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Need for caution if credit growth limits relaxed

Released at: 17:11, 11/08/2017

Need for caution if credit growth limits relaxed

Illustrative image (Source: cafef.vn)

Banks lobbying SBV for increases in limits after strong first-half lending.

by Duy Anh

A host of lenders, both State-owned and private, have asked the State Bank of Vietnam (SBV) to loosen credit growth quotas for this year after using almost all of their quota during the first half, though concerns remain whether this may become problematic.

Vietcombank Chairman Mr. Nghiem Xuan Thanh requested a higher credit growth cap than the 16 per cent set for the year, adding that it reached 13 per cent credit growth in the first half. Vietnam International Bank (VIB) has also used up almost all of its credit growth quota of 16 per cent for this year, with outstanding loans rising 15.7 per cent in the first half.

ACB’s CEO Mr. Do Minh Toan said the bank has reached more half of its credit growth limit of 16 per cent and is waiting for SBV approval of an expansion. Meanwhile, VPBank’s credit growth during the first half stood at 12 per cent out of a 16 per cent quota.

The central bank is aiming for credit growth of 18 per cent this year. Data from the General Statistics Office showed that growth during the first half was 7.5 per cent compared to a year ago; the highest in six years. Meanwhile, SBV Governor Le Minh Hung said that credit growth at a pace of 9.06 per cent was seen as at June 30 compared to the end of 2016.

In July, the SBV sprang a surprise on markets by reducing the refinancing rate, rediscount rate, overnight electronic interbank rate, and the rate of loans to offset capital shortages in clearance between the central bank and domestic banks by 25 basis points.

The cuts, which come three years after the previous move, reduced the refinancing rate to 6.25 per cent and the rediscount rate to 4.25 per cent and was aimed at stimulating the pace of economic growth towards the 6.7 per cent target for the year.

Few would question whether there was room to cut rates but it comes at a cost of putting upwards pressure on prices going forward as well as potentially fueling a credit bubble. The International Monetary Fund said in July that the SBV should stand pat on policy rates and check its spiraling credit growth.

There are signs, unfortunately, that Vietnam is going overboard in order to achieve the targeted GDP growth rate.

First, Vietnamese banks were quick to reduce their lending rates post the central bank rate cut but have not done the same for their deposit rates. According to Governor Hung, interest rates on short-term loans have fallen to 6-6.5 per cent and medium and long-term rates are now in the 8-10 per cent range.

Second, a central bank directive that places limits on the maximum ratio of short-term funds used for medium and long-term loans will force banks to keep this ratio at 50 per cent until end-2017 and, starting in 2018, the ratio will decline to 40 per cent. While the deadline will make it nearly impossible for banks to reduce deposit rates as they’ll face liquidity issues, what’s more troubling is that profitability among local banks is much less than in many other sectors and is not commensurate with their size, according to local banking experts.

Nevertheless, market liquidity in the market shows no signs of distress, according to SSI Retail Research, which reported the SBV net injected VND10.5 trillion ($462 million) into the money market last week after two previous consecutive weeks of net withdrawal. But a directive from the Prime Minister earlier this month asking the central bank to rev up credit growth to at least 20 per cent this year should be taken in a cautious manner, as it would make 2017 the first year since 2010 when credit growth exceeded the 20 per cent threshold.  

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