Sluggish credit growth 'a blessing in disguise'

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Staff employees count money at a branch of the Bank for Investment and Development of Vietnam in Hanoi. Experts say Vietnam's credit growth this year will be much lower than the initial target of 15-17 percent. Photo: Reuters

A mixture of caution and low demand has dashed expectations that lower interest rates would boost lending, and commercial banks are facing the prospect of not meeting their credit growth targets for the year.

But lower credit growth could actually be a good thing as a leading bank has said economic growth based on productivity rather than credit expansion is more sustainable in the long run.

The representative of a Hanoi-based commercial bank said his bank has not seen negative credit growth since early last month, but the number of customers who want to borrow capital is still limited even when interest rates are down.

The bank now offers annual interest rates of 13-14 percent on dong loans and 5-6 percent on dollar loans.

"It is very difficult to increase loans now, as firms, because of lower purchasing power and worsening exports, have smaller capital demand for business and production expansion," he said.

After the central bank reduced the deposit rate cap to 9 percent on June 11, many banks have reduced their lending rates to 12-15 percent, much lower than the 20 percent or more that firms had to pay late last year.

Given a credit growth quota of 17 percent, Eximbank has tried to expand lending since the beginning of the year, but the increase has been insignificant at 2.4 percent as of the end of May, said vice chairman Pham Trung Cang.

"It is very hard for banks to find good customers to lend to. Many firms with good performance and feasible projects are not expanding their production as local consumption is decreasing," he said. "We, striving to ensure safety as bad debts increase, cannot increase credit by all means."

The central bank said banks had posted weaker financial performances last year compared to 2010, and their bad debts have been rising continuously. Bad debts in Vietnam hit US$5.18 billion, or 4.14 percent of total loans as of April, up from 3.06 percent in 2011, due to economic difficulties faced by businesses, according to a recent report from the central bank.

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Economist Tran Du Lich attributed the rising bad debts to the fact that banks use short-term deposits to offer long-term loans to firms.

Thus, what is most important now is not to increase credit, but deal with bad debts, he said. "If we are not able to solve the bad debt issue, firms will not be able to access bank loans despite lower rates."

Slow growth

HSBC in a report issued early this week said that although rates were reduced, credit growth is likely to be sluggish, as demand is low and companies lack collateral.

"Credit to the economy since the end of 2011 until April contracted by 0.6 percent. This means that even if the State Bank of Vietnam tries to encourage lending, credit growth will likely expand by only 13 percent this year," it said.

The VnExpress newswire cited a report submitted to the government by the National Financial Supervisory Council as saying loans increased only by 0.4 percent in the first six months of this year. It forecast a credit growth of around 8 percent this year, much lower than the initial target of 15-17 percent.

The low credit growth has affected the whole economy. Prime Minister Nguyen Tan Dung said at a meeting on Wednesday that economic growth this year is likely to be 5.2-5.7 percent, compared to the 6-6.5 percent target approved by the National Assembly.

However, HSBC said growth will likely accelerate in the second half of this year, suggesting that the worst could be over.

While low credit demand and bad debt in the system will remain a burden, for now at least, the economy is heading in the right direction, it said.

"With inflation slowing and the trade deficit narrowing, the macro environment for Vietnam looks bright."

The State Bank of Vietnam has been able to accumulate more foreign exchange reserves to better manage the economy against risks, it said.

Reforms are gathering pace to tackle deep-seated issues in the economy. These are necessary to ensure that growth is built on increased productivity rather than credit expansion, a more sustainable strategy, it said.

"As such, while growth is slow, it might be a blessing in disguise."

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