Despite setting lower goals for credit growth, banks are still falling far short of their lending expectations as high interest rates and a badly-performing economy have lowered businesses' demand for capital.
The credit growth ceiling varies from 0 percent to 17 percent based on operational capacity at individual banks, according to the central bank's recent allocation of credit growth targets for this year.
The two groups of the strongest banks are allowed to gain maximum credit growth rates of 17 percent and 15 percent, respectively down 3 percent and 5 percent over the previous year.
In the first quarter of this year, total loans in the banking sector dropped by 1.96 percent compared to the end of last year, official statistics showed.
The loans by Orient Commercial Joint Stock Bank, or OCB, dropped by some 2 percent in the first four months of this year.
"It is very difficult to increase loans now, as firms, amid lower purchasing power, have smaller capital demand for business and production expansion," said the bank's general director Trinh Van Tuan.
Many firms also do not want to borrow capital from banks because of high interest rates, he said.
The central bank imposed a 15 percent cap on lending interest rates for four preferential sectors starting May 8. Beneficiaries of the lowered rates include businesses operating in supporting industries, the export and agriculture sectors, and small- and medium-sized enterprises.
More than half of local firms accessed loans at interest rates of over 18 percent in April, according to a survey by the Vietnam Chamber of Commerce and Industry that also said most of those firms could really only afford 13-14 percent.
Tuan said banks are carefully considering lending, as bad debts are rising across the board and more firms are headed toward insolvency.
Being allowed to reap credit growth of 15 percent, a Hanoi-based commercial bank has tried to expand lending since early this year, but its loans have seen only an insignificant increase, its general director said.
"It is very hard for banks to seek good customers to lend to. Many firms with good performance and feasible projects are not expanding their production as local consumption is decreasing."
Meanwhile, banks were unwilling to try any risky lending due to worries about bad debts, he said. Bad debt at his bank was nearly 1.7 percent in 2011, a slight increase over the previous year.
Without customers, many banks are facing an abundant supply of capital, the general director said.
Former governor of the State Bank of Vietnam Cao Sy Kiem said more bad debt was a barrier to an increase in lending at commercial banks. To boost credit growth, bad debts, which have increased alongside the gloomy real estate market and a rise in the number of weak firms, should be effectively dealt with.
Nearly 18,000 companies shut down or suspended operations in the first four months of the year, up 9.5 percent over the same period last year, according to the Ministry of Planning and Investment.
Slower credit growth also means lower profits at banks.
Dai A Bank reported a pre-tax profit of VND105 billion (US$5.03 million) in the first quarter of this year, compared to the whole year target of VND650 billion. Meanwhile, the respective figures at OCB bank are VND100 billion and VND550 billion.
Vu Viet Ngoan, chairman of the National Financial Supervisory Committee, said it would be very difficult for Vietnam to reach credit growth of 15-17 percent this year.
The economy expanded at only 4 percent in the first quarter, the slowest pace since 2009. With the growth, experts said it would be extremely hard to reach the full-year target of 6-6.5 percent. The International Monetary Fund cut Vietnam's 2012 growth forecast to 5.6 percent from 6.3 percent in its world outlook report last month.
"Credit may grow by 5-6 percent at maximum in the second quarter of 2012," said Ngoan.
"The expansion of loans would not be able to reach the 12-13 percent needed in the second half of this year to ensure that credit growth for the whole year will reach 15-17 percent as targeted."
However, State Bank of Vietnam Governor Nguyen Van Binh said business loans grew 1 percent in March. With the average monthly credit growth at 1.5-2 percent, the targeted credit growth rate of 15-17 percent of the whole year will be within reach, he argued.