VCN – According to banking and finance expert, Dr. Nguyen Tri Hieu, the two top goals for the State Bank (SBV) are inflation control and economic development. Controlling credit growth with a limit mechanism (room) to control the flow of money entering circulation through lending activities of credit institutions is an important “valve” in monetary policy.
|Banking and finance expert, Dr. Nguyen Tri Hieu.
How do you assess the current credit situation and capital flows in our country?
Vietnam’s financial market is currently experiencing significant fluctuations. The World Bank has reported that the country’s credit-to-GDP ratio has reached a record high of 124% of GDP, leading to potential risks for the banking system and the economy as a whole. One of the main concerns is the potential liquidity risk facing the banking system due to a lack of funds to pay back savings deposits. Additionally, many loans have medium and long-term terms, while people’s deposits are mainly short-term, which can create imbalances and further exacerbating the situation.
Businesses are facing a difficult situation, with rising loan costs and tightened credit from banks. While the State Bank has attempted to address this issue by increasing the credit room for certain banks, many businesses are still unable to access bank capital, and are being denied loans or having their disbursements delayed, even if they are willing to pay higher interest rates. The restrictions on bank credit have also limited their ability to provide medium and long-term loans, due to regulations put in place by the State Bank of Vietnam. This has had a particularly negative impact on real estate businesses and long-term investment projects.
In addition, the government’s interest rate support package of VND 40,000 billion for businesses has been slow to be implemented, and many enterprises have reported that they are unable to access this support or are not eligible for it. This lack of capital from traditional sources has also led to a freeze in the stock and bond markets, at a time when businesses are in desperate need of funding due to the prolonged economic downturn caused by the Covid-19 pandemic. With the end of the fiscal year approaching, businesses are in need of capital to boost production and end the year on a strong note, as well as to plan for the coming year.
The State Bank is managing credit through the credit room mechanism. In your opinion, how will this affect banking activities and businesses?
The State Bank of Vietnam (SBV) has two main objectives for its monetary policy: controlling inflation and stabilizing the value of the Vietnamese dong, as well as promoting economic development. As a result, controlling credit growth and the money entering circulation through lending activities of credit institutions is a crucial part of the SBV’s monetary policy. The goal of keeping inflation below 4% means that the credit valve must be tightened, even though there is still room for credit growth. This lack of liquidity can lead to a race among banks to increase deposit interest rates in order to mobilize capital, followed by increases in lending rates.
The SBV uses a range of tools to manage monetary policy, including increasing operating interest rates and ceiling savings interest rates, reducing the credit room, widening the exchange rate trading band, and providing support to banks experiencing liquidity issues in order to stabilize the value of the dong, control inflation, and support banks and other economic sectors. However, these solutions to monetary policy can also hinder enterprises. In particular, importers are hit hard when the exchange rate rises by nearly 10%, in addition to import inflation, making the cost of imported goods very high and eroding profits. Businesses face a double whammy when they are unable to borrow from banks because many banks have reached their credit room limits, and the overall credit ceiling for the banking system is still maintained at 14%.
How should the above problems be solved, sir?
In order to address the challenges facing Vietnam’s economy, closer coordination between the country’s monetary and fiscal policies is necessary.
For instance, increasing the credit room for banks is the responsibility of the State Bank of Vietnam, but this must be coordinated with the Ministry of Finance. In addition to the SBV’s own criteria, such as efficient operation, low non-performing loan ratios, and compliance, non-financial indicators such as banks with customers who contribute significantly to the national budget, employ many workers, or protect the environment should also be considered. On the other hand, the SBV should receive regular updates on individuals or organizations evading taxes from the Ministry of Finance in order to take appropriate measures and sanctions against banks that support such individuals or organizations.
Furthermore, the Ministry of Finance should expand its dialogue with people, businesses, domestic and foreign investors, in order to listen to and incorporate the opinions of a wide range of stakeholders. This will be key to solving the financial difficulties faced by businesses, investors, and economic sectors. In addition, if banks need liquidity support, the SBV can use a special lending mechanism with low interest rates and short terms. Banks offering high deposit rates should also be monitored by the SBV to prevent the interest rate race from becoming a risk to the economy.
Thank you very much!
Hương Dịu (recorded)/ Thu Phuong