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Finance & Banking

Last updated: Wednesday, July 18, 2018


Quick Credit Growth: Concerns about Capital for Infrastructure, Real Estate

Posted: Tuesday, June 20, 2017

Vietnam’s GDP growth is heavily dependent on bank credit and a credit increase will accelerate CPI growth. The country’s GDP growth climbed just 5.1 per cent in the first quarter of 2017, the lowest in three years, while credit growth rose to a record high in eight years.

Further loosened monetary policy
At the regular government meeting for May 2017, the Prime Minister requested the State Bank of Vietnam (SBV) to increase credit growth beyond the initial plan of 18 per cent. As disbursed funds for public projects grow slowly, the Government-backed credit boost will stimulate economic growth and create opportunities for banks to expand credit loans.

Remarkably, the Prime Minister's instructions came after a series of commercial banks reported record credit growth rates since the beginning of this year, especially in the latest two months. According to SBV data released at the regular cabinet meeting for April 2017, the credit growth of the entire banking system grew 4.86 per cent in the year to April 20, 2017. Then, at a dialogue between the business community and the Prime Minister on May 17, SBV Governor said that the credit growth of the entire banking system reached 5.76 per cent in the year to April 28. Specifically, credits in Vietnamese dong and foreign currencies rose 5.87 per cent and 4.64 per cent, respectively. Thus, in just eight days, the banking system recorded a credit growth of 0.9 per cent. And, the latest figures showed that the credit growth hit 6.53 per cent in the year to May 25, the highest in eight years. Some banks such as ACB, Vietcombank and LienVietPostBank reported their credit growth ranging from 8.3 per cent to 11 per cent from the beginning of the year.

The Government’s administration indicated loosened monetary policy to spur growth. A recent report by Bao Viet Securities Joint Stock Company (BVSC) showed that, given the current inflation, SBV's loosened monetary policy may be moderate. If inflation is under control in the coming months, the SBV may raise the target credit growth by another 1-2 per cent to support growth in the context of relatively low GDP growth in the first quarter of 2017.

CPI doesn’t match fund increase
The GDP growth of 5.1 per cent in the first quarter of 2017 was lowest in three years, while credit climbed to an eight-year high. Rapid credit growth and low GDP growth somewhat herald that funds are being allocated to low value-added areas.

The economic growth was not as high as expected. Thus, economists questioned where credit is being allocated in the economy. Besides, despite slowing growth, outstanding loans in industrial and construction sectors still make up the largest share in the economy. As of the end of 2016, total outstanding loans in industrial and construction sectors valued more than VND1,700 trillion, three times more than credits for agriculture, forestry and fisheries in combination. These figures showed that bank loans have been poured heavily into traffic infrastructure, construction and real estate.

Another issue is that monetary policy is loosened while bad debt has not been resolved in essence, thus causing concerns that the debt is ballooning rather than being tackled gradually. Specialists warned that credit flows need to be tightly controlled. Bank credits flowing into real estate may be cloaked in the form of consumer loans and a real estate bubble may occur as a result, thus creating a new class of bad debt. The land rush in Ho Chi Minh City is a warning token against credit flows into the property market rather than into the manufacturing sector.

In this regard, the SBV asked credit institutions to control short-term and medium-term loans, real estate loans and credits for BT and BOT transport projects. The SBV intensified control by issuing Circular 06/2016/TT-NHNN amending and supplementing a number of articles of Circular 36/2014/TT-NHNN on security limits and ratios at credit institutions and foreign bank branches or Circular 41/2016/TT-NHNN on capital adequacy ratio for banks and bank branches.

To effectively manage risks, credit quality must be tightly controlled. Controlling credit risks and measuring credit safety is not easy for the time being as security assets are real estate. Meanwhile, the real estate market is quite volatile and risky to bank loans, while bad debts remain huge and unsettled.

Le Minh

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