An Asia Commercial Bank employee inspects bricks of dong bank notes. Experts warn that high credit growth in the fourth quarter may cause high inflation. Photo: AFP
The central bank is considering easing credit policy to spur growth, but analysts warn it could backfire and result instead in high inflation and bad debts.
The central bank announced that 23 banks have sought permission to raise their annual credit growth quota to 27 percent early August. Since then, the bank has approved 10 requests from institutions whose credit growth had initially been capped at 7 or 8 percent.
Earlier this year, the central bank set credit growth targets for individual domestic banks at between zero and 17 percent in an effort to balance growth while keeping inflationary pressures in check.
The rate at which they were allowed to expand their loan portfolio was based on their holdings and performance.
Tien Phong Bank and Ocean Bank have received the central bank's permission to expand lending by 27 percent this year, while the Military Bank was permitted to raise its credit growth quota to 25 percent from an initial target of 17 percent.
A leader from the Military Bank said his institution's credit grew by some 12 percent in the first half of this year, prompting managers to seek a higher credit growth quota.
"The credit expansion is suitable, as many customers have registered to borrow capital from our bank," he said. "Demand for loans often peaks late in the year, when firms expand production."
However, economist Bui Kien Thanh said banks will have a hard time meeting or exceeding the quota, as most businesses remain cautious and conservative about expansion.
"The stagnant lending has nothing to do with low credit limits."
Bank loans grew by just 1 percent in the first seven months of this year, according to the central bank. The monetary authority has lowered its credit growth projection from 15 percent to 8-10 percent a fairly conservative estimate when compared to 2011's 14.4 percent expansion.
Few large banks have expressed interest in inking new loans.
Vietcombank, the country's third largest partly-private lender, said it reported 5 percent credit growth in the first seven months of the year and would have a hard time reaching its current limit of 17 percent.
Meanwhile, representatives from Vietinbank, the second largest partly-private bank, estimated annual growth of just 10-12 percent.
An economist, who declined to be named, said small banks want to see the quotas raised for profit purposes only. Some worry that these banks may end up breaking the cap on deposit interest rates to fund their new loans.
Economist Vu Dinh Anh warned that banks attempting to expand their loan portfolios after a stagnant borrowing year may create risks for the system as a whole.
"High credit growth in the fourth quarter may cause high inflation, not just in 2012, but the following year as well" he said.
Soaring credit growth in recent years was widely blamed for stoking Vietnam's runaway inflation, which rose to 23 percent in August last year before falling to around 18 percent for all of 2011.
Consumer prices rose 5.04 percent in August from a year ago.
"Why do we need to increase credit growth?"Anh asked. "Ineffective usage of credit is one of the primary causes of macroeconomic instability."
In the past, loose lending requirements led firms to borrow capital to dabble in stock and real estate rather than expand their business and production, he said.
"This is very dangerous, as it generate bad debts."
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