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Wednesday, July 24, 2024

Credit growth and rate cuts

By Thuy Le

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Since early this year, many banks have made deep deposit rate cuts, with the rate for tenures shorter than six months reduced by 0.5 percentage point and that for longer tenures slashed by 1.5 to 2.0 points. The lending rate, however, remains high as its reduction has been narrower than that of the deposit rate. What are the reasons?

Borrowing demand

As the lending rate remains stubbornly high, some people blame the low credit supply induced by the tightly-controlled credit growth at a time when the credit demand stays high.

In early 2023, the State Bank of Vietnam (SBV) set the annual credit growth target at 14-15%, higher than last year’s, alongside credit growth caps for individual banks, and said it would make this target flexible depending on market conditions. Observers estimated the overall credit growth would be in the range of 10%-12%, lower than the SBV’s target, due to economic slowdown and high interest rates.

In the meantime, the credit growth caps for banks announced in March 2023 are mostly lower than their actual credit growth rates in 2022. Such a disparity has prompted speculation that the monetary regulator is keeping a close watch on the market and the performance of banks before deciding whether to lift the credit growth ceiling at a later stage, a practice often seen in recent years when the credit growth caps have often been eased in the third or fourth quarter.

However, an important reality is that the credit demand in the economy remains low due to economic slowdown. Many struggling enterprises have downsized business, resulting in low capital demand, while others cannot access credit due to their disrupted cash flow or even being at risk of bankruptcy. Conversely, many efficient enterprises eligible for credit are shying themselves away from expansion plans due to fears of economic slowdown and falling consumption.

While corporate clients are grappling with difficulties, individual customers are also mired in hardships, having survived the grave consequences of the pandemic in the past three years. In addition, an increasing number of enterprises are exiting the market or closing down businesses, leading to many people being laid off or having income reduced, and thus their eligibility for loans has also been affected. Many clients even are having their previous loans turned into bad debts.

This reality is mirrored in Circular 02/2023/TT-NHNN by the SBV, which asks local banks and foreign bank branches to reschedule debt repayment and to keep the debt status unchanged so as to assist struggling clients including consumers as many individuals are deemed unable to pay debts now.

Beside the low capital demand of the economy, Deputy Governor of the SBV Dao Minh Tu also attributed the low credit growth to the real estate market facing multiple impediments. Many real estate projects are mired in the legality issue, which chokes off their capital demand and results in the overall low capital demand.

The lending rate remains high

Latest data from the SBV showed that in the year to April 20, 2023, new bank loans had totaled VND12,230 trillion, inching up by only 2.57% against the end of 2022 and growing 10% year on year. The growth rate of 2.57% was lower than that in the corresponding period of 2021 and 2022, specifically at just over one-third of the rate in the same period of 2022. Most banks reported low credit growth, with many recording a growth rate of 1%, and some even seeing a negative rate. Therefore, this reality rules out the argument that the high lending rate is due to tight credit growth control despite high capital demand.

Several banks have lately sought to lure borrowers by offering medium- and long-term loans with a preferential lending rate in an initial period, or even a soft rate for the whole term to stimulate the capital demand.

From the monetary regulator’s perspective, besides new policies like extension of debt payment and allowing banks to buy back corporate bonds at any given time rather than after 12 months, the SBV has told banks to further cut lending rates to make capital more easily available for enterprises.

However, there are several factors that may prevent banks from lowering lending rates.

First, the risk of higher bad debt is in the horizon no matter whether debts are rescheduled or not, which will adversely affect the profitability of banks. Therefore, maintaining a high lending rate is a measure to compensate for such losses.

Second, though the credit growth has been stagnant, banks are not in a rush to expedite lending while anticipating risks and challenges ahead in the economy. Higher lending rates will make up for lower credit volumes, which could explain why banks maintain high lending rates.

Third, facing the demands to implement subsidized lending programs and to finance social housing projects with a concessional lending rate, banks may have to set aside a large amount of capital for such purposes. Therefore, banks have to keep the lending rate high for ordinary credit programs to compensate for soft loans under assistance programs.

Finally, a sizeable amount of capital was mobilized at a high deposit rate in the period between last April and this February, resulting in higher capital cost. Banks have recently lowered the deposit rate, but it will take time for them to lower the capital cost altogether.

It should also be noted that while banks have in the past two months formally posted lower deposit rates, they are still competing with one another to attract depositors, with lucrative interest rates offered to clients meeting certain conditions. In addition, the borrowing rate among banks on the tier-two market remains high, indicating that their liquidity is not as high as expected, and therefore, it is still challenging to lower the capital cost.

As such, to lend a helping hand to lowering the lending rate, the SBV needs to boost money supply in a flexible way, especially at a time when the inflationary pressure has eased. Higher liquidity will force banks to boost lending and lower lending rates. Data showed that money supply as of March 20 increased by only 0.57% against the beginning of the year, substantially lower than the growth rate of 0.77% for mobilized capital and 1.61% for credit.

Since early this year, the SBV has boosted money supply by buying foreign currencies. However, part of the injected money has been withdrawn from the market by the central bank via open market operations and T-bill issues due to concerns over high inflation.

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