Vietnam’s credit growth limit no longer appropriate: experts

The credit growth cap maintained by Vietnam’s central bank no longer suits the current situation because certain weaknesses have begun to appear, experts say.

They say that their assessment is based on the appearance of the “ask and give mechanism” wherein decisions are taken based on orders “from above” as well as other “non-market factors.”

Nguyen Thi Hong, Governor of the State Bank of Vietnam (SBV), acknowledged the problems indirectly at a conference last week when she said that the central bank would review the entire process of managing credit targets to decide whether or not to continue application of this tool.

The conference discussed ways to remove difficulties related the “credit room” created for production and business activities in order to promote growth and maintain macroeconomic stability.

The “credit room” solution was officially launched by the SBV in 2011 when Vietnam's economy experienced a period of high inflation. It set a maximum credit growth limit for the banking industry every year and, based on the overall credit growth of the entire economy and the financial health of commercial banks, allocated credit growth quotas to each.

Banks that exceeded their credit growth quota would be fined.

Critics of this policy say that information about each bank's credit growth limit is only revealed at meetings with investors and shareholders or announced by each commercial bank. The SBV itself does not publicize the criteria it uses to determining the "credit room" for each bank, they note.

Vietnam’s credit growth in the first 11 months of 2023 was very low compared to the 14.5% target set for the year, reaching only 8.21% as of November 22.

On November 29, the central bank re-allocated its credit quotas, reducing them for banks with no demand and increasing them for those that needed balance credit growth. It also kept the 2023 credit growth target of 14.5% set at the beginning of the year.

Nguyen The Minh, chief analyst at Yuanta Vietnam Securities JSC, said that maintaining a credit growth limit was only a short-term solution. In the long term, commercial banks' credit growth should be based on market factors and not decided by the central bank, he said.

On the one hand, credit management by allocating quotas to commercial banks leads to an imbalance in credit delivery among institutions, and on the other, it makes them passive in implementing their business plans, he added.

If the “credit room” tool is no longer used, the market will operate on its own, Minh said.

When the banking system has adopted world standards like Basel II and Basel III, the “credit room” measure was no longer necessary. Banks should manage risks on their own, he stressed.

Not most effective

Echoing Minh, Dr. Nguyen Tri Hieu, another banking expert, said “credit room” was neither the most effective tool and nor was it consistent with international practice.

He noted that in 2022, Vietnamese commercial banks used all allocated credit quotas in the middle of the year, forcing the SBV to repeatedly adjust their "credit rooms" as well as the annual credit ceiling.

This year, too, many banks have used up their credit quotas, but some have not, resulting in the credit growth falling far short of the annual target. This shows that credit management method is ineffective, Hieu reiterated.

"The central bank should not ‘buy strings to tie itself’. Removing the credit room would be an appropriate move at this point. It should keep the credit ceiling at 14% this year."

Hieu said there were many other tools to control inflation and manage credit growth for the right purposes. The three policy tools that countries often apply are interest rates, open market operations (OMO) and reserve requirement. The SBV has used OMO and interest rates, but not reserve requirement.

If the central bank continues to use the credit room tool, there should be a set of transparent criteria for granting quotas that must be made public, Hieu added.

In a dispatch recently sent to the SBV on the management of credit growth in the last months of 2023, Prime Minister Pham Minh Chinh asked the central bank to ensure sufficient provision of credit for the economy and the safety of the credit institution system, while avoiding congestion in capital flows.

Early this month, 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.