Easing the SMLR: What are the risks?

The State Bank of Vietnam (SBV) has raised the maximum ratio of short-term funding for medium and long term loans (SMLR) from 30% to 40%, while also exempting certain credit lines for key infrastructure projects from credit growth limits.

This decision, regulated under Circular 25/2026/TT-NHNN issued on June 22 and taking effect on July 1, 2026, is believed to support banks regarding liquidity while creating more room for them to expand their credit growth.

Increasing Risks to Credit Profiles

Mr. Phan Duy Hung, CFA, MBA, Senior Director of the Financial Institutions Rating Department at VIS Rating, along with his colleagues, analyzed and assessed that raising the SMLR ceiling will increase risks to banks' credit profiles. This makes banks more dependent on short-term market funding, which is less stable and highly sensitive to market sentiment, to finance long-term loans. Consequently, this widens maturity mismatches and intensifies refinancing risks.

According to experts, several fast-growing banks are approaching the SMLR ceiling. Loosening this limit could increase liquidity risks. (Illustrative photo: Quoc Tuan)

Experts noted that the ceiling expansion occurs amidst low deposit growth across the entire industry, while bank credit remains the primary channel supporting economic growth. This further exacerbates systemic liquidity risks.

Banks currently hovering near the previous 30% threshold face higher risks if they continue to aggressively push medium and long-term lending, particularly in the real estate sector. In the event of tight market liquidity, these banks could experience intense competition for deposits and rising funding costs, mirroring the liquidity stress period of 2022.

Additionally, exempting certain credit allocations for key infrastructure projects from credit growth limits—encompassing roughly 752 trillion VND for projects deployed between 2026 and 2033, such as airports and railways—could boost industry-wide credit growth by about 1.2 percentage points annually over the next 12 to 18 months. This will continue to drive up banks' capital mobilization needs.

"These short-term pressures reflect structural constraints in the banking system's funding sources while highlighting the need to build a more robust liquidity management framework," Mr. Phan Duy Hung observed.

Pressure to Meet Standards Under the Draft Circular

At the same time, the analysis group also mentioned the context and actions of the SBV, which proposed stricter liquidity regulations in May 2026 to gradually steer the banking system closer to Basel III standards. According to the draft, the Loan-to-Deposit Ratio (LDR) will be replaced by the Credit-to-Deposit Ratio (CDR) with a broader scope of coverage.

Furthermore, requirements for the Liquidity Coverage Ratio (LCR), Net Stable Funding Ratio (NSFR), and Leverage Ratio (LEV) will be rolled out progressively starting from 2028. According to VIS Rating analysts, stricter liquidity requirements will encourage banks to increase the proportion of stable funding from customer deposits, reduce reliance on market funding that is sensitive to investor confidence, reinforce liquidity buffers, and enhance resilience against long-term liquidity shocks.

Notably, VIS Rating believes that banks with rapid medium and long-term loan growth, high exposure to real estate-related lending, or a heavy reliance on less stable corporate deposits will face the largest deficit in stable funding.

Detailed data supporting this assessment shows that among 11 surveyed banks, some lead with exceptionally high ratios of real estate-related loans (including loans to developers, construction, and individual homebuyers) to total loans. Specifically, about 3 banks have ratios above 50% to over 75%, 4 banks range from 40% to under 50%, and the remainder are below 30%. Banks with both high proportions of long-term lending and heavy real estate exposure face the most distinct maturity mismatches. This is because real estate loans typically have long maturities while mobilized capital remains predominantly short-term, putting pressure on the SMLR and widening the Net Stable Funding Ratio gap (NSFR gap) as supervisory regulations tighten.

Conversely, according to VIS Rating, banks possessing a diversified and more stable retail deposit base (such as HDB, ACB, and LPB) along with a solid long-term funding structure (such as MBB and TCB) are better positioned to meet the new ratios. Although many private banks have begun building management and monitoring capabilities for LCR and NSFR in recent years, currently only TPB has officially published compliance metrics according to Basel III standards, according to VIS Rating.

In reality, monitoring by the Business Forum Magazine (Dien dan Doanh nghiep) shows that many banks have also announced the implementation of a relatively comprehensive set of Basel III standards. Aside from TPBank, others include ACB, LPBank, VIB, SeABank, HDBank, Nam A Bank, Vietcombank, BIDV, and Agribank. Essentially, these banks are deploying internal capital models, standardizing information disclosure under Pillar 3, and gradually moving towards international standard governance, laying the foundation for a long-term presence in international financial markets.

Mr. Phan Duy Hung and his colleagues stated that applying a stricter CDR ratio will increase capital mobilization pressure during the transition period, thereby creating unforeseen additional pressure on industry-wide liquidity. Under tighter CDR requirements, VIS Rating estimates that the majority of banks will not meet the maximum threshold of 85%. Consequently, competition for deposit mobilization is highly likely to intensify, keeping funding costs elevated and squeezing Net Interest Margins (NIM) in the short term.

Applying VIS Rating's new methodology to 26 banks against the 85% regulatory limit, it is estimated that TCB has an exceptionally high CDR, exceeding the limit by about 38 percentage points—the largest variance in the industry. The 5 runner-up banks all exceed the 85% threshold by very wide margins (17-38 percentage points).

The group moderately exceeding the threshold includes SHB, BID, VIB, OCB, SSB, and VCB. From LPB downwards, most banks sit below or around the 85% mark, including KLB, ACB, PGB, STB, BAB, NAB, MSB, with the lowest group consisting of EIB, NVB, VBB, BVB, ABB, VAB, and SGB holding the lowest ratio in the entire industry.

"Overall, while the State Bank's reforms will help strengthen the banking system's liquidity profile in the long run, the simultaneous loosening of the SMLR ceiling alongside stricter CDR compliance requirements could increase funding and liquidity risks in the short term, especially for fast-growing banks that rely heavily on market funding or less stable capital sources," the expert concluded. This implies that the role of the SBV's inspection and supervision authorities needs to be elevated further, and banks must continuously strengthen their own risk control in accordance with the standards set out in Circular 14 from the previous year.