Should We Abandon the Credit Growth Target?

The State Bank has instructed credit institutions to focus on achieving healthy, efficient, and safe credit growth, in addition to their assigned credit targets.

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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.

A transaction at a bank in Ho Chi Minh City. Photo: TAN THANH

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.

Ensuring Credit Quality

According to a financial expert, the current credit growth of about 6.63% is quite low compared to market expectations and the regulator’s target. This situation reflects uncertainty and economic difficulties influenced by various domestic and international factors. “The current credit allocation tool can lead to adverse effects on credit quality, meaning that growth is not substantive but has to keep up with annual targets. A bank that fails to achieve its credit growth target this year may have its allocation reduced next year, even though economic conditions vary annually. Therefore, the proposal to remove credit limits to allow capital to reflect market demand needs consideration,” the financial expert said.

Mr. NGUYEN HUY VINH, Director of IPP Sachi Joint Stock Company (Binh Dinh):

Opportunity for Businesses to Expand Production

Bank borrowing is now easier and cheaper. Our company is currently borrowing medium-term capital of several billion VND at a fixed interest rate of 8% per year to invest in our factory. In addition, many banks offer short-term loan packages with interest rates as low as 6% – 6.5% per year, but we have no need to borrow amid the slow market growth. With the favorable interest rates, we plan to borrow more medium-term capital next year to expand our factory and meet export orders for specialized markets requiring Halal certification.

Mr. TA QUANG HUYEN, Chairman of Hoang Son I Joint Stock Company (Binh Phuoc):

Facilitating Businesses with Insufficient Credit Limits

The interest rates are favorable for manufacturing and trading businesses. Short-term VND loans are around 6% per year, and USD loans are 4% per year. Most enterprises choose to borrow in VND as it is more beneficial, especially during periods of loan settlement when the USD is high. Cashew exports are going well, and our company has ample capital for production and business and has not fully utilized the credit limit assigned by the bank. However, some enterprises in the industry face insufficient credit limits due to the decline in real estate prices, leading to lower valuations, while cashew prices have increased, requiring more capital. In addition, some enterprises that guessed the price trend wrong and signed contracts to sell at low prices while buying raw materials at high prices also face difficulties in cash flow.

Mr. NGUYEN THANH HIEN, Director of Tomcare Biotechnology Company Ltd. (Chilica fermented chili sauce brand):

Adjusting Loan Tenure to Suit Business Needs

Our company is missing out on a great business opportunity because we cannot borrow the desired 20 billion VND. Currently, chili peppers from farmers are very cheap due to difficult market conditions, our factory has excess capacity for processing, and we have good export orders. However, the bank only provides working capital loans for a maximum of nine months, while the fermentation process for Chilica chili sauce takes 12 months, plus the time for selling the products and getting the money back is 15 months. Our company’s loan application is very ‘clean’ as we operate in the agricultural sector, are profitable, and have transparent tax and VAT refund records, and clear cash flow from exports, so the expected lending rate is only 6.5% per year. But with a loan term of nine months, we won’t have enough time to get the cash flow to repay. The authorities need to adjust the loan term to match the actual production model to support businesses.

Mr. HOANG VAN THUY, CEO of Dai Hoang Thuy Coffee Company Ltd.:

Loosening Loan Conditions is Necessary

After the COVID-19 pandemic, businesses need capital to resume production and seek export markets, but they cannot borrow because they must provide collateral and have been profitable in the last six months. As the economy is facing difficulties and the market is declining, requiring businesses to be profitable to access loans is challenging. Our company needs to borrow to purchase 350 tons of raw coffee for production and processing. Increasing the credit limit and loosening loan conditions will help some businesses facing difficulties.

Ng.Anh – Ng.Hai

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