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Tuesday, July 16, 2024

Bank losses can threaten entire system: Deputy Governor

The Saigon Times

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HCMC – While a company going bankrupt can impact hundreds of employees, the losses incurred by a bank can potentially lead to a collapse in the entire banking system, said the central bank’s Deputy Governor Dao Minh Tu.

He shared these remarks during a conference on capital access and utilization in the business sector held on August 22.

There remains ample room for lending within the banking system. The State Bank of Vietnam (SBV) continues to utilize interest rate tools to bolster the capital of commercial banks. In return, these banks are expected to lower lending rates to provide assistance to businesses.

However, data from the SBV indicated that over 1,000 firms had halted taking out bank loans, reflecting a substantial reduction in loan uptake. Although there was a notable improvement in credit growth in June, the rate was still notably lower compared to the same period in the previous year.

As of late July, the total credit scale across various economic sectors had increased by 4.56% to VND12,470 trillion compared to figures from late 2022. Nevertheless, credit expansion for the first seven months of the current year fell significantly short of the same period in 2022, which stood at 9.54%.

Recent credit growth rates for the economy were recorded at 3.03% in April, 3.27% in May, and 4.73% in June. It is evident that credit growth decelerated and even turned negative in July, following a positive recovery surge in June. This decline highlighted the challenges businesses face in effectively utilizing capital, Deputy Governor Tu pointed out.

According to him, some firms are heavily reliant on borrowed funds, with up to 90% or even 100% of their capital being financed through loans. This exacerbates the challenges in managing monetary policy in the present circumstances.

“While global interest rates are on the rise as part of tightening monetary policy, Vietnam is moving to reduce interest rates to support struggling businesses,” explained Tu.

Banks can ease their lending criteria to promote credit growth, but doing so could potentially compromise credit quality and increase the risk of non-performing loans.

Tu emphasized the potential consequences of growing bad debt, as it could lead to a cycle involving dealing with bad debt, tightening lending, and resulting in hardships across various economic sectors.

However, banks are facing a similar challenge as businesses dealing with unsold inventory. Deputy Governor Tu pointed out that banks thrive on credit. They attract idle capital and then lend money out to individuals and businesses to drive economic growth.

Nonetheless, in a scenario where struggling businesses face losses due to slow sales, bank losses could trigger wider repercussions throughout the economy, Tu warned.

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