Ongoing Issues with Credit Room Allocation
According to data from the State Bank of Vietnam (SBV), as of September 17, 2024, the overall credit growth in the system only reached 7.38% compared to the end of 2023. This figure is well below the target of 15% set for the year, indicating disparities in credit growth among banks. Some banks experienced negative growth, while others saw rapid increases and requested additional credit room to continue growing.
Kim Byoungho, Chairman of the Board of Directors of HDBank, stated that their credit growth had exceeded 15% since the beginning of the year. He suggested that the SBV consider granting more credit room to financial institutions that demonstrate strong capital provision abilities, particularly as the final quarter of 2024 approaches.
Similarly, by the end of August 2024, Nam A Bank had recorded 14% credit growth, using up 85% of its allocated room. The bank also hoped to receive additional room to continue its growth trajectory. On the other hand, some banks have expressed disappointment, reporting that despite employing various strategies and mechanisms to stimulate lending, their credit growth had not met expectations.
These recurring issues around credit room allocation have been persistent for years. Despite the SBV’s efforts to introduce new credit management policies in 2024, the system remains plagued by imbalances. Historically, the SBV set an overall credit growth target at the beginning of the year, which was then distributed to individual banks. Throughout the year, banks that required more room would have to request additional allocations from the SBV, which based its decisions on economic developments and each bank’s health.
In 2024, the SBV allocated the full 15% credit growth room to all banks from the outset, directing them to manage their lending activities accordingly. This change was aimed at facilitating the supply of capital to support economic growth. However, despite this new approach, the old problems persist, with some banks having excess room while others face shortages. To address this imbalance mid-year, the SBV redistributed credit room from banks that did not need it to those with stronger growth potential. Moreover, the SBV warned that banks that failed to utilize their allocated credit room would face stricter reviews when being assigned credit limits for 2025.
This highlights the limitations of the credit room mechanism: while it helps manage risk, it also presents operational challenges for banks.
The Debate Over Credit Room Mechanisms
At a recent conference between the government and commercial banks, SBV Deputy Governor Phạm Quang Dũng acknowledged that although the SBV had continuously improved the process of allocating and managing credit growth targets, it had not yet been able to completely eliminate the credit room mechanism. He noted that removing the credit room limits too soon could lead to uncontrolled credit expansion and a return to the competitive interest rate hikes that plagued the market before 2011. This could destabilize the macroeconomic environment, increase inflationary pressures, and raise the risk of bad debt, all of which could harm the banking system.
However, Deputy Governor Dũng also mentioned that there were plans to gradually phase out the credit room mechanism, in line with the National Assembly and government’s directives.
It is undeniable that the credit room system has served a useful purpose in monetary policy management. In the past, some banks saw credit growth rates soar to as high as 30%, with the overall system experiencing credit growth of 53.8% in certain years. This led to fierce competition among banks for deposit rates in order to fund their lending activities. Since 2011, the SBV has reintroduced credit room controls to limit credit expansion and reduce systemic risk.
While the SBV’s allocation of credit room is based on clear quantitative and qualitative criteria, including the ranking of banks based on their performance, the mechanism remains largely administrative in nature. As a result, the SBV finds itself adjusting credit room allocations for individual banks every year.
A Call for New Solutions
According to economic experts, central banks in countries like Japan, China, Nordic nations, and Australia have used similar credit growth control mechanisms during periods of crisis. However, as their banking systems developed, these mechanisms were gradually abandoned.
One reason is that imposing credit limits can cause lending activities to shift toward non-bank entities, which are harder to regulate. For example, when banks reach their credit limits, they might engage in off-balance-sheet lending by purchasing corporate bonds as a way of indirectly providing more credit. This makes it more difficult for regulators to monitor and control credit growth.
To address this issue, many experts suggest that Vietnam should move toward a more market-oriented approach. Instead of relying on administrative tools like credit rooms, the SBV could adopt a more flexible system. For instance, the SBV could set an overall industry-wide credit growth target of 14-15% and require each bank to submit its own credit growth plan for approval. In practice, many banks’ credit growth plans presented to shareholders often exceed the limits imposed by the SBV.
Under this proposed system, to prevent excessive credit growth, the SBV could approve each bank's credit growth based on its CAR. Banks that do not meet the required CAR ratio would be compelled to raise additional capital to qualify for more credit room or halt lending once they reach their credit limit. This approach would encourage banks to strengthen their capital positions and promote more sustainable growth.
Moreover, this method would reduce the need for the annual "asking-for-room" process that has become a hallmark of Vietnam's banking industry. Instead, banks would have greater autonomy over their credit growth, provided they maintain strong capital foundations. At the same time, this approach would ensure that credit growth is aligned with broader economic objectives while minimizing risks such as inflation and bad debt accumulation.
In conclusion, while Vietnam’s current credit room mechanism has been effective in controlling credit growth and preventing overheating in the financial sector, it is becoming increasingly clear that a more market-driven solution is necessary. By managing credit growth based on CAR and encouraging banks to raise capital, Vietnam can create a more flexible and responsive banking system that supports economic development while maintaining financial stability.
