As BizLIVE has reflected recently, the State Bank of Vietnam (SBV) is taking public comments on the draft circular replacing Circular 36/2014/ TT-NHNN stipulating prudential ratios and limits in operations of credit institutions and foreign bank branches (Circular 36).
In particular, an important content, which has received a lot of contradictory comments, is the revision related to the continued reduction of the limit of short-term funds for medium and long-term loans to 30 percent.
The draft provides two options for adjusting to different routes.
Option one is to decrease the threshold by five percent each year. Specifically, until the end of June 30, 2020, it will keep the maximum level of 40 percent, until the end of June 30, 2021, maximum of 35 percent and from July 1, 2021 up to 30 percent.
Option two is to decrease the threshold by five percent each year. Accordingly, by the end of June 30, 2020, the maximum level is 40 percent, up to the end of June 30, 2021, maximum 37 percent, by the end of 30/6/2022, up to 34 percent, and from 01/7/2022 up to 30 percent.
Although this is a draft, the current regulated ratio is still high with 40 percent. However, in fact, banks have actively reduced sharply the ratio of short-term capital for medium and long-term loans.
Latest update from SBV, by the end of April 2019, the ratio of short-term capital for medium and long-term loans of the whole system continued to decrease to 28.01 percent, down from 28.77 percent announced at the end of February 2019 and was very deep below the 40 percent limit under the current regulations. In particular, the ratio at state-owned commercial banks was 30.99 percent and in joint-stock commercial banks was 31.52 percent, a sharp decrease compared to the previous two months, at 31.56 percent and 32.94 percent respectively.
Looking at the above figures, it can be seen that the goal of reducing short-term capital ratio for medium and long-term loans to 30 percent in the next two or three years is feasible.
According to SBV’s assessment, difficulties can occur for some banks with large medium and long-term lending activities, but in the overall market, this is a feasible target, and therefore the level of cooperation motion is forecasted under control.
In the sense of international practice and regulations on liquidity risk management (in which there is a risk of term deviation due to the use of short-term capital for medium and long-term loans) are focused, especially after the economic and financial crisis in 2007-2009, reflected in some indicators of stable capital and liquidity of commercial banks, which are strictly regulated in the Capital Safety Treaty (Basel III, valid route from 2013-2019). Accordingly, commercial banks will not be able to use short-term capital to serve loans or medium and long-term investments.
Thus, compared to international practice, the target of 30 percent to mid-2021 (option one) or mid-2022 (option two) is still a modest number, taking into account the capital market (stock and bond markets) that Vietnam has not yet developed.
Besides, the restriction of commercial banks for medium and long-term loans can help Vietnam develop stronger than the capital market, encouraging businesses to seek capital in the stock market, thereby overcoming imbalance in the financial system.
Currently, the banking system accounts for 68 percent of the entire financial system’s assets and is taking on the main task of providing medium and long-term capital for the economy (the function that should belong to the capital market) when the proportion of medium and long-term credit of the credit institutions system remained at 50.6 percent (end of 2018).
This, according to Dao Minh Tu, SBV deputy Governor in a recent forum, is creating great pressure and risks for the credit institution system.
And promoting and facilitating businesses to mobilise capital in the capital market is considered a key task to help solve this problem.
