Why must credit growth targets be assigned?

The State Bank of Vietnam has just sent a report on researching and moving towards eliminating the management of credit growth targets for each credit institution to the 7th session of the 15th National Assembly.

Accordingly, from 2024, the SBV will not assign credit growth targets to foreign bank branches, in accordance with the characteristics and credit scale of this group, and will continue to assign credit growth to the remaining credit institutions. The SBV is continuing to review to gradually remove this measure completely.

However, in the process of implementing this task, the State Bank found that there were still some difficulties and problems.

Currently, inflationary pressure still exists, posing challenges to the monetary and credit policy management of the State Bank of Vietnam in both supporting economic recovery and ensuring inflation control.

The credit/GDP ratio continues to remain high, with an increasing trend (end of 2023: 132.75%; 2022: 124.89%; 2021: 123.05%).

Therefore, the State Bank believes that maintaining the credit limit tool is to ensure the safe operation of the banking system, thereby actively contributing to controlling inflation, supporting economic growth and stabilizing the macroeconomy.

Before 2011, due to the characteristics of the Vietnamese economy, which relied mainly on bank credit to balance capital needs, credit was the main capital supply channel for the economy, and had a very rapid growth rate. In the period 2007-2010, the average credit growth of the whole system was about 36%/year.

The credit/GDP ratio in this period also increased rapidly, leading to a race for interest rates among credit institutions to have capital for lending, leading to corresponding increases in lending interest rates and high bad debt in the banking system, many credit institutions are at risk of losing liquidity, causing macroeconomic instability.

W-SHB Bank_39 Nam Khanh.jpg
Given the specific characteristics of Vietnam's economy, the State Bank still has to control credit by assigning credit growth targets to banks. Photo: Nam Khanh.

The process of implementing credit growth management measures from 2011 to present shows that credit growth of the whole system has decreased from over 30%/year (in some cases, it increased by 53.8%) to about 12-14%/year in recent years. This has contributed to stabilizing the monetary market, controlling and maintaining stable inflation below 4%.

At the same time, this measure has contributed to promoting credit institutions to improve their management and operation capacity, improve operational safety indicators, and reduce market interest rates.

Easy to return to "hot" credit growth

Up to now, the Vietnamese economy still depends mainly on bank credit channels to supply capital needs for production, business and consumption.

In that context, the pressure to supply capital for economic recovery is very large, the capital demand of the economy depends mainly on bank credit, so Vietnam's credit/GDP ratio is currently high, posing potential risks of macroeconomic instability as warned by some international organizations.

At the same time, although inflationary pressure has been controlled, it still poses risks and challenges to the management of the State Bank of Vietnam when it must both support economic recovery and ensure inflation control and the stability and safety of the credit institution system.

Given Vietnam's unique economic conditions, if credit institutions increase credit growth without control measures through both the system of operational safety indicators and credit growth limits, the credit institution system may return to the state of hot credit growth as in the period before 2011, not only creating increased bad debt and threatening the safety of the banking system, but also risking general macroeconomic instability for the economy and inflation risks.

Therefore, maintaining the credit limit tool is to ensure the safe operation of the banking system, thereby actively contributing to controlling inflation, supporting economic growth and macroeconomic stability.

The State Bank believes that removing this measure needs to be cautious, have an appropriate roadmap, ensure necessary conditions and be implemented step by step in accordance with market conditions.

Currently, in the process of operation, the State Bank has been implementing the synchronous combination of applying safety indicators according to international standards in the operations of credit institutions with the allocation of credit growth targets for credit institutions, thereby stabilizing the monetary market, contributing to controlling inflation, improving management and operational capacity, and improving the operational safety indicators of credit institutions.

At the same time, to move forward and control credit through safety indicators, the State Bank is directing credit institutions to implement solutions for restructuring and handling bad debts, improving governance standards according to international practices; however, this also needs to go hand in hand with the effective implementation of the economic restructuring process to enhance the role and promote the healthy development of the capital market to meet the medium and long-term capital needs of the economy, reducing dependence on the bank credit capital channel.

Tuan Nguyen