State Bank of Vietnam unwilling to cut credit space | business
Usually, the State Bank of Vietnam grants each commercial bank a credit line depending on the state as a healthy bank at the beginning of the year. From the middle of the year, operators will begin to adjust the credit margin for commercial banks based on developments in the economy, operations and the health of the bank. This means that by looking at the real needs of the market, commercial banks can predict their loan growth, but only within the levels allowed by the State Bank of Vietnam. Every year, starting around the middle of the second quarter, commercial banks usually step up and send requests to the State Bank of Vietnam to request more credit space.
The mechanism for granting credit leeway to any commercial bank is often referred to by experts as an administrative order, and it was proposed five to seven years ago to abolish this mechanism after banks made new strides in the restructuring process. However, this topic became very heated when MPs in the National Assembly questioned the allocation of credit lines for each bank. Even Mr. Vuong Dinh Hue, Chairman of the National Assembly, said that this is the first time the National Assembly has questioned the granting of credit lines to commercial banks. Mr. Vuong Dinh Hue also questioned whether this was administrative in nature or to ensure publicity and transparency, and a roadmap to eliminate this.
According to State Bank of Vietnam Governor Ms. Nguyen Thi Hong, the regulator sets targets each year based on inflation and economic growth targets to align credit growth. According to this, the State Bank of Vietnam classifies commercial banks, and healthy banks are allocated a higher credit limit. This mechanism has been in use since 2011 because the State Bank of Vietnam found it to be an effective means of organizing, operating and stabilizing the money and credit markets.
Before this leeway was not granted, many commercial banks granted very high credit growth, in some years up to 30 percent. Previously, systemwide credit growth was as high as 53.8 percent, leading to an interest rate race to mobilize capital for lending. This has been an effective solution in the past and is still used when the banking system is in the process of restructuring or aligning with international standards.
This theme was raised at a press conference announcing the results of banking operations for the first six months of 2022 in the middle of last week. Mr. Pham Chi Quang, deputy director-general in charge of the monetary policy department, said that according to statistics from the State Bank of Vietnam, registered commercial banks’ credit growth demand has always been about over 20 percent for the past three years, far exceeding the capital account.
If credit growth is limited only to the needs of banks, inflationary pressures will be high and banks will also have to struggle to raise deposit rates, leading to higher lending rates and bad debts. Therefore, the State Bank of Vietnam must manage commercial banks in accordance with the International Standard Prudential Ratio and control credit growth by providing credit headroom. In summary, the State Bank of Vietnam’s view so far is that it is not possible to dismantle the credit facility granting mechanism for commercial banks.