Foreign Currency Credit Growth Rate: Too Rapid To Be Risky

Reviewing several business result reports for the last 6 months published by commercial banks has proved the fact. Vietcombank has before-tax profit of VND2,778 billion when its credit growth nearly doubled over the sector’s average. As of 30^th June, its loans, including corporate bonds, reached nearly VND294 trillion, up 6.63 percent.

 

The figure of 6.63 percent is very impressive compared to negative credit growth of the same period last year. However, Mr Nguyen Hoa Binh, Chairman of Vietcombank confessed that the result is attributed largely to foreign currency. For the last 6 months, Vietcombank’s VND credit growth rate rose only 0.44 percent, while foreign currency credit growth rate was over 25 percent – these figures seem to say many things. Compared to average growth rate of 2.17 of the whole sector, VND credit growth rate of Vietcombank is much lower while its foreign currency credit growth rate is higher.

 

This situation exists in most other commercial banks. The SBV has officially allowed foreign currency credit. In a document issued on 6^th July, the authority assessed: for the last 6 months, when credit grew slowly, the SBV has flexibly allowed banks to expand foreign currency credit, contributing to the general credit growth of the economy.

 

According to Ms Nguyen Thi Hong, Head of Monetary Policy Department, SBV, as of the end of May 2014, credit growth rate reached only 1.51 percent over 2013, of which growth from foreign currency was 9.35 percent, while that of VND credit was very moderate.

 

According to SBV, in the first months of 2014, despite positive changes in the economy, businesses still face many difficulties. Many enterprises have high inventories and do not have demand of expanding operations and getting bank loans. Others cannot get loans because of weak financial condition, infeasible and impractical projects.

 

Despite helping the target of credit growth rate generally, rapid credit growth rate brings many risks. A new report of the National Financial Supervisory Commission (NFSC) has shown that in the first 5 months, foreign currency credit growth rate has strongly increased, which has resulted in Loan to Deposit Rate ( LDR) of 99.5 percent, and it is one of factors putting pressure on foreign currency liquidity.

 

After the above mentioned report, on 6^th July, the SBV had a document analysing in more detail and more clearly about foreign currency growth. Accordingly, the situation “is not concerning and is one of flexible management policies of the SBV”. Foreign currency has grown 9.35 percent over 2013 but it has increased only 1.34 percent compared to the same period of 2013. And if other foreign currency deposit and foreign capital are counted, the LDR varies from 50-60 percent. Analysing more deeply, Ms Hong said that: foreign currency loans are concentrated mainly on enterprises with revenues in foreign currency, which does not put a pressure on commercial banks to sell foreign currency to repay loans.

 

While VND credit has hardly grown, foreign currency credit growth seems to be a protector that improves the index, it is also an option for commercial banks to make profit, especially when the SBV officially allows the operation instead of prohibiting it previously.

 

Stable foreign exchange, trust in policy on stabilizing foreign exchange of the SBV, as well as attractive interest rates has encouraged many enterprises to lend in foreign currency. Export has seen improvement, which has results in increasing demand of foreign currency. However, enterprises’ carry-trade cannot be ignored, where enterprises lend money in foreign currency and exchange them into VND to enjoy interest rate gap. The math is very simple. An enterprise receives a loan of US$500,000 at an interest rate of 5 percent a year, equivalent to US$25,000 a year or about VND535 million a year. If the enterprise gets a loan of VND10 billion (to US$500,000) at an interest rate of 10-12 percent a year, equivalent to VND1-1.2 billion a year. The interest rate gap is very remarkable.

 

It is understood that if an enterprise gets a loan in foreign currency, foreign exchange is the top concern. However, currently the foreign exchange is very stable, the SBV fixes it and as enterprises calculate, if added about 1-2 percent of inflation each year, a foreign currency loan is still a bargain compared to a VND loan.

 

A leader of a large joint stock commercial bank assessed that: Expecting foreign exchange to be stable while interest rate of VND loans is much higher, many enterprises apply for foreign currency loans to enjoy lower interest rate. The SBV has allowed this form of credit and this will be a new competition direction of commercial banks. Calculation on benefits is very reasonable.

 

However, the issue is unreasonable compared to the plan of the SBV. According to Circular 29, by the end of 2014, subjects of foreign currency credit will be limited. Foreign currency lending – borrowing relation will turn into selling – buying one.

 

Actually, this is not the first time when carry-trade has occurred in the banking system. In 2008, foreign currency supply increased dramatically, banks reduced the purchase and caused foreign exchange decline. However, a month later, demand on foreign currency returned to the high trend and banks could not satisfy the demand, foreign exchange increased. In 2010, enterprises applied for USD loans at low interest rate, then exchanged USD into VND and enjoyed the profit. In Q1/2010, foreign currency credit growth rate of the whole banking system increased more than 14 percent while VND credit growth rate increased only 0.21 percent. Interest rate of US$loans then was about 7 percent per year, if added inflation it was still more profitable than that of VND loans of 14-15 percent.

 

 At that time, banks were not concerned and thought that carry-trade is reasonable because of high interest rate gap, stable foreign exchange and abundant foreign currency resource. Despite earlier warning from the NFSC, banks did not react in time. The SBV had to raise average inter-bank foreign exchange by 2 percent in 18^th August. And at the beginning of 2011, carry-trade was also the reason of rapid foreign exchange increase of 9.3 percent.

 

Therefore, banks and enterprises should not keep a subjective view on money flow, their calculation could be wrong in any time. The economy still faces many difficulties and is not strong enough to suffer any shock.