Credit growth quota policy needs to ensure safety of banking system

The State Bank of Vietnam (SBV) this year removed the credit growth quota for foreign banks, but the policy remains for Vietnamese banks, due to concerns about rising bad debts, the security of the banking system and macroeconomic instability.

In a recent report sent to the National Assembly, the SBV said prior to 2023, it applied quotas for all banks, both domestic and foreign ones. However, it eliminated the policy for foreign banks and branches this year, while retaining it for Vietnamese banks.

The credit growth quota regime, or putting a cap on the credit expansion of each bank, was officially deployed in 2011 when Vietnam’s economy was experiencing hyperinflation stemming from excessive money supply.

The credit growth quota regime was announced by the SBV at the beginning of each year.

Based on the annual credit growth target for the entire banking industry, the SBV will allocate the credit growth quota for each commercial bank, depending on its financial health indicators such as capital levels, asset quality, governance, business performance results, liquidity and sensitivity to market risks.

The SBV will also consider other criteria related to the bank’s implementation in meeting the Government and SBV’s policies and orientations to give credit growth priority, such as reducing lending interest rates to support firms and people, focusing loans on business and production, and participating in supporting the handling of weak banks.

However, not all banks were satisfied with the SBV’s credit growth quota allocation, with some having a high credit growth and therefore often running out of the allocated quota earlier.

Those banks were concerned that the quota regime was applied subjectively by the SBV, without properly looking at the development plan of individual banks, which didn't always conform to the market-oriented economy, resulting in ‘ask-and-give’ deals.

The banks believed they could map out their own credit growth targets based on their financial strength and governance capacity.

According to the SBV, it must continue to allocate the credit growth quota for Vietnamese banks in 2024, because it sees there are still many difficulties and obstacles if the policy is removed.

First, the SBV explained, inflationary pressure still exists, which causes challenges for the SBV’s management of monetary and credit policies.

Therefore, maintaining the credit growth cap tool can contribute to inflation control, economic growth promotion and macroeconomic stability.

In addition, according to the SBV the Vietnam economy mainly depends on capital of banks. The pressure to balance capital for the economy continues to weigh heavily on the banking system, posing potential risks of term and liquidity gaps.

Under Vietnam's specific economic conditions, if banks increase credit without control measures, the banking system may return to a state of overheating credit growth like before the 2011 period, the SBV said in the report.

The SBV said the removal of the credit growth cap can lead to a risk of rising bad debts and threaten the safety of the banking system, which will cause a macroeconomic instability.

The removal of the measure needs to be considered carefully, and perhaps in small steps, in accordance with market conditions.

Instead of removing the policy, the SBV said it has implemented the application of safety criteria related the allocation of credit according to international standards in the operations of credit institutions.

Experts also agreed, saying the credit growth quota is designed to boost lending for some banks without encouraging excessive credit growth so the measure is necessary and effective in the short term to stabilise the macroeconomy and control inflation.

Lawyer Truong Thanh Duc, Director of ANVI Law Firm, said the country’s banking industry had huge volatility when credit growth reached 51.39% in 2007.

According to Duc, risks related to bad debts and inflation often arise later in Vietnam than in other countries. Unlike many other countries, high inflation in Vietnam is particularly difficult to control and is much more heavily influenced by market sentiment and confidence than elsewhere. Vietnam experienced bitter lessons in the past and any economic growth will become meaningless if inflation is high.

It is necessary to impose the credit growth quota and the central bank shouldn’t change the regime, Duc said. Adding that if the policy is removed, it must be replaced by another similar measure.

According to the SBV’s report, credit by May 10 this year increased by 1.95%, equivalent to more than 264.4 trillion VND, compared to the beginning of this year.

The SBV has put up a target for credit growth this year of 14-15%, equivalent to roughly 2 quadrillion VND. Commercial banks are gradually stimulating capital demand through a preferential interest rate programmes for both corporate and individual customers./.