At shareholders' meetings in recent years, the common discussion of commercial banks is that they often set credit growth targets much higher than the credit growth target of the whole banking system. However, how much is set depends on the credit limit granted by the State Bank of Vietnam.
Usually at the beginning of the year, the State Bank of Vietnam grants a credit room to each commercial bank depending on their state as healthy banks. From the middle of the year onwards, the operators begin to adjust the credit room for commercial banks, based on developments in the economy, operations, and health of the bank. This is to say, that looking at the actual needs of the market, commercial banks can predict their credit growth, but they can only do so within the level allowed by the State Bank of Vietnam. Every year, around the middle of the second quarter onwards, commercial banks mostly step up and race to send applications to the State Bank of Vietnam to ask for more credit room.
The mechanism of granting credit room for each commercial bank is often called an administrative order by experts and it was proposed to remove this mechanism five to seven years ago after banks made new strides in the restructuring process. However, this issue became very hot when the National Assembly deputies questioned the allocation of credit lines for each bank. Even Mr. Vương Đình Huệ, Chairman of the National Assembly, said that this was the first time the National Assembly had questioned the allocation of credit lines for commercial banks. Mr. Vương Đìnnh Huệ also questioned whether this was of an administrative nature, or for ensuring publicity and transparency, and a roadmap for getting rid of this.
According to Ms. Nguyễn Thị Hồng, Governor of the State Bank of Vietnam, every year, based on inflation and economic growth targets, the regulator sets targets to orient credit growth. After that, the State Bank of Vietnam classifies commercial banks, and healthy banks will be allocated a higher credit room. This mechanism has been applied since 2011 because the State Bank of Vietnam found it to be an effective measure in organizing and operating and stabilising the money and credit markets.
Before this room was not granted, many commercial banks gave very high credit growth, up to 30% in some years. Earlier the credit growth of the whole system was up to 53.8%, leading the interest rate race to mobilize capital for lending. This was an effective solution in the past and is still applied when the banking system is in the process of restructuring or approaching international standards.
This issue was dredged up at a press conference in the middle of last week to announce the results of banking operations in the first six months of 2022. Mr. Phạm Chí Quang, Deputy Director General in charge of the Monetary Policy Department, said that according to statistics of the State Bank of Vietnam in the last three years, the credit growth demand of registered commercial banks has always been approximately over 20%, far exceeding the capital balance.
If credit growth is kept to the needs of banks only, inflationary pressure will be great and banks will also have to race to increase deposit rates, leading to an increase in lending rates and bad debts. Therefore, the State Bank of Vietnam must manage commercial banks according to the International Standard Prudential Ratio and control credit growth by granting credit room. To summarise, up until now, the view of the State Bank of Vietnam is that it is not possible to dismantle the credit room granting mechanism for commercial banks.