‘The State Bank of Vietnam (SBV) requests banks to expand credit and reduce interest rates in priority areas from March 2019 in order to promote credit growth,’ prime minister Nguyen Xuan Phuc ordered in the regular government meeting last week. The prime minister stressed the same request many times in 2017. However, the conditions of credit institutions have changed.
Profitability taken in consideration
In early 2019, the banking system has experienced a local ‘shock’: Vietnam Joint Stock Commercial Bank of Industry and Trade (Vietinbank) had to cut tens of trillions dong in credit because it reached the limit of its lending capacity.
For the first time in 5 years, in 2019, the SBV expected credit growth at only about 14 percent, a much lower level than that of the previous period.
Annual credit targets are flexible and balanced with other macro indicators, especially inflation, but, above all, it must always be relevant to the conditions of credit institutions.
Until the end of 2018, Vietnam’s credit leverage ratio has reached about 130 percent of GDP, the highest level in decades. The lending capacity of the system was also reflected in the periodic updated data: the ratio of credit to capital is regularly around 90 percent, even nearly 95 percent in state-owned commercial banks, which account for the large proportion of the banking system.
In the said case of Vietinbank, the lending capacity was clearly limited. It is not a singular case. State-owned commercial banks, which account for more than 50 percent of the credit market share, are having similar difficulty.
Last year, Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) was the only bank increasing its charter capital, but the increase was only by 3 percent despite its significant amount. Even worse, Vietnam Joint Stock Commercial Bank of Industry and Trade (Vietinbank), Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV), and Vietnam Bank for Agriculture and Rural Development (Agribank) have not increased their capital for many years.
In several years, many members of the banking system was able to increase their charter capital by only seven to ten percent each year, mainly through paying dividends in stock. Meanwhile, credit and total assets usually grew in two-digit rate.
That difference is a difficulty in the long term, especially when the application of Basel 2, which requires higher capital requirements, is ahead.
Solutions to capital increase are still waiting to be approved in the annual general meeting of shareholders in the next second quarter while usually its implementation requires a long time.
However, ‘credit expansion’ in the statement of the prime minister is not necessarily a further boost to this year’s credit growth, but may be understood as a plan to expand credit right from the beginning of the year and spread it evenly throughout the year to reach the target of 14 percent.
Difference in deposit interest rates
Prior to the prime minister’s direction, state-owned commercial banks simultaneously lowered lending rates for priority areas earlier this year.
In fact, interest rates on the market in early of this March showed no prospect of a rapid decline.
After the Tet holiday, deposit interest rates at some banks decreased, but then increased again last week.
Weekly statistics synthesized by a securities company displayed that, in the group of banks dominating deposit market, deposit rates showed no sign of decreasing in two consecutive weeks in early March.
Deposit interest rates listed by many banks are still above eight percent per year for long terms, even from 8.5-8.7 percent per year, applied together with many bonus programmes.
State-owned commercial banks account for about 50 percent of both deposit and lending market share and often offer deposit rates below seven percent per year while private joint-stock commercial banks offer much higher rates.
That difference is almost defaulting in the entire system. It can be explained by the differences between the two sectors in terms of network, brand, ownership, budget deposits, etc. Among the remarkable factors causing the difference between interest rates of the two sectors is capital structure, which presents a big gap.
Financial reports 2018 shows that, while the proportion of medium and long-term loans in total outstanding loans is 3845.5 percent in Vietcombank, Vietinbank, and BIDV, it is 58-65 percent in many other banks.
Such large proportion of medium and long-term loans requires high level of capital concentration and competitive interest rates to attract capital to maintain a stable resource, especially in long terms, as using short-term capital for medium and long-term loans in 2018 and early 2019 has been further tightened.
The above proportion also reflects that the banking system is serving a huge demand for medium and long-term loans, a need for high interest rates. This need should be shared by the capital market, but it is still in the long-term development plan of Vietnam.
Direct tool?
There are obstacles in reducing interest rates, but subjectively the operator has enforcement tools. Besides, calculating and balancing are needed because reducing interest rates is just a part of a multi-objective monetary policy.
In recent years, Vietnam has only recorded a slight reduction in operating interest rates in July 2017, OMO interest rate in January 2018. This frequency may imply that those interest rates are appropriate, but may also be considered cautious.
Most recently, the SBV has announced a draft circular on compulsory reserve reduction for a number of credit institutions, potentially including institutions having large market shares.
With the stated orientation of the prime minister and the purpose of expanding credit and reducing interest rates right in March and the first quarter of 2019, whether the use of compulsory reserve instruments will be accelerated through implementation of the above draft is still a question.
