The State Bank of Vietnam was compelled to issue bills and withdraw over VND 110,000 billion from circulation. The issue of stagnant capital flows has been a growing concern for market participants. Efforts to address this situation, such as interest rate reduction and targeted credit packages for various sectors, have yet to yield the desired results.
Saigon Investment recently engaged in a discussion with Dr. NGUYỄN TRÍ HIẾU, a seasoned banking and finance expert, to shed light on these pressing issues.
JOURNALIST: - Dr. Nguyễn Trí Hiếu, what is your assessment of the current scenario?
Dr. NGUYỄN TRÍ HIẾU: - The primary product of the banking industry is money, and banks must maintain an inventory of funds. However, this inventory has its limits because the efficient turnover of funds within banks is crucial. Presently, this inventory has swelled to an alarming extent, signifying that money is stagnating within the system.
This situation arises from the fact that banks are receiving an influx of deposits. There are few other channels in the economy that are as secure and profitable as banks. The stock market has experienced declines, the corporate bond market has not recovered, real estate markets have been volatile, and the gold market exhibits fluctuations without stability, making it an uncertain investment. Moreover, the foreign exchange market, while experiencing currency rate increases, is not a viable investment avenue for the masses. Hence, many individuals opt to accumulate deposits in banks, even when interest rates are low.
The vast sums stored in these deposits remain underutilized by banks, primarily because businesses in need of capital face deteriorating financial conditions and lack collateral. Furthermore, several enterprises are reluctant to borrow due to their inability to engage in production, sales, and the fear that increased borrowing may lead to greater losses. Consequently, the banking industry's inventory of funds continues to grow daily, posing concerns for both the State Bank and the commercial banking sector. Regrettably, this does not stimulate economic growth.
- It appears that the issue of excess money is not confined to the banking sector alone, as government bonds also show signs of surplus when deposit interest rates plummet. Corporate bond issuance in the past nine months has fallen by 50% compared to the previous year. Is it accurate to say that the flow of funds to support businesses and economic growth is presently nearly stagnant?
- We are witnessing a peculiar phenomenon—an economy with both excess and scarcity of funds. Just three weeks ago, the State Bank resumed issuing bills to attract money into circulation, providing evidence of an economy with surplus funds. Yet, banks are grappling with difficulties as they struggle to lend, while businesses are clamoring for capital to quench their thirst for growth. Even the government has money at its disposal, yet it remains underutilized. Public investment has also been sluggish this year. Such stagnation has resulted in a sluggish money turnover, which will likely impact the overall economic growth for this year.
As of now, the GDP growth target for this year remains at 6-6.5%, though international organizations predict figures closer to 5-5.8%. Given the broader context, my forecast leans towards the more optimistic scenario, with GDP growth likely hovering around 5.5%.
- Despite numerous measures aimed at addressing the issue of excess money, credit growth has only reached 6.92% in the first nine months of the year, nearly half of the annual target. What, in your opinion, is a practical approach to inject capital into the economy and alleviate the problem of excess funds?
- Credit growth in the initial nine months of the year has been alarmingly low, and with only three months remaining until the end of the year, achieving the 14% target seems exceedingly challenging. Failure to meet this target could have far-reaching consequences for the entire economy. Thus, both the State Bank and commercial banks are under substantial pressure to deploy these surplus funds and utilize their remaining capital reserves effectively.
Recently, in an effort to address the issue of excess funds, the State Bank has sought to lower interest rates. However, the State Bank currently has limited room to further reduce interest rates, given that the interest rate differential between the United States and Vietnam stands at 5%. Vietnam's overnight interest rate has at times dipped to as low as 0.25% annually. Continual interest rate reductions may risk currency depreciation, posing economic risks. Starting from October 1, 2023, the ratio of short-term capital to long-term loans for credit institutions will decrease to 30%. Some have proposed delaying the implementation of this regulation to give businesses a better opportunity to access capital. In my view, implementing these regulations at this juncture is prudent since banks currently have an excess of funds rather than a scarcity.
So, what is the solution to combat the issue of excess money and rectify the ongoing inventory of funds? I maintain that credit guarantee funds must be employed to secure loans for businesses. However, the overseeing authorities have been hesitant in adopting this solution, and if it is implemented, it will not yield immediate results. Therefore, we need to return to measures that enable the effective utilization of capital, with banks finding ways to provide unsecured loans under conditions that monitor businesses' cash flow.
Vietnamese banks have traditionally operated with strict collateral requirements before granting loans. However, in the current climate, banks should consider extending unsecured loans while implementing mechanisms to monitor businesses' cash flow and fund utilization, in line with international best practices. Conversely, Vietnamese businesses must also adapt to international norms. Many Vietnamese businesses maintain multiple bank accounts, scattering their revenue across various accounts, making it challenging for banks to monitor cash flow. This, in turn, hampers the provision of unsecured loans. Businesses should focus on consolidating their accounts or, if necessary, designate a primary account for their revenue, allowing banks to monitor their cash flow effectively. Nevertheless, when it comes to lending, I concur with the State Bank of Vietnam's stance on boosting credit without compromising credit standards, thereby avoiding potential bad debt implications for the economy down the road.
- Thank you for your insights.
