Hard to Expand Credits

In the first six months of 2012, the world economy is forecast to be complicated. Most countries will have low economic growth. Global financial markets are still prone to risks arising from the recurrence of public debt crisis. The domestic economy is expected to see many positive changes. But, it is facing the risk of slowing growth, difficult business operations, and rising inventories. These factors agitate monetary policy.

 

In the first six months of 2012, the State Bank of Vietnam (SBV) lowered policy rates to keep up with new inflationary, macroeconomic and monetary market situations. On June 30, liquidity, yet to exclude valuable papers issued by credit institutions, rose 5.57 percent from the end of 2011, a good result for the target of liquidity growth of 14-16 percent in 2012.

 

Credit growth was low but credit structure was shifted positively as it focused on policy-oriented priority areas. Credits for non-encouraging fields shrank. As of June 30, credit growth was 0.76 percent from the end of 2011 (the rate would be 1.4 percent if corporate bonds and trusts were included. Overall credit growth was low but the lending for targeted priority fields increased. As of May 31, 2012, credit for export expanded 12.63 percent; credit for agriculture and countryside rose 3 percent; credit for supporting industries ballooned 7.13 percent, and particularly credit for small and medium enterprises declined 13.69 percent. Outstanding loans for non-encouraged fields accounted for 5.25 percent of total loans, down 5.91 percent over the end of 2011 (11.16 percent).

 

Notably, VND liquidity of the entire system was guaranteed and tended to improve in comparison with the end of 2011 because deposits increased. Outstanding deposit values at credit institutions augmented month after month while the ratio of credit on deposit decreased month after month, from 103.23 percent in late 2011 to 90.33 percent on June 30. Interbank interest rates slipped because of excess liquidity. Foreign currency liquidity of the whole system was redundant and tended to improve against the early months of 2012. Most credit institutions registered the lending/deposit ratio of less than 100 percent.

 

Lending and deposit rates declined sharply against the beginning of the year. Deposit rates for below 12 month reduced 3-6 percentage points per annum and lending rates declined 3 - 6 percentage points from the end of 2011, specially for rural and agricultural development, export, and small and medium enterprises (SMEs) and supporting industries. Currently, the rates were commonly 11 - 13 percent per annum for the four aforesaid sectors while the rates of 14 - 17 percent were applied to other fields. Interbank interest rates remarkably dived by 8-9 percentage points as compared to the beginning of the year, showing the growing stability of the monetary market.

 

As of June 30, deposits expanded 6.49 percent. Particularly, the mobilisation of VND deposits rose 8.62 percent while a 2.2 percent decline was seen in foreign currency deposits. Credit institutions bought a large amount of foreign currencies from economic institutions and individuals to be sold to the SBV, hence significantly increasing forex reserves.

 

Especially, after more than six months of restructuring credit institution system, systemic risks were gradually controlled and risks of systemic failures were diminished. Up to now, three banks, including Saigon Joint Stock Commercial Bank, First Joint Stock Commercial Bank, and Tin Nghia Joint Stock Commercial Bank, have been merged and continued to be restructured under the SBV’s close supervision. Six other weak banks completed the process of comprehensive supervision and auditing and already formulated the restructuring plans for SBV’s approval. The SBV already adopted the restructuring of two out of six banks to be submitted to the Prime Minister for approval and urgently reviewed the restructuring plans of the four remaining banks to be submitted to the PM for guidance.

 

According to the SBV, credit growth rate is still low but credit extension will still face difficulties in the coming time. The reduction in credit growth has been attributed to many reasons like low demand for credits in domestic and foreign markets, unfavourable business operations and soaring inventories, which result in a restricted absorption of bank loans. Bank loan repayment of enterprises and households is restricted due to their output difficulties while the illiquid real estate market causes difficulties to operations of credit institutions, since most mortgaged assets come from real estates. As a result, credit institutions tend to impose tougher lending conditions to minimise risks and ensure their safe credit operations. Therefore, to boost credit growth, it is necessary to take synchronous solutions based on the macro-economic policies.

 

In fact, the expected inflation rate is low but several credit institutions still quote their 12 month plus deposit interest rate at over 12 percent per annum. In spite of its decline, VND lending rates remain high, particularly the proportion of high interest rate loans is still large.

 

The SBV admitted that operations of credit institution are basically safe but their capital balances have not been improved while bad debts are still on the rise and several credit institutions have violated capital adequacy ratios. Term-based capital balance is not firm since medium and long-term credit proportion out of total credits outstanding remains at 42 percent as at end 2011 while most mobilised resources are short-term. By the end of May, 2012, as reported by credit institutions, total bad debts of the entire system accounted for 4.47 percent of total credits outstanding to the economy (compared to 3.07 percent at the end of 2011). Increasing bad debts are resulted from old loans. In the recent time, due to unfavourable market conditions, growing inventories and worsening financial condition, borrowers could not repay their bank loans. However, according to data from bank supervision authorities, 84 percent of bad debts in the banking sector have been secured by mortgaged assets whose value is equivalent to 135 percent of combined bad debt value. Moreover, by the end of May 2012, credit institutions had made risk provisioning of about VND67 trillion for bad debt settlement.