Bank credit growth cap: Management or Letting go?

Commercial banks (CBs) are a form of business, but they are special businesses that need state control through various tools, among which credit room can be one of those tools.

“The Formula” for Calculating Credit Room

Currently, many opinions suggest that since Vietnam has deeply integrated with the world, why hasn't the monetary and financial markets fully integrated? Commercial banks can also be considered businesses; they have the right to operate freely to achieve the best business efficiency and should not be limit ed by credit growth targets. However, according to him, these arguments are not yet suitable for reality.

Firstly, although CBs can be considered a form of business, they are special businesses that need state control through various tools, among which credit rooms can be one of those tools.

In developed countries, credit room tools are not used because they already have a tight and complete legal system to control and prevent risks in the activities of CBs. On the other hand, in developed countries, inefficient CBs often have to go bankrupt, and depositors have to accept the remaining losses after deposit insurance because they "prefer high interest and choose unsafe banks."

The credit growth of CBs in 2024, according to the "formula" established by SBV, would be determined by two major factors: credit growth in 2023 and the 2022 ranking points as per SBV Circular 52/2018. There are two options to examine.

First, similar to the annual local budget spending plan, if this year's target is not fully implemented, it will be reduced next year, so localities try to spend heavily at the end of the year. Calculating the next year's additional credit growth target based on the previous year's results will cause banks to rush lending at the end of the year, possibly without considering the quality of lending. Thus, for those banks that assess the economic situation in 2023 as unstable, carefully review loan applications, and start building a good customer base, may increase high-quality, safe credit debt in 2024, but are limit  ed due to restricted debt in 2023.

Secondly, the 2022 ranking point is a relatively objective criterion but as said, in case some banks strive to improve operations and risk management in 2023, their efforts will not be recognized. This is unreasonable.

Finally, if SBV announces a rigid formula like that at the beginning of the year, by Q2 or Q3, if the world and domestic economic situation encounters new unexpected developments, possibly in a better or worse direction, there will be a situation where banks either lack credit growth targets to pump into the economy, or banks have to strive to reach credit growth targets to prepare for the next year.

Of course, SBV has a calculation method to come up with the formula for increasing credit debt and publicly announcing it from the beginning of the year helps CBs proactively regulate the increase in credit debt during the year, but the downside of this management approach is the lack of flexibility.

In reality, SBV has in hand tools to implement a “softer” management approach. Additionally, the credit growth limit  s of CBs should be based on the most important criterion, which is their compliance with regulations in lending activities, and SBV can control this issue.

If the SBV system from the central to the local branches does well in monitoring the activities of CBs in

the system, preventing them from circumventing the law or deceiving, then based on the determined capital, the capital pumped into the economy will be safe, sure, and correctly addressed. The incident at SCB Bank, with such severity, has its roots in laxity and a lack of rigor in monitoring the activities of CBs.

Managing Credit Room within the Economic Context

In Vietnam, although the law has provisions for bank bankruptcy, at this stage, the regulatory body still facilitates weak CBs to restructure, recover, and not let CBs go bankrupt to protect depositors. In such a context, SBV's control over the activities of CBs through various tools, including the credit room, is appropriate.

Mr. Hien leans towards the idea of managing credit growth. Thanks to this management, in the periods of 2011-2012 or 2021-2022, the risks of some CBs from issues such as backyard lending, then lack of money so high-interest mobilization, then wanting more credit room to lend to save these companies, were controlled by the Government and SBV, creating stability in the credit and monetary market under difficult and challenging economic conditions.

He argues that instead of focusing on managing limit  s and requests for increased credit room to lend more, let's change that with credit quality. Because the essence of wanting to increase credit room is profit. However, credit growth with unsafe loans, resulting in bad debts, erodes the profits of good loans, and even results in no profit and loss of capital due to bad debts, which has happened in the past and is currently happening.

Therefore, suppose the credit room is only around 12% or 14%, not reaching the level of 15% or 20%, but the additional debt is all high-quality loans, not bad debts, provision for risks, debt write-offs, then the bank's profit can be higher, including the reason for lower management and operating costs.

Credit quality here is not only reflected in the money reaching profitable business addresses, ensuring full recovery of capital and interest. Here, profits also come from services that customers will have to pay fees for when cooperating with banks such as payment services, letters of credit, card services, etc. For example, if banks focus on good manufacturing and business enterprises, with fast capital turnover, large buying and selling - payment of money, and many employees, customers, then banks will provide more payment services and that is a source of profit for banks. Profits from bank services in developed countries are very large, while in Vietnam this ratio is still modest... Saying that banks will enjoy added value from quality loans is for that reason.

Basel is Just a Standard to Increase Capital Safety

Expanding on the views that the current banking system already has many CIs meeting Basel II standards. Some CIs have even been implementing Basel III at different levels, from 1 to all 3 pillars. Therefore, Basel standards can be considered to assess the health of banks and give them autonomy in credit growth.

In terms of the Basel system, it is an international standard that helps banks improve risk management through standards on capital proportions, liquidity improvement, mandatory leverage ratio adjustments, etc. However, looking back at Vietnam as well as recent banking shocks in the U.S. and the world, banks that faced crises were all compliant with standards, at least Basel II. This means that Basel is a standard implemented to increase capital safety for banks, but it does not guarantee that banks will not face risks.

We must understand that effective risk management is only achieved when internal management in banks is good, for example, increasing capital to meet Basel to increase safety for depositors, not to lend more or apply liquidity improvement standards correctly and not just formally…

Suppose you are a borrower, both individual and corporate customers, even if we have prepared the documents well, it is still not certain to get a loan, due to missing a few standards. The same set of documents, but using relationships or bribes, can access the loan. The problem is not so much in the professional capacity of credit officers, heads of credit departments, branch directors, etc., but mostly in ethics. And this existence appears right in the inspection and supervision systems of the regulatory agencies.

So how to improve this situation? For each CB, whether internal management is good or not depends largely on the BOD. The first requirement is that the BOD must be professional. In developed countries, these are people with high professional qualifications in finance, with management achievements and adherence to industry ethics, invited by bank shareholders to manage. When the BOD is professional, the policies, procedures issued will be appropriate, the supervision of compliance with policies, procedures will be strictly implemented. If the BOD are the owners or people designated by the owners, then no matter how competent the management is, they cannot perform effectively.

Another point to note, CBs in Vietnam are now also operating additional investment banking services, and these investment services are usually directly commanded by the BOD through investment committees. This will further increase the risk if the BOD is not professional people with expertise and long experience in finance.