Aggressively Boosting Credit

9:41:32 AM | 7/13/2023

The banking industry has been requested by the government and Prime Minister to control inflation, maintain macroeconomic stability and support businesses during difficult times. The State Bank of Vietnam (SBV) has been operating monetary policy firmly, flexibly, proactively, promptly and effectively to achieve these goals.

The banking industry wants to boost credit growth while still having to ensure credit quality rather than pushing it up at all costs, which may present a potential increase in bad debt risks in the future

Multidimensional difficulties

In early 2023, Mr. Dao Minh Tu, Standing Deputy Governor of SBV, noted that the COVID-19 pandemic and external impacts have exhausted the business resources of many companies, people and state budgets, leading to multidimensional difficulties in managing monetary policy which have not been seen in many years. Despite these challenges, SBV has reduced policy rates by 0.5%-2% with the four latest cuts while encouraging credit institutions to lower lending interest rates to support companies to recover. Deposit rates at commercial banks are presently quoted at around 5.8% per annum (down 0.7% from late 2022), while the lending rate on VND loans is about 8.9% per annum (down 1% from late 2022).

Despite a sharp decline in interest rates, credit growth remains slow. According to Deputy Governor Tu, the credit balance of the whole economy reached VND12,320 trillion (US$535.65 billion) as of June 15, 2023, an increase of 3.36% from the end of 2022 and 8.94% from the same period of 2022.

In February 2023, the State Bank of Vietnam (SBV) assigned a credit room of 11% for commercial banks nationwide and planned to provide credit availability at 14-15% for the whole year. Thus, banks will not lack credit room and the credit liquidity of the whole economy will be very abundant. Not only state-owned commercial banks and giant banks but also small lenders also have relatively good liquidity for the time being. Meanwhile, the central bank is seemingly adhering to its requirements set at the start of the year.

According to Deputy Governor Tu, there are various key reasons for slow credit growth, including slowing economic growth, consumption contraction and investment shrinkage. Companies faced difficulties due to falling orders, disrupted cash flows and growing inventories. Some had to lay off redundant staff. Rising prices of commodities and input materials resulted in higher production costs, leading to shrinking purchasing power in both domestic and global markets. The weakening purchasing power also gave rise to lower demand for loans. Some could not meet borrowing requirements, perhaps due to legal issues or weakening financial capacity in the wake of pandemic hits. Moreover, credit for SMEs and cooperatives did not meet expectations because they failed to satisfy borrowing requirements while credit guarantee funds and SME development funds had limited operations - a long-standing story.

Boosting credit but guaranteeing system safety

Despite difficulties, boosting credit is still the most important task of the banking industry in the coming time, he added.

According to the State Bank of Vietnam (SBV), in the second half of 2023, it will continue to manage rational credit volume and credit structure, meet the credit demand for the economy and direct credit flows to manufacturing sectors. The SBV will still tightly control credit in potentially risky areas. The banking industry also wants to boost credit growth while still having to ensure credit quality rather than pushing it up at all costs, which may present a potential increase in bad debt risks in the future. Credit institutions are also unlikely to lower their borrowing standards because this move poses a potential risk to system security.

“During this difficult economic period, the level of risk is likely higher. As enterprises’ business performance is difficult to prove positive, credit institutions find it hard to make lending decisions because they cannot lower their credit standards imposed to ensure system security. This is not a new reason, and ensuring credit security is an “immutable” principle,” said Deputy Governor Tu.

After four policy rate cuts, the SBV will continue to lobby credit institutions to actively reduce both deposit and lending interest rates provided that market economy principles are respected and the rights of commercial banks are regarded. The Government firmly directed that commercial banks must continue to streamline administrative procedures, reduce operating costs, facilitate businesses to access credit, and expand credit room to slash interest rates. However, there is a certain lag on either the rate cut side or the rate hike side. “Policy always has a lag. But, given today’s rough conditions, how to make that lag shorter is the desire of the Government, the banking industry and businesses," he added.

By Anh Mai, Vietnam Business Forum