The central bank is revising the mechanism on controlling securities lending activities, according to a vice governor of the State Bank of Vietnam. Accordingly, total securities loans of a credit institution may amount up to 20% of its chartered capital however securities loans must be categorised into the asset group having the risk rate of 200%-250%.
If so, the regulation on limiting the securities lending ratio on total outstanding loans of Instruction3has been replaced by the securities lending ratio on chartered capital. The central bank will not require banks to set aside risk provisioning funds for securities loans as reported previously by mass media.
The information about the central bank’s revising the management mechanism over securities lending activities is a hot topic of the press circle and related sides from yesterday. Many people said that although the mechanism on managing securities lending activities are new, the limiting ratio for securities loans is not different from Instruction 03.
For example, a commercial joint stock bank in Hanoi has total outstanding loans of 13.3 trillion dong, chartered capital of two trillion dong. If basing on Instruction 03, the allowed securities lending balance for this bank is nearly 399 billion dong, or 3% of total outstanding loans. If following the new mechanism, the bank is allowed to lend 400 billion dong to securities investment activities, or 20% of its chartered capital.
It can be seen that the central bank still tightens securities lending activities strictly.
This move can show that reining inflation will still be the top target of the central bank in 2008. some people forecasted that the consumer price index will increase by over 3% right in January.
Meanwhile, demand for credit capital is still sharply increasing. According to the balance sheet of credit institutions by December 2007, the credit growth in 2007 was even higher than the estimated figures.
Commercial joint stock banks continued reporting hot credit growth. In some cities, the credit growth of commercial joint stock banks was up to 127% against the end of 2006. Therefore, if the securities lending management mechanism is revised by this time, the credit growth may become hotter, particularly when share prices are cheap and many people advice investors should buy in shares in order to wait for the recovery of the market which is expected to happen at the end of February.
Additionally, many commercial joint stock banks are always targeting at expanding loans to securities trading activities, which the central bank does not encourage. Furthermore, the central bank is planning to encourage banks to lend direct production and business activities instead of injecting capital into non-production sectors or speculation such as securities, real estate and gold which contain potential risks for the economy and generates inflation pressures.
There is no reason to say that Vietnam’s stock market’s strong fluctuation is due to the central bank’s Instruction 03. However it can be seen that the effective time of Instruction3coincides with the downward situation of the stock market.
However, the movements of VN Index within two recent months demonstrated that the real reason for the downward of VN Index is supply exceeding demand, investors lose confidence in the market.
Furthermore, movements in the international financial market in 2007 and forecasts on recession of the global economy are also adverse impacts on Vietnam’s stock market.