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Eleven banks were allowed to expand credit for the third time because they had reached their credit limit early within nine months. Among these, four commercial banks were granted room of more than 20%, including TPBank receiving from 17.4% to 23.4%; Techcombank received from 17.1% to 22.1%; MSB received from 16% to 22%; and MB received from 15% up 21%. VIB also expanded to 19.1%; VPBank to 17.1%; OCB to 15%; and ACB to 13.1%. Among the commercial banks with state capital, Vietcombank was granted the highest credit limit from 12.5% to 15%; and BIDV and VietinBank saw an increase to 12% and 12.5%, respectively.
From the beginning of this year, the credit limit granted by the State Bank of Vietnam was lower than bank expectations, which they soon exhausted around the beginning of June. The State Bank of Vietnam usually increases the credit limit twice a year for banks that use up all the credit. From a positive perspective, opening credit room for commercial banks is a good thing, but banks have conditions to lend in the context that credit rebounds, as in the situation caused by Covid-19 pandemic. As of 25 November, the outstanding loan growth in the whole economy reached 10.1%. This figure as of 29 October was at 8.7%. This is to say that in just one month, credit increased by 1.4%, equivalent to VND 120,000 bn loaned out. Forecasts suggest that credit growth in the whole industry can be achieved at 13%.
By expanding credit room at this time it will hit multiple targets, which will also send a supportive signal for reopening of the economy. Currently, the room for monetary policy is limited, and the State Bank of Vietnam cannot further reduce the operating interest rate, and it is also difficult for commercial banks to continue lowering deposit rates. In such context, banks have run out of credit room. If the room is not extended, banks that have run out of room cannot continue to lend, and banks that are close to the target will be cautious about accepting loan applications from customers. Usually, the limited credit balance will push the interest rate up to compensate for the profit, because credit is the main source of profit for banks.
At the request of the State Bank of Vietnam, banks have reduced interest rates to support economic growth, helping businesses and borrowers to tackle their difficulties during the ongoing pandemic. Accordingly, banks have reduced a part of interest income. Expanding the credit room will offset profits, although this may not be evident in the fourth quarter of this year, but will serve as a growth base for next and coming years.
From another perspective, credit limit extension at this time is quite sensitive, because it is not certain that the business sector can absorb this capital flow. Last year, credit also rebound strongly at the end of the year, and many experts said that credit flowed into risk areas such as securities and real estate. This is because credit growth is very strong but GDP growth is very low. In other words, credit flow is not effective for economic growth, but only for investment and speculation.
This year, according to newly released data from the Ministry of Construction as per the State Bank of Vietnam report, as of 30 September, the credit balance for real estate businesess reached VND682,594 bn. By the end of June, this figure was VND672,224 bn, an increase of VND10,370 bn in three months. This was also due to the underground credit flowing to real estate from the consumer credit channel. Similarly, credit for the securities segment is low, but as Saigon Investment analysed, it is very likely that the money source from consumer loans will also be divided into this segment. The report also showed that in the third quarter, the speed of personal lending continued to accelerate, while lending to SMEs and large enterprises slowed down due to prolonged social distancing.
Banks still open their lending doors to production and business enterprises, because this is the group that must support recovery. However, according to Asso. Prof. Dr. Tran Dinh Thien, former Director of the Vietnam Institute of Economics, at this time, the cash flow in many enterprises has been exhausted, their loan conditions are very poor, and it is difficult to meet the lending standards of banks. Currently, the banking system has restructured about VND600,000 bn of outstanding loans and it is forecast that this number will increase sharply next year. Statistics show that up to VND3,000,000 bn of outstanding loans are affected by the Covid-19 pandemic. The increasing structural debt balance shows that enterprises are in immense difficulties.
Therefore, there is risk of bad debt increasing in the next few quarters when loans gradually begin to mature. Currently, on an average, about 10,000 businesses withdraw from the market every month, most of which are direct customers of banks. During the restructuring period of the banking system from 2016 to 2020, the on-balance sheet bad debt ratio of commercial banks decreased from 1.99% at the end of 2017, to 1.9% at the end of 2018, and at the end of 2019 to 1.63%. However, the bad debt ratio increased again due to the impact of the pandemic, to 1.69% at the end of 2020 and 1.9% at the end of September this year, which was almost back to the level it was in 2017. These factors limit the ability of enterprises to access capital. Therefore, banks will not lend to all businesses because they cannot lower their lending standards. Hence, whether businesses can borrow or not depends on their health and collateral.
Banks approaching the credit limit, see growth in corporate bonds. This was granted by the State Bank of Vietnam in the third quarter to increase credit room. Banks mainly hold corporate bonds of other credit institutions and real estate companies and possibly use this credit room to legitimize capital.
