The State Bank of Vietnam (SBV) continued to carry out credit growth targets for each credit institution, although many recommendations should be removed. However, macroeconomic policy makers have their own arguments to maintain that limit.
Since 1994, SBV applied credit growth limit to four state-owned commercial banks. After that, the application of credit limit was extended to joint stock commercial banks and large foreign bank branches to limit lending speed and to control inflation.
Economists analysed that the credit limit was a direct tool to regulate the amount of money in circulation, SBV can strictly control the total amount of money supplied. That tool was really effective when the payment instruments in the economy was high and other indirect tools appeared to be ineffective.
Nguyen Tri Hieu, economic expert, said that when the secondary market had not yet developed, SBV could not use open market to control payment instruments, and the use of that tool was necessary.
However, Hieu said that the credit limit was an operating tool that could directly interfere and only be allocated to some commercial banks, so it would limit fairness in competition. At the same time, the credit limit was not adjusted flexibly according to market signal, which would affect the demand for capital for the economy.
Accordingly, in 1998, SBV did not use credit limit as a regular tool in operating monetary policy, but only when it was necessary to limit credit growth quickly, leading to high inflation risks.
By 2011, SBV returned to using this tool in the direction of Directive 01/CT-NHNN, dated March 1, 2011 on implementing monetary solutions and banking operations. Specifically, the Governor of SBV required commercial banks to build credit growth plans for 2011 not to exceed 20 percent of outstanding loans compared to the end of 2010 and must be approved by SBV.
At the same time, SBV set a credit limit for non-manufacturing sectors, such as real estate, securities, and other consumer loans, etc. up to December 31, 2011 with a maximum of 16 percent. It was no coincidence that SBV stipulated that. According to data at the beginning of 2011, there were 18 joint stock commercial banks with non- manufacturing proportion of less than 25 percent; 24 joint-stock commercial banks with proportion of over 26 percent (in which commercial banks had the lowest proportion of non- manufacturing loan of 8.5 percent on total outstanding loans, the highest was 59 percent).
In fact, the credit balance of the whole economy in 2011 was only 12 percent, much lower than the plan, but the credit limit for the non-manufacturing sector was ensured seriously. Then, SBV continued to maintain the credit growth targets to banks right from the beginning of the year.
Recommendations to remove the credit growth limit have not been used…
Sebastian Eckardt, chief economist of World Bank, said that previously, the problem of high credit growth had brought some consequences for the economy. Therefore, it was necessary to consider further stabilising credit growth. However, the issue of supply and demand should allow the market to decide and SBV should only monitor liquidity and interest rate in accordance with the activities in the economy.
Having the same view, Nguyen Tri Hieu analysed that SBV should let each bank adjust its business plan. Banks guaranteed their capital adequacy ratios, such as outstanding loans on deposits, nonperforming loan ratio not exceeding three percent, etc. The remaining indicators such as business growth should depend on the conditions and capabilities of each bank.
Nguyen Xuan Thanh, senior research officer of Harvard Kennedy School, and also lecturer in public policy at Fulbright University in Vietnam, stated: “Macroeconomic growth has a close relationship with credit growth. Usually, when referring to economic growth, people often think of the corresponding credit growth to support production. However, in the period of 20152017, credit growth reached a speed of 14 percent to16 percent, causing concern for international organisations. After that, we slowed down credit growth while economic growth was still high. It means that economic growth is not necessarily accompanied by credit growth”.
Pham Thanh Ha, Head of the Monetary Policy Department of SBV, said that SBV had set the target of credit growth for the whole year of 2019 at 14 percent, adjusted accordingly to the actual situation but still based on the target of 6.8 percent economic growth and an average inflation of less than four percent. Accordingly, SBV directed the credit orientation for the whole system and announced credit growth target for each credit institution. The orientation was to prioritise high credit target for banks that had implemented before the deadline on capital adequacy ratio (CAR) in Circular 41/2016/TT-NHNN.
Commenting on this orientation, Nguyen Dinh Tung, Chief Executive Officer of Orient Commercial Joint Stock Bank (OCB) said: “Macro-policy makers have their own reasons and in this case, the policy of reducing credit growth (credit limit) is for the common goal. Commercial banks have ways to manage their own business strategy.”
What is the reason for SBV to keep credit growth limit?
According to SBV’s data, at the end of 2016, the credit/GDP ratio was 122 percent, then increased to 130 percent at the end of 2017. At the same time, World Bank also said that the credit ratio for the private sector in 2017 in Vietnam reached 130 percent of GDP. According to financial experts, if Vietnam’s credit growth is still about 15.6 percent per year in the near future, while nominal GDP will increase only 10.2 percent per year as in the period of 2012-2016, after about 10 years, the credit/GDP ratio will be among the highest in the world, reaching 200 percent.
Sebastian Eckardt said Vietnam’s credit/GDP outstanding ratio in 2010 was 135 percent. Credit growth was a long-term problem in Vietnam. The banking system in Vietnam had a relatively large scale with a high growth rate.
That would increase the rate of capital leverage. Accepting excessive risks was likely to lead to deterioration in credit quality or collateral assets.
In fact, Vietnam’s credit/GDP ratio increased to more than 130 percentthe level that many international organisations recommended when assessing Vietnam’s credit rating.
Economic experts analysed that when the credit/GDP ratio was high, the stability of the financial system in particular and the economy in general would become more sensitive to fluctuations in interest rate. A small increase in interest rate could lead to a significant increase in the interest-paying responsibility and make the economy’s sustainability decline.
Besides, with a credit rate of 130 percent, Vietnam’s economy is borrowing 1.3 time more than the annual income generated. If the credit/GDP ratio rises higher, the pressure of debt repayment of enterprises may increase and the risk of bankruptcy will be greater, especially in the context of increasing interest rate globally.
In addition, high credit to GDP ratios do not always mean that the manufacturing sector is provided more capital, when the capital demand of the manufacturing sector is limited while depending on effective use. High credit/GDP may be a sign of money flowing into asset market such as securities and real estate. Therefore, too high credit/GDP ratio can lead to asset price bubble.
For these reasons, it is understandable that the state management agency still has not abandoned the credit growth limit.
