Interest Rates Fall, Credit Yet to Rise

While credit growth recorded 13.71% in 2023, a marginal 0.6% contraction in January 2024 has spurred heightened concerns, making the revitalization of credit growth a pressing matter.

Economic challenges and a stagnant real estate market have resulted in subdued credit expansion in certain banks

Mr. Dao Minh Tu, Standing Deputy Governor of the State Bank of Vietnam (SBV) attributed the decline in credit growth to poor capital absorption. He noted that credit growth is inherently seasonal, with a tendency to stagnate during the Tet (Lunar New Year) month. Furthermore, the weak absorption capacity of the economy, coupled with business difficulties and a decrease in consumer demand, has contributed to the slowdown in credit. It is important to note that these factors, rather than policy, have led to low credit growth.

Dao Minh Tu further elaborated that the credit decline observed in January was an inevitable trend given the current context of low credit demand. There are expectations of improved outstanding debt in the near future as the economic recovery gains momentum. However, economic difficulties and a sluggish real estate market have resulted in low credit growth at some banks. This is primarily due to unresolved legal issues associated with numerous real estate projects.

Unprecedentedly low interest rates

Ms. Ha Thu Giang, Director of the Credit Department for Economic Sectors at SBV, outlined the SBV’s objectives for 2024. Aligned with the National Assembly and Government targets - projecting economic growth between 6% and 6.5% and inflation within the 4% to 4.5% range - the SBV aims for a credit growth rate of approximately 15% across the entire banking system. This target will be dynamically adjusted in response to actual market developments and prevailing conditions.

On December 31, 2023, the SBV formally allocated credit growth targets for 2024 to credit institutions. Publicly disseminating its guiding principles, the SBV encourages proactive efforts by these institutions to facilitate credit expansion, thereby bolstering the economy. Subsequently, on February 7, 2024, the central bank issued Official Dispatch 1088/NHNN-CSTT, directing credit institutions to implement solutions outlined in Directive 01/CT-NHNN - a blueprint aimed at stimulating economic growth.

While the banking industry has consistently played a pivotal role in supporting businesses and the overall economy, it is essential to recognize that credit serves as an ancillary capital source, rather than the primary one. Businesses with medium and long-term capital requirements must increasingly turn to capital markets for sustained funding.

Presently, several banks have concurrently adjusted their deposit interest rates across various terms. According to Bao Viet Securities Company (BVSC) data from February 2024, the average interest rate for 6-month deposits declined by 31 basis points compared to January 2024, and a substantial 381 basis points relative to the same period in 2023. Similarly, the average interest rate for 12-month deposits decreased by 22 basis points from January 2024 and a significant 359 basis points from the corresponding month in 2023. These trends indicate that deposit interest rates are likely to remain at historically low levels in the upcoming months.

Standing Deputy Governor Tu emphasized that today’s exceptionally low interest rates no longer pose a significant barrier for borrowers. Only a few businesses encounter challenges accessing bank loans due to non-compliance with borrowing conditions.

Drastic solutions to boost credit growth

In order to stimulate credit growth in 2024, experts suggested that the Government needs to implement more policies to invigorate demand. Concurrently, localities should take proactive measures to alleviate difficulties and legal impediments for projects and enterprises.

Mr. Nguyen Thanh Tung, General Director of Vietcombank, emphasized that for banks’ solutions to be highly effective, the SBV needs to maintain stable monetary policy management. This includes supporting credit institutions in their appeals to the Government, central agencies, and localities to eliminate legal obstacles for real estate projects, thereby accelerating their progress.

Deputy Governor Dao Minh Tu advocated for the expansion of credit to bolster businesses and the economy. He asserted that if macroeconomic conditions are favorable, commercial banks operate in a healthy and stable manner, and capital flows are directed appropriately, the SBV is prepared to increase credit growth targets for banks. However, he cautions that commercial banks should not lend indiscriminately but need to ensure a balance of all factors.

He urged commercial banks to implement accurate and targeted credit growth solutions from the outset of the year. This includes strengthening the review and simplification of borrowing processes and procedures, applying digital transformation to lending processes to reduce costs, and further lowering lending interest rates. He also encouraged facilitating access to bank credit for people and businesses, especially through digitalized channels, products, and services. Additionally, banks should diversify credit products and services to cater to different customer segments, markets, types, and the production and demands of borrowers.

For specific sectors, he advised banks to continue prioritizing the balancing of capital sources to promptly and fully meet the capital needs of people and businesses in priority fields. In the real estate sector, banks should continue to review and classify real estate projects to promptly provide appropriate credit solutions. This includes promptly providing capital for qualified real estate projects, especially those that meet real market needs, social housing projects, and affordable commercial housing projects for workers. They should also expedite the VND120 trillion credit program for investors and homebuyers of social housing projects, worker housing projects, and old apartment renovation and rebuilding projects. Furthermore, they should proactively update the list of worker housing projects and old apartment renovation projects eligible for the program announced by the Provincial/Municipal People’s Committees.

In the BOT and BT traffic investment forms, banks need to oversee loans of old projects and report to competent authorities to handle lending difficulties for them. For new projects, banks need to actively access information, review, and decide loans by evaluating the effectiveness of target projects and borrowers’ ability to repay loans as well as their own ability to balance capital sources.

Banks also need to enhance their responsibility to appraise and consider lending decisions for large, key national projects, ensuring safety and efficiency. They should increase co-financing for large, key projects to boost credit funding capacity and credit quality. They should also continue to carry out debt repayment term restructuring policies and keep debt categories unchanged as per Circular 02/2023/TT-NHNN, ensuring safety and preventing any act of profiteering debt restructuring schemes and debt group classification for personal interests.

By Quynh Anh, Vietnam Business Forum