Central bank declines to lift credit growth cap

The State Bank of Vietnam has stuck to its 14% credit growth cap for this year over inflation risk concerns.

"With the current inflation situation, we need to exercise caution. For the immediate future, the State Bank will stick to the target of 14%," SBV Governor Nguyen Thi Hong said at a government meeting Saturday.

Quite a few banks and businesses wanted to have the ceiling on credit growth raised, but 14% was already higher than last year and the central bank had already factored in the economic recovery stimulus when determining the 14% cap, she said.

"Vietnam’s ratio of credit to GDP is up to 124%, the highest in the world. The ratio of credit to deposit is already 99%. If the credit growth cap is raised, there is a risk of an interest rate race like in 2010-2011. In order to stabilize the exchange rate, the State Bank must stabilize credit."

In 2010-2011, many banks engaged in a race to raise deposit rates that led in turn to surging lending rates, negatively impacting the business and the economy.

Hong said the global economy was currently going through many unprecedented, unpredictable and complicated developments. It is very rare for the US Federal Reserve (Fed) to raise interest rates by more than 4% per year, the dollar to appreciate very strongly and inflation occurring on a global scale - inflation in the UK and the U.S. has now reached 8- 9% from just 1-2%. Meanwhile, Vietnam’s economy has a big level of openness, with domestic production heavily dependent on imported input materials.

"Experience shows that in such a difficult context, the most important thing is to be consistent with the goal of controlling inflation, stabilizing the macro-economy, and exercising caution on inflation. Another important goal is to ensure the safety of the banking system," she noted.

Although Vietnam has successfully controlled inflation in the past seven months, the central bank governor said inflation risks were visible.

Vietnam's inflation in the last seven months was 2.54% and the central bank's target is to keep it below 4% for 2022.

The Ho Chi Minh City Real Estate Association had proposed last week that the SBV raise its credit growth cap for the year to 15-16% from the current 14%. It suggested that the credit ceiling is lifted for the "Big 4" - BIDV, Agribank, VietinBank and Vietcombank, as well other commercial banks meeting Basel II standards.

The association also suggested that the central bank allows commercial banks to provide loans to customers to "make capital contributions or cooperate in investments" if borrowers had collateral or could prove their financial capabilities.

Referring to this proposal, Hong said the view of the SBV was that the source of capital for real estate can come from many channels including foreign direct investment, the stock market and corporate bonds. "Credit is just one channel. Meanwhile, the nature of credit for the real estate sector is medium to long-term, while most bank deposits are short-term."

In the first six months of the year, credit for the real estate sector reached VND2,330 trillion ($99.5 billion), a year-on-year growth of 12.31%, higher than the country's average credit growth of 9.35%, according to SBV data.

The governor added that the national economy was recovering strongly, and from now to the end of the year, thanks to the government’s directions on accelerating public investment, there would be cash flow to the market to support growth.

"In the coming time, the State Bank must control the exchange rate to solidify the confidence of investors. With foreign exchange reserves consolidated over the past time, the State Bank is always ready to sell foreign currencies to stabilize the exchange rate," she said.

Vietnam's foreign currency reserves, currently at more than $100 billion, equal 3.1 months of the country’s imports, are forecast to keep rising.