Solutions for credit flow in 2024

Unlocking Credit Capital

Recently, the Prime Minister has issued specific instructions to the State Bank of Vietnam (SBV) to increase loan distribution toward the end of the year and into 2024.

Bank capital has only risen by around 10% in the last 11 months, which is similar to the initial interest rate until 2022. Because of the high mobilization interest rates in 2022, certain banks mobilized money at interest rates as high as 11% per year, with an average of 9% per year. Given the difficulties that both individuals and corporations experience, namely savings without expenditure, it is impossible to say that banks are loaded with cash. Banks, on the other hand, purchase and sell government bonds and state treasury bonds via open market operations (OMO). Because banks cannot mobilize without lending, they must invest.

Mr. Hoe offers the following methods to achieve positive credit growth in 2024: At first, commercial banks' capital has to be more unlocked, including capital disbursement from public investment into the economy, providing a broad and unfettered capital supply. Second, credit limit s should be eased, and banks with a decent Capital Adequacy Ratio (CAR) and a solid lending portfolio would effectively extend credit, easing the flow of money into the economy, according to Basel II. Third, encourage low-income consumers and workers to use consumer credit to assist them manage their lives and promote general demand.

Caution on Real Estate Credit

In the next year, there will be a continued emphasis on increasing lending for the real estate sector. While revitalizing the real estate market is good to the entire economy, it must be done with caution because real estate in Vietnam is predominantly speculative. Many people acquire houses or property in order to profit from future appreciation. There are even many vacant villas in Hanoi, with money just transferring from one investor to another. Meanwhile, millions of low-income workers lack housing because they cannot afford to purchase one.

To overcome this problem, a comprehensive strategy is required to reorganize the Vietnamese real estate market and comprehensively examine resources such as land, unfinished projects, and so on, in order to identify the growth route. If credit continues to flow into real estate beyond specified limit s, another real estate bubble may form.

Despite the Prime Minister's direction to increase real estate capital distribution, it is also specifically specified that loans should not be issued to shell firms or cross-ownership. This issue requires immediate response in order to clean up the credit flow into the market.

Reviewing Debt Handling Mechanisms 

Experts identify two challenges that require continual attention in 2024: first, updating debt managing procedures. Recently, the SBV enabled banks to alter repayment plans, allowing some debtors to keep debt categories for a maximum of 12 months. If the method continues to lengthen payback periods, retain debt categories, and continue lending, it simply shifts risks to the future, resulting in major economic consequences. As a result, a determined plan based on international standards is required.

Furthermore, interest rate levels must be scrutinized. Despite a significant fall in bank interest rates, particularly for short-term deposits (less than 2% per year for a 3-month period), lending rates remain high, with many firms reporting annual interest rates of 9-10%. There is a danger of interest rate volatility if banks mismanage term lengths. For example, the collapse of the SVB bank in the United States in early 2023 was caused by mishandling of non-term deposits placed in government bonds. When the Federal Reserve of the United States raised interest rates, it resulted in a lack of liquidity and insolvency.

Hoe argues that high loan rates in Vietnam are attributable to a high-risk environment, but that they are not overly high because the average mobilization interest rate has reduced to 5-6% every year. The SBV and the Prime Minister have issued directions on this matter, but meaningful improvements have yet to materialize. This makes it difficult for Vietnamese enterprises to compete with regional ASEAN businesses, thus loan rates must be further reduced.