Credit growth limits still appropriate in current Vietnam context: lawyer

Applying credit growth limits is necessary in Vietnam as businesses and the economy still rely too much on bank credit, said lawyer Truong Thanh Duc, CEO of ANVI law firm.

What is your view on the State Bank of Vietnam’s use of credit growth limits to operate monetary policy - an issue of great concern in the financial market?

The State Bank of Vietnam (SBV) has many tools to manage credit growth and quality. However, I think that setting credit growth limits, also called “credit room”, over the past decade was inevitable for the following three reasons:

Firstly, businesses and the economy have relied too much on bank credit, so it is necessary to limit credit growth, especially when for many years international financial institutions have continuously warned of high and risky credit growth in Vietnam.

Secondly, the State Bank of Vietnam (SBV) has the full legal basis to operate monetary policy using credit growth limits. Among the regulations is Article 10 on "Tools for implementing national monetary policy" of the Law on the State Bank of Vietnam 2010. Accordingly, the SBV governor has the right to decide on the use of six tools to implement national monetary policy, including refinancing, interest rates, exchange rates, reserve requirements, open market operations, and other tools and measures in line with government regulations.

The government's decrees regulating the functions, tasks, power and organizational structure of the SBV, such as Clause 4, Article 2 of Decree No. 102/2022/ND-CP, allow the SBV to use "other tools and measures" to implement national monetary policy.

Thirdly, although the allocation of credit quotas is administrative and shows shortcomings, it is consistent with reality and the context of the Vietnamese banking market, which has its own characteristics and requirements, very different from other countries, especially developed countries.

There are many specific tools aimed at credit room, with reserve requirements being a standard and effective tool according to international practice. It is true that by using this tool, the SBV can easily tighten and loosen credit growth. For many years, our required reserves have been at 1-3%, depending on the nature of each bank. Just increasing this ratio by a few percent will immediately squeeze credit growth and vice versa.

However, this "blockbuster" tool has its "destructive power", causing the risk of great turmoil, strong fluctuations, instability, and failure to achieve the goal of restructuring and stabilizing the banking system. Increasing the required reserve ratio will hike the capital cost of commercial banks, pushing up interest rates, greatly affecting the banks themselves, as well as businesses and the economy. In addition, banks that still have many limitations, are facing difficulties or are in the recovery stage will not be able to withstand this pressure. Even strong banks that are supporting weak banks have been hit.

A strict policy is not suitable for the operation of a multi-target monetary policy like in Vietnam. For example, in 2023, with the same goal of controlling inflation, while the whole world increased interest rates many times, we made multiple rate cuts. Operating policy tools according to international standards is very easy, but the difficult part is how to implement them synchronously and coping with the negative effects and consequences they bring.

You mentioned the "Vietnamese context" and multi-target monetary policy. How are they related to monetary policy dictated by credit growth limits?

To achieve economic growth goals, it is necessary to set corresponding credit growth targets and reduce interest rates. But the number one responsibility of the SBV, like other central banks, is to simultaneously stabilize the value of the local currency and curb inflation. To do this, it has to reduce credit growth and hike interest rates. Choosing one goal is not easy and choosing two goals at the same time always requires double efforts and can lead to contradictions and conflicts.

There are many other factors that affect credit growth, which is always coupled with risks. When credit demand increases sharply, we’re not happy about the limits, but when demand is low we view the limits as excessive. The flow of bank credit is like that of vehicles on the highway. Although the road is very big and beautiful, with few vehicles, we are still not allowed to go beyond the speed limit. In case of congestion, we must accept running below the speed limit. We cannot request removing the maximum and minimum speed limits.

Some people have called for the criteria for credit quota allocations at banks be made public, helping to make this information transparent. What do you think about this proposal?

That's really open, transparent, and clear, but even as an outsider, I find it not that simple. If a bank is ranked A it's given a credit growth quota 20%, while a bank ranked C is allowed gredit growth of 5%. Other banks are not allocated a credit quota because they are too risky or weak. However, this stops people from using these banks, posing a potential risk of affecting the system's safety.

Therefore, doing so is only reasonable if it does not pose significant risks. In other words, it will only be done when the people are ready to accept the information and the state is willing to bankrupt any bank if it cannot pay its due debt. Now, the Law on Credit Institutions only allows banks to go bankrupt after they have tried to resolve their debts over many years.

This is considered a long-term goal, but with the current state of the economy and the banking system, it is not easy and simple, and is causing a headache for regulators.

In the end, sooner or later there will come a time to abolish credit limits, but we never plan to remove them completely; they will be replaced by another more appropriate and effective measure.

If we want to achieve the goal of development coupled with macroeconomic stability, we must still closely adhere to the provisions of the Law on the State Bank of Vietnam, ensuring that the top goal is "to stabilize the value of the local currency", and the second is "to ensure the safety of banking operations and the system of credit institutions".

In early December, Deputy Prime Minister Le Minh Khai requested the Government Inspectorate to inspect the SBV’s management of credit growth in 2022 and 2023.

It would focus in particular on the central bank’s implementation of assigned functions and tasks in managing credit growth; building, allocating and administering credit growth quotas; and management and supervision of credit growth in the period.

The inspectorate has been asked to submit the results of its investigation in January 2024.

Vietnam’s banking system credit grew 11.09% in 2023 through December 21, up from 7.39% recorded in early November, according to the General Statistics Office (GSO).

The figure showed a significant improvement despite being much lower than the target of 14%, it said, adding capital mobilization by credit institutions increased by 10.85%.