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Credit growth sparks concerns

By Thuy Le

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The State Audit Office of Vietnam has issued a warning that credit growth in high-risk areas exceeded overall growth in 2022, and the credit-to-GDP ratio now poses potential risks. What do these facts signify and why is it concerning?

Credit in high-risk areas

In the 2022 report recently submitted to the National Assembly, the State Audit Office of Vietnam highlighted that credit growth in most high-risk sectors surpassed the general growth rate of 13.91% last year. Specifically, credit for real estate, securities, and corporate bonds increased by 15.37%, 23.85%, and 17.65% respectively.

While the relative growth rate appears higher, it is important to note that outstanding loans in these risky areas are only a sub-component and remain relatively low compared to the overall credit volume, which has been kept under control in recent years. Therefore, although the growth rate is higher, the absolute increase is not as alarming.

However, considering the challenges and uncertainties faced by the real estate, securities, and corporate bond markets over the past year, the credit growth rates in these sectors raise concerns. This can be explained from the following perspective:

Firstly, the capacity of other industries, particularly manufacturing, to absorb capital has declined. Many enterprises have been struggling with a sharp fall in orders since the fourth quarter of 2022, leading to production and business activity reductions. In contrast, real estate firms faced a greater need for capital last year due to sluggish consumption caused by a stagnating housing market.

While real estate companies sought increased access to bank loans, they also intensified the issuance of corporate bonds. These bonds were often purchased by banks, especially in the first half of 2022 before the incident involving Van Thinh Phat Group occurred. According to a report by the Vietnam Bond Market Association (VBMA), the real estate sector issued over VND51.97 trillion worth of corporate bonds, accounting for 20.4%, the second-highest after the banking sector.

Furthermore, as awareness of the risks associated with corporate bonds grew following incidents involving Tan Hoang Minh and Van Thinh Phat, and stricter regulations were imposed, individual investors became more hesitant to invest in this channel. Consequently, banks could no longer distribute corporate bonds to individual investors as they did before. Instead, banks had to assume the responsibility for these debt securities if they had previously provided advice, facilitated or underwrote bond issues.

For enterprises without assets for collateral or access to bank loans, causing a strain on their cash flow, their leaders and major internal shareholders resorted to leveraging additional capital by mortgaging more shares. This resulted in an increase in outstanding loans in the securities sector. The forced selling of margin accounts held by corporate leaders and major internal shareholders in October 2022, which caused a sharp market downturn, exemplifies this phenomenon.

It is worth noting that many of these loans may have been concentrated in the first half of 2022, before the situation deteriorated in the latter half of the year and risks became more apparent. However, recovering these previously granted loans is no longer easy, as most participants in the aforementioned markets face multiple hardships and cash flow pressures.

According to VBMA, the real estate sector issued over VND47 trillion worth of corporate bonds in the first eight months of last year, with Novaland Group being the leading issuer with over VND9.85 trillion. It is likely that most banks, when granting loans in early 2022, expected to recover the lent amounts by the end of the year to reduce outstanding loans in these risky areas. Unfortunately, the outcome was contrary to their expectations, leaving banks with no choice but to shoulder these loans, resulting in a high rate of credit growth in these three sectors.

Dependency on bank credit

Another significant warning in the State Audit Office of Vietnam’s report is the high credit-to-GDP ratio in the economy, which stood at 114.3% in 2020 and 113.2% in 2021. This level places Vietnam among countries with the highest ratios worldwide, posing numerous potential risks to the control of credit in high-risk areas, as noted by the World Bank.

Furthermore, based on calculations by the author of this article, with outstanding loans in the entire economy exceeding VND11,924 trillion by the end of 2022 and the gross domestic product surpassing VND9,513 trillion last year, the credit-to-GDP ratio at the end of 2022 had increased further to 125.3%. Alarms on the high credit-to-GDP ratio have consistently been sounded, indicating that economic activities still heavily rely on credit supply from the banking system.

This situation underscores the issues faced by the capital market, which has not effectively fulfilled its role as a long-term capital provider for the economy and businesses.

The first area of concern is the stock market. Despite being in existence for nearly 23 years, investors still lack confidence due to witnessing many businesses rushing into the market prematurely and exploiting their shareholders whenever an opportunity arises. Additionally, corporate leaders are often manipulative, and regulators have limited supervisory capacity. Consequently, people still view bank savings as a safer option for their funds.

Meanwhile, the corporate bond market, though in its early stages, has exhibited signs of overheating and potential risks in recent years. Numerous controversies have eroded investor confidence, leading regulatory agencies to tighten control measures. Notably, a significant portion of capital invested in corporate bonds comes from banks themselves, indicating a continued heavy reliance on bank credit.

Given this situation, it is understandable why there is still a need to maintain the annual credit growth target for the industry as a whole and the limits assigned to each bank. Although some National Assembly deputies consider these restrictions as barriers that should be dismantled promptly, the current risks in credit activities make it inevitable to maintain stability by allowing banks to compete in lending. Credit demand varies with each economic cycle, explaining why the determination of limits and target allocation differs from one period to another and depends on priorities in macroeconomic management.

According to the latest data from the State Bank of Vietnam (SBV), credit in the economy exceeded VND12.300 trillion by the end of May 2023, a 3.17% increase from late 2022. State-run banks, accounting for approximately 44% of the credit market, have achieved around 35% of the level assigned by the central bank for credit growth. Private banks, representing 44% of the market, have accomplished half of the set target. In other words, both of these groups still have significant room for credit growth in the rest of this year.

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