If the instruction by the central bank to limit the outstanding loans funding securities trading to 3% of banks’ total outstanding loans is enacted the stock market will suffer as cash flow will decline dramatically.
Loans to fund securities trading deals have been booming for the last two years. The demand for borrowing money to make investment in securities has been increasingly high, especially when the market is hot.
The outstanding loans funding securities trading deals have been sharply increasing in banks in the last time. The Asia Commercial Bank (ACB), for example, has reported the increase of 30% in loans to securities investors in the first quarter of 2007 compared to the fourth quarter of 2006.
According to Bui Tan Tai, Deputy Director General of ACB, the limit at 3% of total outstanding loans is nearly used up (90%). Mr Tai said that though the stock market had declined in recent days, the number of clients asking for funding securities trading deals was still increasing.
Other commercial banks did not reveal the exact figures of their outstanding loans funding securities trading deals, but said that their outstanding loans had also nearly hit the bar. In fact, commercial banks have found out that funding securities trading deals proves to be good business, and they do not want to miss opportunities.
Some commercial banks have voiced their dissatisfaction at the central bank’s decision. “Why limit the loans if banks can control the mortgaged assets, while clients can prove their capability to pay debts?” they questioned.
In fact, the funding of securities investment deals has been going safely. Analysts said that banks just provided the loans valued at 50% of the market share values at the time of loaning.
Director General of a HCM City-based joint stock bank said that he agreed with strict control over loaning for securities trading deals. However, he said that the limitation would make the stock market suffer.
He said that banks would have not much time to implement the central bank’s instruction as they had to obey the instruction within 15 days after the day the instruction went into effect.
The problem lies in the fact that the outstanding loans for securities trading deals in many banks have nearly hit the bar of 3% of total outstanding loans.
Banks will have to collect debts from the borrowers, the securities investors, soon, to ensure that their outstanding loans are within the safety line. Investors will have to sell shares to pay off their debts at the banks, and this will affect the cash flow in the stock market.
“The urgent implementation of the central bank’s instruction will put difficulties on banks, investors and stock market as well. Therefore, it would be better to draw up a roadmap to reduce gradually the loaning for securities trading deals. This work cannot be done overnight,” the director said.
Huynh Anh Tuan, Head of the Brokerage Division under ACB Securities Company, also said that the stock market would suffer from the limited cash inflow into the stock market.
In the past, the market was quiet when the cash flow into the market was limited, but the situation has been improved with the banks’ support. With the new regulation, the market may be quiet again.
Mr Tuan said that there would be more and more commodities on the stock market when big groups and corporations make IPO. In order to buy the commodities, investors need to have enough capital. However, they will find it difficult to arrange enough capital to make new investment deals.
Source: VNE
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