Knots in Credit Growth

2:22:59 PM | 8/19/2014

The credit growth in the first 7 months was just 3.68 percent, as announced by the State Bank of Vietnam (SBV) on July 12. That figure shows the knots in credit growth, which can hardly support the economic recovery.
According to the regular report of the SBV, the activities of the SBV are relatively stable; the liquidity of the credit institutions remains at surplus; the interbank market works smoothly and the interest rate of the interbank market increased slightly but it still tends to be stabilized at a low level.

The credit growth of the whole system is still concerned. As of July 31st, 2014, the new credit only increased by 3.68 percent, compared to the end of 2013. According to Le Xuan Nghia, Director of the Business Development Institute (BDI), the low credit growth reflects the low investment of the domestic private enterprises while the contribution of this sector to GDP accounts for 60 percent.
Bad debt has not been handled
Low credit growth is an indicator showing the difficult situation of the domestic enterprises, especially in private sector. According to the National Financial Supervisory Committee (NFSC), the low credit growth is resulted from the difficulties of the enterprise, especially in the consumption of the products and the high cost of capital. The number of enterprises dissolved or suspended in the first 7 months of the year increased by 9.8 percent, compared to the same period in 2013.
The credit growth also reflects the bad debts that have not been cleared to push up the economy for recovery. The bad debt is ballooning even though the Vietnam Asset Management Company (VAMC) has acquired over VND50 trillion of bad loans of the banks. However, this has not been efficient enough to settle the bad debts.
The NPL ratio of the banks remain high; the debt group 5, the potentially irrecoverable debt, accounted for the bulk of the bad debt.
The SBV will confirm its efforts to curb the bad debt from increasing. One of the measures is to require the banks to increase their savings to limit the risks of the bad debts and propose solutions to improve credit quality to limit the development of new bad debts.
Through mid-year financial reports of some banks, the provisions of high risk are quite high. As in ACB in the second quarter of 2014, the amount of the bank's provision for credit losses is more than VND354 billion while the amount in the same period last year is nearly VND57 billion. The high provision leads to VND412.28 billion of the pre-tax profit in the second quarter; the amount accumulated in the 6 months of this year reached VND730.54 billion while the amount of the same period last year reached VND945.63 billion.
The bad debt tends to rise. In the first 5 months of the year, Ho Chi Minh City handled over VND6 trillion of bad debt but the amount of cash collected is just over VND300 billion. Meanwhile, the sale of bad loans of VAMC currently cannot address the root of bad debt so the banks must deduct 20 percent of reserve. If after 5 years, the bad debt has not been settled, the banks will have to receive the debts.
Once the bad debts have not been thoroughly removed, it is difficult to boost credit growth without lowering lending standards. And this return is the cause of the arising of new bad debts.
Will the inflation rate gallop at the end of the year?
The credit congestion cannot support economic recovery. In addition, the interest rate is still high. According to the report of the NFSC, the average loan interest rate has now dropped by 0.25 points compared to December 2013, but remained at 10.08 percent per year. It is said to be relatively high.
High interest rates, difficult access to capital and low product sales continue to put pressure on the producers. The number of firms dissolved or suspended in the first 7 months of the year has increased by 9.8 percent compared to the same period in 2013.
In the first 7 months of the year, the new credit of the economy increased only 3.68 percent compared to the end of 2013; Meanwhile, the SBV still keeps the target increased by 12-14 percent by the end of this year. Only 5 more months is left to reach the target of credit growth of 12-14 percent. To achieve this goal, there is likelihood of that the capital will be poured into the economy by the end of the year, causing pressure on inflation.
Some argue that in upcoming time, the SBV may cut interest rates to stimulate credit growth. In August, the CPI stood at 1.62 percent, leading the inflation easily to be controlled at 5 percent as targeted this year. To support the credit growth as well as difficulties of enterprises, the SBV may lower the interest rate by 0.5 percent.
Lowering the rate is very good, but it is not the most important thing for businesses at this time. Both of the ability of firms to absorb capital and the economy situation are difficult; the measures to increase public investment have been disbursed but that is not much, leading the aggregate demand of the economy not to grow back. The government should propose the growth solutions at this time to increase the total demand and support for the markets for the products. The businesses themselves also need to reinforce the confidence to strongly increase production and expand markets. This is the time for businesses to restructure and reorganise operations, improve technology innovation, and focus on improving management capability, competitiveness and doing research on the most feasible production and business plans.
Le Minh