last until the end of 2007 at the earliest or until early next year.

At the time of the decision enactment, most joint stock banks had outstanding loans to securities investors reaching 7-10% of total outstanding loans. Therefore, right after the decision was promulgated, banks rushed to recover debts to reduce the loans. As a result, the capital flow has been prevented from going to the stock market.

The central decision’s has not only stopped the capital flow to the stock market, but also drawn capital from the stock market to banks, which has greatly influenced stock prices. A lot of investors have had to sell crops before harvest and at any price in order to get money for paying debts.

Keeping control does not mean stopping circulation

Experts all said that the attempt by the central bank to prevent the circulation of the capital flow between banks and the stock market with such the administrative order would have long-term impacts rather than short-term influences. No one has been able to produce a reasonable explanation about why the 3% threshold should be set up.

Le Xuan Nghia, Head of the Banking Development Strategy Department under the State Bank of Vietnam, said that only India limited loaning for securities investments (no more than 5% of total outstanding loans), while in other countries, commercial banks had the right to decide whether to give loans.

Le Dac Son, Director General of VP Bank, said that in other countries it was quite a normal operation for banks to loan for securities investment deals. However, he said that in these countries, banks always provided loans via investment funds, and that in these stock markets, the number of individual investors just accounted for 10% of total investors; therefore, not many individual investors borrowed money from banks for their investment deals.

According to Gerri Walsh from the US Securities Investors’ Association, in the US, banks still loan to securities investors with stocks being the mortgaged assets, provided that the borrowers take out insurance policies on this kind of investment.

In Vietnam, commercial banks have been trying to be cautious with their loans to securities investors. Banks only fund the purchasing deals of good share items, and the value of the loans is only 3-5 times higher than the share’s nominal value at maximum.

Avoiding hot development, but stabilisation is the priority

In fact, the aim of Decision 03 is to cool the overly hot development of the stock market; however, it has also brought about undesired effects. It has caused the instability of the stock market, prolonged the ‘correction period’ of the market, while affecting the IPO plans of big corporations, thus influencing foreign portfolio investment.

Preventing the overly hot development proves to be an important task, but the State Bank of Vietnam and the Ministry of Finance should also take actions to ensure the sustainable development of the stock market.

Source: VietnamNet.