Foreign currency credit should not be tightened

19-Sep-2020 Intellasia | Dien dan Doanh nghiep | 6:02 AM Print This Post

The development strategy of the Vietnamese banking industry to 2025, with a vision to 2030, had set out the goal of gradually reducing the ratio of foreign currency credit to total credit towards stopping foreign currency lending.

Although in the past one year, the foreign currency credit tightening had achieved some positive results, many experts believed that the tightening of this activity should not be considered, especially when the export was still facing difficulties due to the COVID-19 epidemic.

Should not disturb the market

According to the provisions of Circular No.42/2018/TT-NHNN, since October 1, 2019, credit institutions had stopped lending foreign currencies in the medium and long term. Previously, from April 1, 2019, credit institutions also terminated short-term foreign currency loans to pay abroad for the import of goods and services in order to carry out the plan of producing and trading goods to serve domestic demand service.

Until then, it had been nearly a year since the effective date of Circular No.42/2018/TT-NHNN, but the tightening of foreign currency credit had not caused much turmoil in the market. Explaining this problem, a banking expert said that, according to the current regulations, domestic export enterprises were still allowed to borrow in foreign currency, not only for payment for the import of raw materials but also for meeting the capital needs for the production of export goods.

As for domestic consumer goods importers, due to a lack of foreign currency income, they were not eligible to borrow foreign currency for a long time, but they often had to buy foreign currency from banks to pay for imported goods.

There was also an opinion that the tightening of foreign currency borrowers made foreign currency credit decline. Although the State Bank of Vietnam (SBV) had not released data on foreign currency credit recently, according to Hochiminh City Statistics Agency, the largest and most vibrant currency market in the country, foreign currency credit decreased slightly over the same period last year. Specifically, as of early August 2020, the total outstanding credit in the city increased by 9.09 percent over the same period last year, but credit balance in foreign currency decreased by 4.14%.

According to the above-said banking expert, the foreign currency credit decline was only a small part due to the impact of Circular No.42, also mainly due to the decrease in credit demand. Because the COVID-19 pandemic, on the one hand, disrupted the supply chain of raw materials and caused export activities to stall. As a result, businesses also restricted foreign currency loans to import raw materials for export.

Need to have a specific roadmap

Assuming that SBV having not limited the time to borrow foreign currency for exporters was very positive, Nguyen Tri Hieu, a banking expert, analysed that currently, the foreign currency loan interest rate was much lower than the dong loan interest rate, thereby helping businesses save capital costs, lower product costs to improve competitiveness for export goods.

While the tightening of foreign currency credit for the demand for importing domestic consumer goods also contributed to limit the import of luxury consumer goods, thereby contributing to a persistent surplus of the trade balance. It was estimated that in the first eight months of this year, the export surplus reached $11.9 billion.

In particular, the tightening of foreign currency credit was also consistent with the policy of anti-dollarisation in the economy. The development strategy of the Vietnamese banking sector to 2025, with a vision to 2030, had also set out the target to gradually reduce the ratio of foreign currency credit to total credit, and to stop lending in foreign currencies by 2030 at the latest dollarisation of the economy.

In fact, the tightening of foreign currency lending recently had helped to maintain exchange rate stability. In the previous years, the foreign currency credit growth rate was often much higher than the credit in the local currency due to the lower interest rate on foreign currency loans. Consequently, at the end of the year, when many loans matured, businesses rushed to buy foreign currencies in the market to pay debts, making the foreign exchange market in the last months of the year often become raging.

However, the current situation was different. Mostly since the beginning of the year, due to the decline in foreign currency credit, plus the abundant supply of foreign currency in the economy, the foreign currency market had been stabilised, despite the fluctuations from the outside. The stable exchange rate not only prevented SBV from spending foreign exchange reserves but also bought more foreign currencies to supplement the foreign exchange reserve fund. Figures released at the recent August government regular meeting showed that Vietnam’s foreign currency reserve had reached a new record at $92 billion.

Although continuing to tighten foreign currency credit, to altogether terminate this activity according to the Vietnam Banking Industry Development Strategy to 2025, with a vision to 2030, was necessary, but experts also believed that there should be a specific route. Especially in the context that exports were still facing many difficulties due to the COVID-19 pandemic, regulators should not consider tightening foreign currency credit.

 


Category: Finance, Vietnam

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