Concerns about Rapid Credit Growth

As many as 18 commercial banks have been newly approved by the State Bank of Vietnam (SBV) to increase their credit by 36 percent this year. This news has raised a variety of opinions.

 

Banks are expecting to loose credit because this is an opportunity to increase credits for enterprises who have more demands for credit at the end of the year. The banks were assigned to keep their credit low at the beginning of the year and many of them have given their full allowed credit. The credit retains a large share of total profits of the banks so it is clear that the adjustment of credit growth puts lower pressure on business results at the end of the year.

 

All the banks are in race of keeping their customers, even in time of very low credit growth. But the bad debt is still a major obstacle to banks pouring capital into new investment projects because they do not dare to lower credit standards, which may cause increasing bad debts so the high quality customers are always more welcomed. The competition among commercial banks, particularly in retail banking and consumption loans segments, has increased.

 

However, according to analysis of experts, the national income of Vietnam is low while the domestic market is not large so if the banks are in race of increasing credit, the capital flows are likely to flow into the stock and real estate as in the past. General director of a commercial bank said that a credit growth might be a risk that may not happen immediately, but right after the end of the next few years, it will happen as it did in 2009.

 

After the credit growth is accelerated, the local banking system's bad debt exists and the banks take a lot of efforts and money for a risk management fund. According to the figures from the Supervision Office of the SBV, by the end of 2014, the credit system processed a total of VND311 trillion of bad debts, equivalent to 67 percent of the bad debt that has been determined by September, 2012. Thus, the bad debt is under control and the NPL ratio until the end of 2014 is VND145.2 trillion, equivalent to 3.25 percent of total loans. According to the statistics of the SBV, the bad debts are estimated at VND214.9 trillion, equivalent to 4.83 percent of total loans.

 

The credit growth has been revised up by 36 percent in some cases; in theory, the rapid credit growth certainly has risks as what happened in previous years. Lesson about the risks of the previous period is still there, but the hot growth with pressures of profitability may lead to ignorance of the banks.

 

To open credit room for 18 banks and branches, including 12 domestic commercial banks, the SBV is applying credit for each unit. However, the different point is that most of 12 banks that are allowed to loose their credit growth have very small market share. The four largest banks that account for over 50 percent of the national credit market are not allowed loose their credit. Thus, despite loosened credit, the increase of total loans of the whole system will not be too big.

 

However, the credit growth will be a sign for tougher competition among banks to attract their customers, causing an obstacle to reduce interest rate and preventing the banks from reaching borrowing rates of 1-1.5 percent as targeted in this year. In recent time, the deposit rates have been pushed up.

 

In 2015, the SBV has set a targeted credit growth of 13-15 percent to support economic growth and the rate can be revised up by 17 percent. The governor of SBV stated that to limit the credit, the banks should not only aim at increasing the credit, but also grow well services.

 

Most recently, the SBV issued Directive 05/CT-NHNN on enhancing control of risks in the process of granting credit for projects of BOT and BT. This is one of solutions of the mangers to respond to the fact that there are more money poured into infrastructure projects with higher risks. Indeed, the credit line of the SBV has been targeted to a number of priority areas, but the credit quality is important if the banks do not want to leave a slide into bad debt and pay the hefty price of restructuring process as recently.