Why does SBV not increase credit growth limits?

11-Aug-2018 Intellasia | VnEconomy | 6:02 AM Print This Post

Governor of the State Bank of Vietnam (SBV) Le Minh Hung has issued Directive 04 on further implementing effectively the key tasks and solutions of the banking industry in the last six months of 2018, with the direction of strictly controlling credit growth.

The Directive specifically stated that “Strictly controlling credit growth rate and credit quality of the entire system as well as of each credit institution (CI) according to the set objects and orientation; and not considering to raise credit growth targets (except for special cases, such as some commercial banks that participated in restructuring some weak CIs).

According to the orientation of the past years, the head of SBV continued to require CIs to focus credit on production and business areas and priority areas; and to tightly control lending to potentially risky areas such as real estate, securities, transport build-operate-transfer (BOT), and Build-Transfer (BT), etc.

Talking to VnEconomy about the above orientation, Governor Hung said that the SBV has assigned specific and appropriate targets since the beginning of the year based on the evaluation of the conditions and financial balances of each CI.

Accordingly, CIs having good financial situation and ensuring safety ratios in operations were assigned higher credit growth limits, and vice versa in CIs with limited conditions.

In terms of general direction, the Head of SBV emphasised that the top two priorities in managing monetary policy are currently stabilising exchange rate and controlling inflation. In particular, the goal of curbing inflation is more directly linked to credit growth. The tight control of credit now also aims to take more initiative in the goal of controlling inflation in the future.

In Vietnam, for many years the credit leverage ratio has been maintained at high level (usually from 110-120 percent of the Gross Domestic Product (GDP)). This level has alerted by many international organisations as it poses risks to inflation and macro stability.

Governor Hung affirmed that reasonable credit demands that satisfy the conditions of borrowing are and will be well met.

However, the main role of the system of CIs is to serve short-term capital needs and working capital loans. Meanwhile, medium and long-term capital needs as well as large quantity of capital need require the sustainability of the stock market so that businesses are more active in accessing and raising capital.

As mentioned above, in order to have more favourable credit growth target, each CI must further improve its financial capacity. Governor Hung also said that in addition to the assigned credit growth limit, if CIs want to offer more loans, they have to accelerate the bad debt settlement in order to create regeneration sources as well as to create their own credit growth room.

Looking in that direction, credit in the recent years has actually been growing in two ways. On one hand, the credit has been growing towards normal expansion direction. On the other hand, the outstanding loans have been expanded more substantially along with the gradual bad debt settlement, instead of being largely blocked in bad debts as before.

According to the latest updates, at the Mergers and Acquisitions (M&A) Vietnam Forum 2018 on August 8th, deputy prime minister Vuong Dinh Hue said that the bad debt ratio of the entire banking sector has dropped from 10.08 percent in the beginning of 2016 to 6.9 percent in June 2018. The bad debt ratio on balance sheets was less than two percent.

After the hot credit growth period which posed many risks, from 2012, SBV has tightened the annual credit growth limits for active control. Since then, the agency has annually reviewed the financial situation and operation of each member and assigned specific targets which better fit the reality.

In the general situation, with the top priority of controlling inflation, since the beginning of the year until now, the SBV has more closely controlled credit. Although credit has been growing steadily over the months, it has shown signs of slowing down.

As estimated, by the end of July 2018, the credit growth only reached above seven percent, while it was about nine percent in the same period of 2017. With this result, the room for expanding credit in the last five months of 2018 is not small.

For commercial banks, the shift in strategy has been clearly shaped in the recent years. Instead of speeding up and relying more on traditional credit as before, the structure of revenue of many members has been expanded towards raising higher revenue from services.


Category: Finance, Vietnam

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