return icon

Why should credit growth quotas remain necessary?

The National Assembly has tabled the issue of gradually doing away with credit growth quotas, which has sparked controversy. Vietnam and China are among a few countries that still impose quotas on credit growth.

The credit growth quota regime was officially deployed in 2011 when Vietnam’s economy was experiencing hyperinflation stemming from excessive money supply. The credit growth quota regime put the cap on the banking industry’s credit expansion announced by the State Bank of Vietnam (SBV) at the beginning of each year. Based on the credit growth quota for the entire banking industry, the SBV will determine the credit growth for each commercial bank depending on its financial health such as its credit quality and credit management efficiency.

For the SBV, credit growth quotas are an important vehicle to bring about healthy growth for the banking industry in the past years, contributing to macro-economic stability. For economic experts, however, the credit growth quota regime mirrors the subjective imposition by the SBV without properly attending to the development plan of each commercial bank, resulting in “ask-and-give” deals not conforming to the market-oriented economy. Meanwhile, commercial banks can map out their own credit growth targets based on their financial power and management capacity.

First of all, we need to review the pivotal role of bank credits in the economy, and whether such a fundamental has changed considerably in the past ten years or not.

Vietnam’s banking industry plays a starkly different role

The banking industry plays an important role in each country. For Vietnam, the banking industry assumes a specially important role in funneling capital into the economy. A national capital market comprises bank credits, the stock market, and the bond market. While bank credits are deemed an indirect financial channel, capital from the stock market is the direct funding source as enterprises can mobilize funds directly from the market. Vietnamese banks’ credit growth in 2021, despite far slower than in preceding years, was still among the steepest in Asia.

In an efficient capital market, bank credits will mainly serve short-term capital demands of enterprises, while the stock market will meet their long-term capital demands. Funds mobilized by banks, by nature, are mainly short-term capital, so it is suitable for banks to respond to short-term capital needs.

However, as the stock market as a capital channel is still far from effective, banks in Vietnam have over the past several decades catered to both short-term and long-term capital demands of the economy. Data made public manifest the structures of both mobilized funds and credits at ten biggest commercial joint-stock banks in Vietnam. These figures show how banks are using short-term deposits to finance long-term demands. In other words, the banking industry in Vietnam has also been overarching, encompassing the financial market as well. The capital allocation efficiency in the banking industry can therefore give way to either macroeconomic stability or instability in the national economy.

When the economy is overheated, banks will also see a surge in the credit growth, but with low cost-effectiveness. This was proven in the 2006-2010 period when credit annually expanded 30% to 50%, but with a poor incremental capital output ratio (ICOR) as this excessive growth was translated into GDP growth of only 7-8%.

The credit impulse index is formulated by having the incremental credit in a year divided by the national GDP. The lower the index is, the more effective the credit will be in spurring economic growth. By using the credit impulse index to measure the cost-effectiveness, it is apparent that during the period when the credit quota regime has been imposed, the capital efficiency has much improved. Currently, Vietnam has been able to maintain a high economic growth rate of some 7%, but money supply and credit growth now are far lower than those before 2012.

Over the past several years, the policy of selective credit growth has always been a vital orientation for commercial banks in Vietnam to achieve efficient governance of the banking industry’s assets. The selective credit growth also stimulates the growth of non-credit income streams via the diversification of financial services for enterprises.

Credit quotas help improve macroeconomic stability

The banking industry plays an important role in the economy, but it poses both pros and cons. When the banking industry operates efficiently, it helps accelerate economic growth. But if banks pursue short-term profits and fail to allocate funds efficiently, bad debts in the economy will increase. Moreover, an increase in money supply triggered by credit growth may plunge the economy into high inflation.

While in the U.S., the Federal Reserve controls money supply via the Federal fund rate, in Vietnam, money supply is controlled via commercial banks. Loans given by commercial banks are the key factor that spurs money supply in the economy. The incremental money supply via credits is the driver of inflation.

For a developing economy like Vietnam, failure to control inflation will result in instability. However, by resorting to the credit quota regime, the SBV has achieved its goal of macro-economic stabilization as inflation is put under control, and the forex rate is kept within a narrow fluctuation range, contributing to the attraction of foreign investment into Vietnam owing to investors’ high confidence in Vietnam dong.

If a vehicle, not the most efficient one as it might be, has been working efficiently, then we should think twice when considering to change it. Other more logical vehicles might not necessarily work better as they might not be suitable for the domestic economy. The Vietnamese economy will continue to rely on credits as the key resource to maintain growth, so any intention to do away with this credit quota regime must be weighed carefully by policymakers if bitter lessons from the past are not to be repeated.

Souce: SGT


More foreign visitors to HCMC signals thriving tourist season

Roughly 100 French, American, German tourists traveled to Ho Chi Minh City on French Le Laperouse yacht of Ponant after the last visit in mid-November 2019 signaling a thriving tourist season.

First monkeypox infection detected in HCM City

The Ho Chi Minh City Department of Health has just announced the first reported case of monkeypox in Vietnam.


2.97 billion USD in FDI poured into HCM City in 9 months

Trendy jobs in Vietnam

New and fashionable professions are being pursued by many young people. But not everyone is succeeding.

Shooting star targets bright future

After the retirement of senior champions, the Vietnam shooting team is now relying on its younger athletes, such as 18-year-old Phi Thanh Thao, who was recently nominated as Best Young Athlete of 2022 at the prestigious Victory Cup.

Hanoi needs world-class entertainment sites to lure tourists

According to experts, the lack of world-class amusement and entertainment zones is a big "hole" in Hanoi's tourism.

HCM City tightens management of food labelled 'organic'

Many families choose organic food though recently several supermarkets and e-commerce platforms had to apologise to consumers after non-organic food was labelled and sold as organic.

Vietnam win ticket to 2022 Futsal Asian Cup quarterfinals

Despite their defeat in the match against Japan on October 2, Vietnam’s national futsal team will advance to the quarterfinals in the 2022 Futsal Asian Cup as it ranked second in Group D.

Many parts of Vietnam saw increased fertility rates during pandemic

Fertility rates over the past two years increased across many localities in Vietnam, and it was even higher than the total replacement birth rate, said Director General of the General Department of Population and Family Planning Nguyen Doan Tu.

HCMC plans to eliminate 20,000 slum areas by 2025

According to the Ho Chi Minh City Department of Construction, over the past 20 years, the city has removed 36,000 slum areas along canals, but there are still about 20,000 of them.

Vietnam to have 33 new highways by 2030

With 33 highway projects totaling nearly 3,000 km long planned for construction in 2021-2030, a decade of busy expressway building is expected.

Viettel, VNPT lead Vietnam’s Top 10 most valuable brands

Four telecommunications brands of Vietnam have a total value of 13,136 million USD.

Floods kill eight in Nghe An, Ha Tinh

Heavy downpours and floods in the north central region claimed the lives of eight people in Nghe An and Ha Tinh provinces as of 5:30pm on October 2.

Localities urged to rectify flaws in fishery sector

With the visit of the European Commission’s delegations ahead, Vietnam’s ports and fishers are aiming to remedy the previously criticised issues regarding international fishing regulations.

Market likely to continue to correct this week

Analysts said that in the current environment, financial markets will be very likely to continue revaluing.