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Caution about credit growth targets

By Thuy Le

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The fact that credit growth has been sluggish in the year to date means that it is not yet necessary for banks to allocate high targets in the beginning of the year. In addition, the potential risks to the economy, especially for inflation, give banks more reasons to retain their control over credit growth.

Prudence is of great importance

The maximum credit growth limit of 13.5% has been assigned to Vietnam Maritime Commercial Joint Stock Bank (MSB), ordered by the central bank last week during its first allocation of credit targets for 2023, since MSB has a lower loan-to-deposit ratio (LDR) than other banks. As per data provided by VNDirect Securities Corporation, 11 banks have been granted credit quotas for this period, with their growth targets ranging from 8% to 10%.

The best credit growth result last year was 28.3%, reported by VPBank, whereas most banks only reached 12-14%, while others reported 18-20%. With that in mind, the picture of preliminary credit targets in this early stage of the year suggests prudence remains the central policy when it comes to credit development in 2023. Specifically, those banks entrusted with high credit growth targets last year have now been given much lower rates, such as VPBank with a mere 9%, MBBank with 9% despite the impressive result of 25.4% obtained in 2022, VCB with 9.6%, versus 18.9% last year, or TPBank, ACB, and VIB with 9-9.8%, as opposed to more than 14%.

Those banks tasked with lending weaker banks a helping hand have been allocated significantly tighter limits than last year, probably because the growth targets for the banks they support have not been determined. Apart from that group, it is obvious that all lenders have been assigned relatively low targets, contrary to earlier expectations, although the goal for the entire system this year is forecast to remain at a high level of 14-15%.

A look back at the past few years shows that the central bank often opted for fairly modest targets during its initial allocations, usually in the first quarter. Perhaps it is because the central bank needed to keep track of inflation and interest rate trends before it could gradually adjust upwards its growth targets, rather than hastily imposing high rates when the year has just begun. In the latter scenario, banks would be dragged into a cut-throat credit competition at the beginning of the year, exerting more pressure on interest rates, especially now that quite a few banks are seeing their LDR approaching the prescribed threshold, according to their financial statements for 2022.

Meanwhile, as per the latest updated data on the website of the State Bank of Vietnam (SBV), outstanding loans in the banking industry amounted to over VND11.69 quadrillion in November 2022, while customer deposits totaled more than VND11.55 quadrillion, i.e. the LDR already exceeded 100%. Such a gap in capital is being bridged by those valuable papers that banks have been issued over the years, plus loans from international credit and financial institutions.

Also, setting aside certain room for credit growth in the later months is probably for the sake of management and evaluation of banks. To be specific, any bank that manages to further improve its financial resources, strictly complies with prevailing policies, develops in the direction outlined by the central bank, and offers credit to those areas preferred by the Government, may be subject to higher-than-average limits for the remaining time of the year as a reward for its efforts.

Obstacles on the way out

As credit growth in the year to date has been relatively slow, in contrast with its significant growth in the same period last year, capital outflow is another difficult problem for quite a few banks. As per the most recently published data, credit growth in the banking sector in the first two months of 2023 was 0.77%, much lower than 1.82% in the year-ago period. In HCMC, the economic locomotive of the nation, outstanding loans by the end of this February were nearly VND3.24 quadrillion, a slight fall of 0.12% against end-2022, according to data from the municipal statistics office.

This is considered an unusual development compared to the preceding period, when the economy was said to still be in the process of recovery. However, considering how economic conditions have been displaying signs of deterioration since late last year, evinced by the fact that the Purchasing Managers’ Index (PMI) of the manufacturing sector in Vietnam had declined for three consecutive months before it rose back to 51.2 points last month, it is apparent how meager the demand for loans is at the moment.

Meanwhile, data from the General Statistics Office reveal that the number of enterprises newly established or resuming their operations in the first two months of 2023 was some 37,900 nationwide, down 11.2% year-on-year. On the contrary, roughly 51,400 businesses pulled out of the market, a surge of 14.5% over the same period last year.

In fact, as the number of orders has been dwindling since late last year with no improvements in sight, a considerable number of enterprises are left with no choice but to further scale down their production, lay off employees, and shorten working hours, thus there is no longer any incentive to borrow capital to invest and expand their operations as before. Perhaps, high interest rates and escalating inflation have gradually taken root in the economies of developed countries and regions, many of which are Vietnam’s top trading partners, such as the U.S. or the EU, leading to a reduction in household spending and the demand for goods in these markets.

Domestically, exorbitant lending rates and the frozen real estate market are other factors that affect the demand for loans from both corporate and individual customers, with the possibility of many borrowers looking to repay their loans before they fall due to lessen the interest rate pressures that keeps building up, which also have a certain influence on the current scale of outstanding loans at several banks.

In this context, it is probably not necessary for banks to get very high credit growth targets at the beginning of the year. In addition, given the potential risks in the economy, especially inflation, the central bank has more reasons to keep its control over credit growth. However, it should be noted that money supplies in the first two months of this year grew very slowly, by 0.05%, suggesting the operator remains prudent in its management. With such a negligible increase in money supplies, plus limited liquidity in the system, it is far from simple for credit to grow rapidly.

Earlier this year, the SBV set a credit growth target of 14-15% for the year, higher than last year, with adjustments to be made depending on market developments. This target is relatively high, compared to the past five years. However, in the current situation, analysts believe credit growth this year may be 11-12%, at most, lower than the result of 14.8% achieved last year and also below the set target.

Lastly, as expansionary fiscal policy is being heavily promoted with a series of infrastructure development projects in the process of acceleration, it will provide solid support for growth, sharing part of the burden with the monetary policy. For this reason, the SBV may no longer feel obliged to excessively extend credit growth limits for the sake of growth, as in the previous period. Instead, a more important goal for this year is to rein in and keep interest rates stable to avoid causing uncertainties in the economy and dealing a hard blow to business performance and household spending.

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