Despite a 50 percent reduction in the compulsory reserve ratio (CRR), the credit institutions (CIs) still cannot use this amount of capital to lend out due to the regulations on loan to deposit ratio (LDR).
Exemption or reduction is just a…formalistic order
In the Draft Circular regulating the implementation of compulsory reserve of credit institutions and branches of foreign banks (hereinafter referred to as CIs), the State Bank of Vietnam (SBV) proposed exemption of the implementation of compulsory reserve for three subjects, including: CIs under special control, CIs not yet started their operations, and CIs that have decided to liquidate, or dissolve, or terminate operation or are revoked operation licenses by competent authorities.
Besides, supporting CIs (the CIs which are designated to participate in management, control, administration and support of organisation and operation of specially controlled CIs) are subject to a 50 percent reduction in reserve ratio for all types of deposits within the special control term according to the approved plan.
According to Decision 1158/2018/QD-NHNN, the applicable reserve ratio from 1st June 2018 for CIs is three percent for dong deposits with tenors of less than 12 months and one percent for dong deposits with tenor of more than 12 months. Reserve ratio for foreign currency deposits is eight percent and six percent respectively (particularly, the CRRs applicable with Vietnam Bank for Agriculture and Rural Development (Agribank) and Cooperative Bank are on percent lower for all types).
If the regulation on reduction of the above reserve ratio is approved, the supporting CIs will only have to carry out the reserve ratio of 1.5 percent for dong deposits of less than 12 month tenors and 0.5 percent for dong deposits with the tenors of more than 12 months.
There are currently two streams of opinions around this regulation. The first opinion supports the reduction of compulsory reserve for CIs to encourage CIs to actively participate in the process of restructuring weak CIs. In fact, the Law amending and supplementing a number of articles of the Law on Credit Institutions (Law No. 17/2017 QH14) also stipulates that the supporting CIs can get rediscount loans with preferential interest rates to zero percent, and are entitled to a 50 percent reduction of the reserve ratio according to the approved restructure plan”.
However, the second opinion recommended SBV to be cautious about reducing the reserve ratio, since this could release a huge amount of capital when banks participating in restructuring weak CIs are big banks. Therefore, this move may affect the goal of controlling inflation and creating great pressure on the domestic currency. More worrisome is that reducing the reserve ratio also means that SBV has narrowed the liquidity control tool in the context that the liquidity risk management of Vietnamese banks is still not yet professional.
However, the exemption and reduction of reserve ratio that the Draft Circular provides is only a formalistic order. Even if the reserve ratio is reduced, CIs are still unable to use this capital to lend because of the LDR regulations.
Choose ponds… or lakes
Indeed, according to Circular 36/2014/TT/NHNN, CIs must maintain the ratio of outstanding loans to total deposits as follows: that of state-owned commercial banks, branches of foreign banks is 90 percent; that of cooperative banks, joint-stock commercial banks, joint-venture banks, 100 percent foreign-owned banks is 80 percent.
It also means that even if exempted from or reduced the reserve ratio, the CIs can only take money from the central bank to bring back to their safes, but cannot lend out.
Right when the regulation on loan to mobilised capital (now revised to the maximum ratio of outstanding loans to total deposits) was introduced according to Circular 13/2010/TT- SBV, many experts have warned that this regulation has “disabled” the required reserve ratio toola fairly strong monetary policy tool often used by central banks around the world to control inflation.
In fact, since the effective date of Circular No. 13/2010/TT-NHNN, the reserve instruments have not been used by the SBV. Accordingly, the reserve ratio is still maintained at three percent for dong deposits with tenors of less than 12 months and one percent for dong deposits with tenors of over 12 months from 2009 to the present, even during this time, the economy experienced periods of high inflation like in the years of 2011-2012. Only the reserve ratio for foreign currency deposit had changes.
An expert opined that regulation of LDR created small “ponds” in each bank, while if SBV removed this regulation, and increased the required reserve ratio it will bring merge these small ponds into a large “lake” at SBV and SBV will easily use this lake to ensure liquidity for the whole system. In particular, SBV also has a stronger tool to control inflation.
Dr Le Xuan Nghia at that time also recommended abandoning the provision of credit ratio to mobilised capital, and replacing by the CRR tools. However, until now, LDR regulations have not been abolished, but only slightly better adjusted than before. But with this provision, the CRR tool has been “disabled”.
