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The credit growth limit: pending questions

The State Bank of Vietnam (SBV) has said it has adjusted the credit growth rate limits of some commercial banks in 2022. As usual, the adjustments were not made public.

Why is there a credit growth limit?

The granting of credit limits to credit institutions is implemented based on a number of technical criteria stipulated in Circular 52 released in 2018.

The credit growth limit began in 2011 together with Resolution 11 on stabilizing the macro economy and controlling inflation. In the next years, when Vietnam joined WTO in 2006, the economy witnessed overly hot development with the explosion of private, state and foreign investment.

In 2007-2011, credit grew by 33 percent per annum and it once reached a record high growth rate of 53 percent in 2007. 

To some extent, the credit room mechanism helped curb the hot credit growth when standards on capital adequacy and the application of Basel 2 standards were not common.

Prior to that, in the mid-1980s, when Vietnam followed the centrally planned economy model, credit growth limit was never mentioned as a solution to fight inflation which galloped up to 800 percent.

From 2011 to now, in addition to the administrative measure of credit growth limit, SBV has applied a lot of market measures, especially Basel II with clear quantitative capital adequacy criteria, so a lot of problems of the banking system have been step by step solved.

A report submitted by the government to the National Assembly at the latest session showed that the bad debt ratio was below 2 percent (1.53 percent as of the end of March).

Pending problems

At the latest National Assembly session, Trinh Xuan An, a deputy from Dong Nai, twice questioned the SBV Governor about credit growth limit.

“Could you please tell us the rationality of the annual credit growth limit granting being applied? Do you think the mechanism is too deeply intervening the operation of commercial banks? What is the possibility of the credit room expansion in the time to come?” he asked.

The National Assembly Deputy believes that the credit growth limit granting mechanism is something the leftovers of the subsidized management model which is no longer suitable to current conditions.

“I don’t know if there is any other country in the world that is also doing this like us in granting credit, i.e. granting a credit quota?” he said.

The issue raised by An at the session was highly appreciated by Vuong Dinh Hue, who was Minister of Finance. 

He said at the Q&A session. “This is a very interesting question. This is the first time the National Assembly has questioned the allocation of credit growth rate quotas to commercial banks. This never happened in the past,” Hue said.

He affirmed that the credit limit is an issue of concern of all credit institutions.

“Is the granting of credit room and allocating credit quotas to banks considered an administrative order? How can the mechanism ensure transparency? When will we able to remove the scheme?” Hue said, adding that carrying out management in accordance with risks and credit institutions’ capability is an important issue.

SBV Governor Nguyen Thi Hong was asked to study the issue and give a satisfactory answer.

Hong explained that in principle, at the beginning of the year, SBV, considering the target inflation rate set by the National Assembly, will set up a directional credit limit for the whole year. The limit will be regulated flexibly depending on real conditions, because the monetary policy is short term and the national economy bears a lot of factors, internal and external.

Regarding the allocation of credit limits, Hong said the central bank is pursuing a principle, based on the classification of credit institutions. In general, credit institutions with healthier administration situation would get higher credit limits.

It seems that questions raised by An were not answered explicitly.

In current conditions, when the inflation rate in Vietnam was just 2.58 percent in the first eight months of the year and the rate for the whole year 2022 is predicted (by WB and IMF) at below 4 percent, the explanation by the central bank that it is necessary to maintain the credit growth limit to "fight inflation" is unreasonable. 

Market, not administrative measures, needed

According to the Vietnam Confederation of Commerce and Industry (VCCI), the number of businesses that find it difficult to access bank loans in 2021 accounted for 47 percent, higher than the 41 percent in 2020.

The organization commented that accessing credit is the biggest challenge for businesses and the problem could be seen more clearly in the last two years of pandemic.

Maintaining the credit growth limit model means maintaining the ask-and-grant administrative mechanism. If it continues to exist, it will push back the banking modernization process and bring risks to involved parties.

Tu Giang

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