Different credit limits a rational move

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Strong small banks should be allowed greater lending growth

A local commercial bank's employee counts money next to piles of dong notes in
Hanoi on Monday

The application of different credit caps on different banks based on their operational capacity is expected to correct a situation where banks with customers cannot offer loans while others lack clients to fully use their credit limits.

At a banking conference in Hanoi last weekend, the State Bank of Vietnam announced that it will stop applying one credit growth target for all banks next year, allowing stronger lenders to offer more loans than others.

Credit institutions will be divided into four groups and weaker banks will have to face greater credit growth restrictions.

"This should have been done a long time ago," said Le Tham Duong from the Ho Chi Minh City Banking University. "The move would help improve the quality of banks, facilitate macroeconomic stability and encourage banks to make greater efforts to increase their competitiveness."

However, there would be problems in implementing the decision, especially in categorizing banks, he said.

The central bank has not made clear what criteria will be used to categorize banks. Around 20 banks in the country are facing liquidity problems or have been found violating credit regulations.

Duong said banks should be categorized based on their capital, liquidity, management capacity, and market shares. "This should be done as soon as possible," he said.

Truong Hoang Luong, vice general director of Kien Long Bank, said the application of different credit caps on different banks is rational. However, the central bank should allow small banks with high capital adequacy ratio, and those with good credit quality, to enjoy enough credit growth to ensure their profit.

"It's quite safe to allow small banks with high capital adequacy ratio to have high credit growth. The loans given by a small bank which has a credit growth of even 30 percent could be much smaller compared to that of a big one with a growth of only 1 percent," he said.

The head of a commercial bank said the current application of a single credit growth target for all banks could lead to the situation that some banks have customers, but cannot continue to extend credit, while others, who have not reached their lending limit, do not have customers.

This makes it hard for firms to access loans, affecting economic development in general, he said.

Agreeing with the new policy, Tran Bac Ha, chairman of the Bank for Investment and Development of Vietnam, or BIDV, said it is necessary to define criteria to categorize lenders.

The central bank is aiming for an overall credit growth of between 15 percent and 17 percent next year. Central bank governor Nguyen Van Binh said loans expanded around 12.5 percent in 2011, compared to the average credit growth of 33.5 percent from 2001 to 2012. However, the economy still managed to grow 6 percent this year, which Binh said was a positive sign.

Economist Duong said: "The overall credit target for 2012 is quite logical. If we reduced the growth, inflation would be lowered faster. However, our goal is to lower inflation while ensuring economic growth of a reasonable level."

Vietnam will aim for a 6 percent GDP growth in 2012.

However, credit growth is not as important as the destinations of credit flows, Duong said.

"We should give priority to the agricultural sector, exporters, and small- and medium-sized enterprises in providing access to loans."

Lower interest rates

According to the central bank, a new ceiling may be imposed on lending interest rates next year to stabilize the market, together with a cap on deposit rates.

Governor Binh has criticized the banking system for widespread violations of the 14-percent limit on deposit interest rates, causing borrowing costs to surge, hurting businesses.

Prime Minister Nguyen Tan Dung also said the State Bank of Vietnam has to cut interest rates as inflation was easing.

Vietnam's inflation slowed for a third month in November. Consumer prices rose 19.83 percent from a year earlier, after climbing 21.59 percent in October, according to the General Statistics Office.

Economist Tran Hoang Ngan said lowering interest rates would help firms reduce their production costs and boost stock market development. Thus, it should be conducted as soon as possible.

However, he said, the interest rate reduction may see people withdraw their money from banks, especially the small ones. So, there should be a policy to help small banks increase their liquidity before cutting the rates, he added.

A banker who wished to remain unnamed said many small banks have seen smaller deposits although they have offered the highest allowed interest of 14 percent.

If the rate is lowered further, they would see a further reduction in their deposits, affecting their liquidity, because people were still concerned about high inflation and dong devaluation in the coming time, he said.

As of now, many lenders are attracting deposits with interest rates of 14 percent and offering loans at 17-19 percent, with some banks even charging more than 20 percent.

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