Should We Abandon the Credit Growth Target?

In its latest directive, the State Bank of Vietnam (SBV) has allowed commercial banks with a credit growth rate of at least 80% of the target announced at the beginning of 2024 to proactively adjust their credit balance based on their ranking. This positive move by the SBV comes as system-wide credit growth as of August 26 stood at only 6.63% year-to-date, falling short of the 15% target for the whole year.

Facilitating Banks to Push Capital into the Market

According to the SBV, as lending rates vary significantly among banks, the regulator has redistributed credit growth limits. Some banks have low or even negative growth, while others are close to the SBV’s announced limit. Therefore, the SBV has proactively adjusted credit growth targets.

In the first half of this year, several banks recorded credit growth of over 10%, including VPBank, MB, Nam A Bank, MSB, HDBank, ACB, Techcombank, and LPBank. Many commercial banks are actively pushing capital into the market as credit growth in the first eight months has been lower than expected. Mr. Nguyen Hung, CEO of Tien Phong Bank (TPBank), said that in the third quarter of 2024, there has been an increase in credit demand from both individuals and businesses, providing a basis for TPBank to push capital into the market from now until the end of the year. The SBV has also allocated credit limits for other banks to proactively manage, and TPBank has prepared the necessary capital. Liquidity from capital mobilization is favorable, and abundant capital awaits market demand to boost credit growth. TPBank expects to achieve a credit growth rate of about 16% in 2024, following an increase of about 8% so far this year. “The credit demand from businesses is positive, while that from individual customers remains slow but is expected to improve by the end of the year. Interest rates are expected to remain stable and decrease amid the cooling down of the USD/VND exchange rate as the US Federal Reserve is expected to cut interest rates at least twice this year,” said Mr. Nguyen Hung.

Along with the additional credit targets, the SBV also requires credit institutions to ensure safe, efficient, and healthy credit growth, curb bad debt, and direct credit to production, priority, and growth-driving sectors in line with the Government and Prime Minister’s policies. Military Bank (MB) representatives believe that the additional credit growth target from the SBV will motivate commercial banks to organize management, supervision, and control of capital outflow to proactively manage their business safely and efficiently.

Credit Growth Limits Cannot Be Removed Yet

One of the factors mentioned by the regulator in its document to credit institutions is the continued implementation of the National Assembly and Government’s policy on gradually removing credit growth targets.

According to Dr. Nguyen Duc Trung, Rector of the University of Banking in Ho Chi Minh City, given the current economic context, it is not possible to completely “open the valve” on credit growth limits, especially when the SBV is conducting monetary policy in conjunction with inflation control and macroeconomic stability. Banks are also unique businesses, and removing credit growth limits without the control of this tool by the regulator will increase risks. This could impact the economy, so policies need to be harmonized. However, if the Vietnamese economy is large enough, credit growth limits should be removed. In a recent report to the National Assembly, SBV leaders explained why the SBV has not removed credit growth limits. Accordingly, maintaining credit limits helps ensure the safe operation of the banking system, positively contributes to inflation control, supports economic growth, and stabilizes the macroeconomy.

Currently, the pressure of capital balance for the economy (especially long-term capital) continues to weigh on the banking system, with potential liquidity and maturity mismatch risks (as credit institutions mainly mobilize short-term capital but provide medium and long-term loans). If banks independently increase credit growth without control through safety indicators and credit growth limits, we may return to the situation of high credit growth as before 2011. “This will not only increase bad debts and threaten the safety of the system but also risk causing macroeconomic instability and inflation. Removing this measure needs to be cautious, with an appropriate roadmap, ensuring necessary conditions, and gradually implementing it in line with market conditions,” SBV leaders explained.

Stable Lending Rates

Ms. Tran Khanh Hien, Director of the Analysis Division of MBS Securities Company, said that credit demand would continue to increase stronger from the middle of this year as production and investment accelerate in the last months of the year. In the first seven months, the industrial production index (IIP) increased by 11.2%, and the purchasing managers’ index (PMI) reached 54.7 in July. Public and private investment has also improved. MBS forecasts that the 12-month deposit interest rate of large commercial banks could increase by 0.5 percentage points to 5.2% – 5.5% by the end of this year. However, the lending rate will remain at the current level as regulators and banks are trying to support businesses in accessing capital.

Mr. Dinh Quang Hinh, Head of Macroeconomics and Market Strategy at VNDIRECT Securities Corporation, expects the pace of deposit interest rate increases to slow down towards the end of the year, mainly driven by the credit growth outlook. The 12-month deposit interest rate is projected to increase to 5.2% – 5.3% by the end of this year, lower than the previous forecast of 5.3% – 5.5% per year in the mid-year strategic report. This change is based on the possibility that the Fed will cut interest rates more than expected, meaning the SBV will have more room to conduct flexible monetary policy.

In its latest directive, the SBV also requested credit institutions to maintain a stable deposit interest rate and implement solutions to reduce operating costs, simplify loan procedures, and apply information technology and digital transformation to reduce lending rates.