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Monday, July 22, 2024

Cash-strapped lenders

By Lao Trinh

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The State Bank of Vietnam (SBV) on December 5 loosened its grip on credit limits, raising the credit cap by 1.5-2.0 percentage points on top of the 14% credit growth quota for this year. That means commercial banks can provide an additional VND240 trillion to borrowers, but a question arises over whether lenders can make use of this extra credit room.

Capital sources for lenders to tap

Capital sources for credit organizations to tap to make loans may include:

First, the lender’s own equity: this source of capital can be mobilized from shareholders by issuing shares or convertible bonds, or from the lender’s other funds.

Second, capital from deposits and other borrowings: funds mobilized from individuals and institutions; funds borrowed from the SBV and other credit organizations, or from the capital market, or entrusted by third parties.

The source of capital from the lender’s equity via the issuance of shares or convertible bonds has dwindled this year. A few banks have managed to raise funds this way in 2022, including LienVietPostBank successfully offering 265 million shares at VND10,000 each, Nam A Bank issuing 143 million shares at VND20,000 each under private placement, and SeABank selling 59.4 million shares under an employee stock ownership plan. However, this source of capital in general accounts for just a small proportion of the capital pool tapped by banks to make credits, and is more often used for ensuring bank’s capital adequacy ratio.

The primary source of capital for banks comes from deposits by individuals and institutions. This source has expanded little this year, at just 4.33% in the January-September period, according to data from the SBV. This capital source rose 5.3% in 2021, 7.7% in 2020, 8.7% in 2019, and 9.15% in 2018, which shows that mobilized capital from deposits has contracted sharply since 2021. If banks fail to lure more depositors in the coming time, they can hardly boost lending.

Bond issuance often contributes a sizeable amount of capital for lending, but this source of capital in the year to November amounted to only VND136 trillion, a fall of 20% year on year. Credit organizations normally can enhance liquidity and other capital adequacy standards by borrowing funds from the SBV and other credit institutions via open market operations, discount and recapitalization activities, but this source of capital has also narrowed down due to volatile interest rates in recent times.

Reasons behind capital scarcity

Since the Russia-Urkraine military conflict, many external uncertainties have had adverse impacts on Vietnam’s inflation and forex rates. The SBV has taken prudent steps in controlling money supply. As of the end of September, money supply had grown only 3.21%, while credit had climbed nearly 11% against the year’s beginning. The tightened money supply also placed a check on mobilized funds from institutions and individuals, which had grown only 2.43% and 6.38% against early this year, respectively.

As of the end of November, the amount of corporate bonds issued was worth nearly VND253.5 trillion, a sharp plunge of 56% year on year. However, bond redemption had amounted to nearly VND164 trillion, rising 32% year on year. As such, funds from bond issuers have been used to refund bondholders which can flow back into banks as deposits, though possibly at a reduced volume due to many reasons. Further, due to the corporate bond panic, the value of corporate bonds issued to date has fallen by 20%, straining the capital source for lending.

In addition, money from interest rate differential in carry trade will not flow strongly into Vietnam due to sharp forex rate changes and many central banks hiking their interest rates. It is because the differential is not wide enough to attract this source of money.

How to make use of the higher credit cap

As the SBV raises the credit growth limit by 1.5-2.0 points, banks can boost lending by a total VND240 trillion to prioritized clients. However, not all lenders can make use of this higher ceiling, depending on the availability of their current capital.

In the short run, it can hardly be viable for lenders to boost their equity, issue shares or secure foreign funds. In order to have capital for lending, banks will surely have to boost mobilization from the public and other business entities by raising deposit rates. A dilemma will occur, as higher deposit rates will prevent banks from lowering lending rates, which is a condition for banks to ask for higher credit expansions in 2023. Banks will have to accept tradeoff, sacrificing their short-term profits by reducing net interest margins to gain credit growth in the following years. This is also the Government’s target when repeating its mantra of “harmonized benefits and shared risks”.

To help improve liquidity for the system, the SBV has just issued Circular 16/2022 effective from January 17, 2023 to widen the list of valuable papers. The additional papers include special bonds issued to credit organizations that sell bad debts to Vietnam Asset Management Company; bonds issued by banks wherein the State holds stakes of over 50% (except insolvent banks taken over by the State); bonds issued by credit organizations (except those banks placed under special control) and other entities. Therefore, the SBV will be able to make more proactive liquidity intervention owing to the new valuable papers, while credit organizations can have additional vehicles to borrow funds via open market operations or via discount, recapitalization and mortgage when necessary.

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