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Wednesday, July 24, 2024

The credit growth puzzle

By Thuy Le

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The fact that banks have refrained from lending does not result from their concerns over the credit growth cap since it has already been revised up without any abrupt surge in new loans. There are other factors influencing how banks lend.

The 2022 target

As of December 21, credit growth in the economy compared to the beginning of 2022 was 12.87%. This figure has not reached the old credit growth limit of 14% and is still far below the new limit of 15.5-16%. This is quite an unexpected development since it was widely believed that banks would step up lending as soon as their credit growth limits were raised once again in early December 2022, especially when some lenders previously complained they could not extend more loans for running out of room.

As per the earlier updated data, credit growth until November 29 was 12.2% against the beginning of 2022.

In other words, in the first 20 days of December, the total outstanding loans in the economy picked up 0.67 percentage point, equivalent to an increase of some VND70 trillion. This is roughly the same as the rise of 0.7 percentage point, or more than VND73 trillion, in November, but much higher than that of 0.46 percentage point, over VND48 trillion, in October.

Based on the credit growth orientation for 2022, which was adjusted up to 15.5-16%, there was room for a rise of 3.13 percentage points in credit, equivalent to VND326 trillion.

Apparently, the increase of the credit growth cap in early December was quite a late move since the banking system could hardly accelerate lending to complete the new goals with not too much time left.

On this matter, a representative of the State Bank of Vietnam (SBV) commented that giving extra room for credit growth is not simply a result of the pressure exerted by the business community, but mainly because the pressure of global economic uncertainties on Vietnam has eased, and the major macroeconomic indicators (inflation, exchange rate, liquidity, etc.) are guaranteed, helping the central bank rest assured with such a decision.

This trend also suggests that banks have refrained from lending does not result from their concerns over the credit growth cap since it has already been revised up without any abrupt surge in new loans. There are other factors influencing how banks lend.

The puzzle for 2023

First, although the economy recovered robustly in 2022, with a GDP growth of 8.02% for the whole year, the highest in 2011-2022, not all businesses can stage a recovery as strong as the general development of the economy. In fact, for most of them, the production and business capacity has not been fully restored in this post-pandemic era, whereas the decline in international orders during the final months of the year has left quite a few enterprises with difficulties and challenges in their activities.

Thus, it is inevitable that the demand for loans is weakening.

According to the General Statistics Office, the index of industrial production picked up only 3% in the fourth quarter of 2022, the lowest increase in the year, due to shrinking orders, exorbitant input costs and a shortage of raw material supply. Moreover, the number of enterprises staging an exit from the market last year was 143,200, up 19.5% from 2021. On average, 11,900 enterprises bid farewell to the market every month.

The second factor is that lending rates have recently sharply gone up in line with deposit rates quoted by banks, as a solution to keep the exchange rate and inflation in check. As a result, businesses are no longer keen on borrowing from banks for fear of the mounting interest rate risks.

As analysts have pointed out, with lending rates shooting up to 13-15% per year, it is difficult for corporate borrowers to ensure a profit margin high enough to compensate for the interest expense escalating that rapidly.

Therefore, for those taking out loans at a high interest rate, they have to bear it for the sake of corporate restructuring, or because they have big problems with their cash flows and the need for capital is very urgent.

Without doubt, the risks from those businesses accepting such an exorbitant lending rate are extremely high, so it is unlikely that banks dare to lend to them. In other words, high interest rates are one of the important factors hindering credit development and the operational efficiency of banks.

Talking about the orientation for 2023, the SBV said it would regulate credit growth reasonably, in line with macroeconomic developments, helping curb inflation, supporting economic recovery and growth, concentrating capital on production and business, especially in the preferred sectors, keeping a check on credit in risky areas, and improving credit quality.

“The monetary policy is not managed with only the current year in mind, but a long-term latency of 2-3 years must also be taken into account, so the imposition of credit growth limits must be done with caution,” said the SBV representative.

The consumer price index in December 2022 grew 4.55% year-on-year. Nevertheless, the SBV remarked that core inflation has edged up rapidly and is at an alarming level. Specifically, core inflation inched up only 0.66% in January 2022 but rose more than 4.82% in November and recorded an increase of 4.99% in December. This is the highest growth rate in 10 years, exerting great pressure on the operation of the monetary policy. In addition, due to the high openness of the economy with intense pressure on the exchange rate, the credit target for 2023 is carefully considered by the central bank, with a consistent point of view that the economy should be provided with capital adequately and timely without overlooking inflation.

Also, according to the SBV, Vietnam remains one of the nations with the highest credit leverage ratio in the world (with the ratio of outstanding loans to GDP up to 124%). If the annual credit growth rate of over 12% persists in the coming time, the credit will always grow twice as much as GDP, pushing up the credit leverage ratio even higher and threatening the safety of the banking system. Given the above factors that can potentially cause macroeconomic instability, the SBV will probably once again tightly control the credit growth target for the next fiscal year.

For their part, in the face of such unpredictable risks in the economy, especially the problems of the corporate bond market and the risk of quite a few businesses suffering cash flow disruptions, banks can hardly lower their risk control standards, thus making access to credit difficult, especially for the real estate sector.

Moreover, with credit growth in 2022 twice as much as the growth in capital mobilization, considering both the rate and the absolute balance, banks will no longer have abundant capital to lend as generously as before, especially now that the competition for deposits is increasingly fierce.

In the event that there are policy or mechanism reliefs, i.e., there are more specific instructions on the criteria for assessing the resilience of enterprises before a loan is granted, the policy absorption capacity may improve, according to the SBV representative.

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