Reducing Credit for Nonmanufacturing: More Time or Heavy Penalty

The deadline of June 30, 2011 for commercial banks to provide credit for non-productive fields to 22 percent of total outstanding loans was already over. Till mid-July, some still failed to reach the target. At this point, the State Bank of Vietnam (SBV) has not made a final decision to this effect.

 

In implementing the tightened monetary policy in a bid to curb inflation and stabilise the macro economy, the ratio of loans for non-productive sectors has been gradually lowered as requested by the SBV. On March 1, 2011, the central bank issued the instructive on implementing monetary solutions and banking operations to bring down credit for nonmanufacturing fields to at least 22 percent of total outstanding loans of the banking system as of June 30, and to 16 percent at the end of the year. Some lenders with high ratios of credit for nonmanufacturing fields had to slash loans for these areas in the three months after that, but they could not achieve the target. At present, the SBV has not announced official data concerning banks which failed to reach the target and solutions to their failures.

 

The SBV has shown its determination to ease inflation and control the ratio of credit for non-productive fields to circumvent risks and prioritise capital for manufacturing fields. According to data released by the State Bank, outstanding credits of the banking system rose 7.05 percent as of mid-June, of which VND credits increased 2.72 percent and foreign currency credits jumped 22.21 percent. Loans outstanding for export-oriented fields leaped 10.97 percent and accounted for 83 percent of total outstanding loans. In particular, credits for the agricultural sector and rural development surged 24.96 percent and export credits went up 25.77 percent. Remarkably, credits for non-productive fields slumped 9.46 percent and accounted for 16.92 percent of total outstanding loans. Cash for the real estate field was also withdrawn to some VND222 trillion from VND235 trillion at the end of 2010.

 

After the decision on the non-productive credit cap was made, commercial banks tried their best to lower loans on restricted fields but the time was not long enough because the amount of money injected into these fields was already quite significant. In a press briefing on July 6, SBV Governor Nguyen Van Giau said, as far as this, some 20 domestic commercial banks have outstanding loans for non-productive fields in excess of the 22 percent limit, with two topping 50 percent and 52 percent. It is not a problem for lenders to cut short-term securities loans, but it is a challenge for them to take back long-term property and consumer loans as they can hardly persuade their clients to make premature repayments. In reality, while the real estate market is frozen and the stock market is dismal, the sudden taking out of loans for nonmanufacturing fields is very difficult. For banks with high rates of nonmanufacturing loans, they can easily stop providing new loans, but they may not be able to take back their outstanding loans in the current context of tightened credit policies.

 

As a result, one banker said his bank had stopped providing new loans in the past time and actively recovered existing loans but its outstanding lending ratio for non-productive fields was still as high as 40 percent at the end of June. Despite enormous efforts to stop new loans on nonmanufacturing fields and take back existing loans, many small banks still failed to lower the lending ratio to the prescribed level of 22 percent.

Some lenders managed to reduce the ratio to below 22 percent, but they still showed caution as they had to attain another target of 16 percent as of December 31, 2011. Trinh Van Tuan, General Director of Orient Commercial Joint Stock Bank (OCB), said his bank had lowered the percentage of credits for nonmanufacturing fields to the given rate but it would not open credit access for non-productive fields. OCB has completely suspended securities and property lending, even consumer property lending like home purchases, and tightened consumer loans.

 

The SBV Governor confirmed that there would be no grace period for any banks failing to meet the target of lowering credits for nonmanufacturing areas to 22 percent of total outstanding loans by the end of June and to 16 percent by the end of 2011. They will be subjected to a double cash reserve ratio from the current regulations. They could even be forced to narrow operation scales in the last six months of 2011 and in 2012.

As regards the coercive hike of reserve requirement ratio from 3 percent to 6 percent, many banks are willing to accept that because they do not want to sacrifice business relations with customers. But, the downsize of operating scales in the last six months of 2011 and 2012 is a very severe measure, as they will lose the advantage in network expansion competition with other rivals.

 

Dr Vo Tri Thanh, Deputy Director of the Central Institute for Economic Management (CIEM), said: Technical measures like doubling reserve requirement are not always useful, although they help deliver a strong message to banks. Banks with high ratios of loans for nonmanufacturing areas usually have low liquidity and if the double reserve requirement is applied, they will be force to hike interest rates to attract deposits. Then, a rate race will be aggressively intensified and the system is prone to higher risks.

 

Some banks proposed extending the deadline for those lagging behind, while the governor confirmed a rejection to this request on fears of policy ineffectiveness. Others proposed special supervision over all ratios of violating banks for a specific period of time, forcing them to restructure and reschedule their loans by one means or another. Their operations would also be restricted in refinancing activities on the interbank market, or open market operations. This means these banks will be granted a short extension for reducing loans for non-productive fields to the same rate of the system.