Reducing the credit limit could affect the capital supply to the economy

Businesses need many financial resources to recover and develop. Photo: Internet

Limiting risks from credit concentration

According to the Government's report, the regulation on credit limit s aims to reduce the risk of credit concentration at credit institutions and, at the same time, open up credit access for customers instead of focusing on only large customer groups. Since 2010, the equity capital of credit institutions has increased significantly, so with the credit limit  prescribed in the current Law, the absolute credit balance to individuals and related persons is also greatly increased.

Therefore, to limit  risks from credit concentration and limit  cross-ownership, the draft Law on Credit Institutions has amended and supplemented regulations on credit extension in the direction of reducing the credit limit , specifically reducing the outstanding loan balance for a customer and related persons from not exceeding 15% and 25% to 10% and 15% of own capital at credit institutions, respectively. And reduced from 25% and 50% to 15% and 25% for non-banking credit institutions. The reduction of the credit limit  at this time does not hinder credit sources for production and business, but on the contrary, facilitates many other customers to access more credit sources of the Bank.

According to the State Bank of Vietnam (SBV), as of May 9, 2023, the credit of the whole economy reached over VND 12.24 million billion, up 2.69% compared to the end of 2022. Many Commercial banks are afraid of disabling to lend while mobilizing capital with high-interest rates, which raises problems related to releasing capital flows. Therefore, in danger of high risks, bank credit must also have solutions to control risks.

According to economic expert Dr Le Xuan Nghia, commercial banks must review all credit procedures and conditions and increase businesses access to capital in addition to reducing interest rates. However, lowering credit standards and loosening loan conditions may increase the risk of bank bad debt in the context of high risks.

Responding to the press regarding access to business capital, SBV Deputy Governor Pham Thanh Ha said that if banks support businesses at an acceptable level, the economy will revive. In contrast, if the Bank postpones, rescinds, or loosens credit conditions, they will burden losses, posing a risk of insecurity in the system.

The urgent solution to clear capital flow

Therefore, introducing regulations on reducing the credit limit  ratio as above is still controversial. The Economic Committee of the National Assembly review report recommends careful consideration of amending these limit s.

According to the explanation of this agency, the reduction of the total credit balance will immediately affect the economy's capital supply, significantly affect enterprises' capital access, and increase capital expense. At the same time, the stock market, the corporate bond market, is not a stable capital mobilization channel for the economy and is under many risks.

Moreover, this can also hurt Vietnam's FDI attraction. According to opinions from foreign business associations in Vietnam, if this regulation is applied, the current lending rate of FDI enterprises under the current Law of Vietnam of 15% and 25% will have to look for new sources of capital. Reducing FDI's domestic borrowing capacity for these banks will cost more and make capital inflows likely to have to be mobilized from abroad, thus making it less attractive to attract FDI.

In addition, the definition of a related person of the Law on Credit Institutions is expected to be revised in a broader direction, which means that the total credit balance calculation for "a customer and related person" will be broader but the total outstanding credit for the group of customers will be smaller than before. Furthermore, expanding the definition of a related person while narrowing the total amount of credit granted to a customer and related person will have a double adverse effect on both the customer and the Bank.

Also according to the Economic Committee, international practices are regulated at a higher rate than those specified in the draft Law. The reduction in total outstanding loans lower than that of some neighboring countries may also make the investment environment in Vietnam less competitive than in other countries in the region.

However, according to experts, the fundamental solution to solve the current difficulties for capital flows is to promote public investment and open the valve for the corporate bond market. While accelerating the disbursement of public investment is entangled with many laws and unable to accelerated overnight, there must be more urgent solutions to regain investor confidence.