State Bank of Vietnam to Phase Out Credit Growth Quota, Introduces New Operational Tools
Financial industry prepares for the demise of credit room policy
The State Bank of Vietnam (SBV) is set to phase out the credit growth quota, a monetary policy tool used for over a decade to control the amount of new credit in the economy each year. This move will allow commercial banks greater flexibility to expand lending activities and increase outstanding loans, potentially accelerating economic growth, especially in sectors like manufacturing, exports, and infrastructure projects.
To maintain stability in the Vietnamese economy, the SBV should prioritize the following operational tools:
1. Enhanced Capital Adequacy Ratio (CAR) Requirements
Strengthening banks' capital buffers to ensure resilience against potential shocks is crucial. By encouraging banks to maintain sufficient capital, this measure reduces systemic risk and improves financial stability.
2. Basel II Compliance
Implementing international standards for banking supervision will enhance risk management and governance, improving the quality of banking operations, and ensuring safety and soundness of the financial system.
3. Open Market Operations (OMO)
Managing liquidity effectively through the issuance or redemption of securities will help regulate the money supply and interest rates without relying solely on administrative measures.
4. Digital Transformation
Promoting efficiency and reducing costs in banking operations will enhance access to capital for businesses and individuals while lowering lending rates, contributing to economic growth.
5. Strengthened Supervision and Regulatory Framework
Implementing strict inspection mechanisms will ensure transparency and accountability in banking operations, maintaining financial stability and controlling inflation.
6. Bad Debt Resolution and Credit Quality Enhancement
Accelerating the resolution of non-performing loans and improving credit quality will reduce risks associated with lending and enhance the overall health of the banking system.
7. Market-Based Mechanisms
Implementing a market-oriented system to replace administrative controls will increase the autonomy of credit institutions while ensuring system safety and inflation control.
The SBV should develop a phased approach to implement these tools, starting with pilot projects among selected banks before scaling up to the entire banking sector. This strategy will help assess the effectiveness of these tools and make necessary adjustments to ensure a smooth transition from the credit growth quota system.
The removal of the credit growth quota will be phased in over several years, starting with a pilot program in 2026 for banks with robust financial health. Banks with strong governance frameworks and compliance with Basel III standards, such as TPBank, ACB, VPBank, and HDBank, are well-positioned to capture opportunities arising from the policy change.
Real estate developers have suggested that the State Bank of Vietnam increases credit room to inject capital into the economy and create conditions for property businesses to restructure and develop. However, asset prices in real estate and securities markets could climb to new highs, increasing the risk of asset bubbles.
The SBV will need to rely on a more sophisticated and proactive set of tools to stabilise the macroeconomy and curb inflation if the quota is removed. Beyond prudential ratios, the SBV could make more flexible use of conventional policy tools like interest rates, open market operations, and reserve requirements.
Commercial banks will have to adjust their business strategies and risk management practices to effectively manage credit risk with the increased lending freedom provided by the removal of the credit growth quota. The big four state-owned commercial banks, with strong lending capabilities and large customer bases, are likely to benefit most from this change. Banks with high current account savings account ratios, such as Techcombank, MBBank, and Vietcombank, will also benefit due to their low funding costs.
The Governor of the State Bank of Vietnam, Nguyen Thi Hong, has provided explanations regarding high lending rates and credit room management during a plenary session of the 15th National Assembly's ongoing fifth meeting in Hanoi. The removal of the credit growth quota is a significant step towards modernising Vietnam's monetary policy framework and fostering a more dynamic and resilient economy.
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The new operational tools introduced by the State Bank of Vietnam (SBV) could potentially lead to increased lending activities in sectors like manufacturing, exports, and infrastructure projects, which are associated with the business and finance industry.
In order to maintain stability in the banking and insurance sector, the SBV should prioritize measures such as strengthening banks' capital buffers, implementing international banking standards, and accelerating the resolution of non-performing loans. This will ensure the resilience and safety of the financial system, contributing to the overall economic growth of Vietnam.
