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Asso. Prof. Dr. DANG NGOC DUC, former Director of the Institute of Banking and Finance at the National Economics University shared his thoughts on this issue with Saigon Investment recently.
JOURNALIST: - Sir, many commercial banks are running out of credit room while needing to increase credit balance to support the economic recovery. Many experts believe that controlling credit growth by granting an annual credit limit to commercial banks is an administrative measure that is no longer appropriate. What is your opinion on this issue?
Asso. Prof. Dr. DANG NGOC DUC: - The credit limit has been used by the State Bank of Vietnam as a tool to control credit growth since 2011. The Governor of the State Bank of Vietnam said that this is a very effective measure to keep the credit market stable and has prevented interest rate to increase the scale of deposits and loans.
The use of credit limit tools for commercial banks is based on three basic objectives. First, limiting the situation of credit growth from being too high, potentially posing systemic risks. At the same time, credit growth can promote economic growth and excessive exchange rate rise. Second, deploying commercial banks with safe business operations to tackle higher level of risks. Third, controlling the capital investment structure in the economy.
It is true that this tool has been effective, especially during the years 2011 until 2015. The banking industry or the operation of commercial banks belongs to the official financial sector of the economy, so the credit control of the State Bank of Vietnam is valid and appropriate. However, the methods and tools used for control and intervention need to change in accordance with different stages.
At the question-and-answer session, the National Assembly Chairperson spoke about limiting research and moving towards abolishing the current administrative credit line management. This is not wrong, because the credit line is precisely a direct administrative and rigid tool. This tool affects the size of the credit market and is very difficult to ensure fairness and transparency.
It is true that the establishment of credit growth targets in the banking sector has a basis from growth goals and other socio-economic development indicators, but the annual credit limit allocation to commercial banks is currently mainly based on commercial bank ratings, which is not really objective or comprehensive. In addition to the past historical status of the bank’s credit risk, so far, we do not have a clear evaluation criteria system to allocate limits. Therefore, the credit room easily becomes a form of sublicense like other administrative regulations.
In my opinion, it is time to consider replacing the credit room with more flexible and indirect management tools. In developed market economies, credit lines are applied through indirect and flexible tools, such as discount windows and revised interest rates. When it wants to limit the credit growth, the central bank will narrow the discount window and adjust the interest discount rate. When you want to reduce the structure of investment capital flow into the real estate or stock market, interest rate tools and policies affecting investor income will operate. In other words, developed market economies always give preference to indirect tools over the use of credit lines, administrative tools, and direct capital, with many potential consequences.
- Sir, it is realistic for many banks to ask for room expansion. Like TPBank, BPBank, and Techcombank have told borrowers that their room or credit limit has expired. Is this forcing the State Bank of Vietnam to follow commercial banks?
- When customers have a need to borrow capital, and the capital of these banks is still available for lending, their desire to expand their room is understandable. Under pressure of faster economic recovery after the Covid-19 pandemic, the needs of borrowers and the proposal of many bank credit rooms may be eased.
However, this should be considered very carefully, because firstly by loosening the credit room at the request of banks it may reduce the effectiveness of this policy tool in the near future if continues to be applied. Secondly, the risk of hot credit growth and the pressure to control the destination of credit flow so as not to enter the stock, real estate, and gold markets. Thirdly, difficulties in explaining the targets, the way the room allocation is loosened, and the target standards are relaxed.
In my opinion, the credit line tool should be abandoned and replaced by indirect tools like many countries are doing, for five reasons. First, banks must be autonomous and self-responsible for their business activities, including profits and risks. On the other hand, it is time to put trust in banks and this will motivate them to promote their autonomy and social responsibility.
Second, the operation scale of banks was controlled by such criteria as equity size, capital adequacy ratio as well as other safety criteria according to Circular 41/2016 of the State Bank of Vietnam, effective from 1 January 2020. Third, inspection and supervision activities by the State Bank of Vietnam must ensure the legitimacy, effectiveness, and safety of commercial banks on compliance and risk basis.
Four, credit line allocation is always a direct administrative tool, suitable for a certain period, and needs to be replaced by another tool that is more indirect and effective. Replacing the credit limit allocation tool will limit the management that causes shocks in the financial market and the economy, and at the same time contribute to enhancing fairness and transparency. Five, removing the credit limit will create a motivation to maximize the capacity and resources of each commercial bank in the transfer of capital while still being able to ensure basic compliance, as well as the safety of business operations and building a core stable customer base.
- Thank you very much.
JOURNALIST: - Sir, many commercial banks are running out of credit room while needing to increase credit balance to support the economic recovery. Many experts believe that controlling credit growth by granting an annual credit limit to commercial banks is an administrative measure that is no longer appropriate. What is your opinion on this issue?
Asso. Prof. Dr. DANG NGOC DUC: - The credit limit has been used by the State Bank of Vietnam as a tool to control credit growth since 2011. The Governor of the State Bank of Vietnam said that this is a very effective measure to keep the credit market stable and has prevented interest rate to increase the scale of deposits and loans.
The use of credit limit tools for commercial banks is based on three basic objectives. First, limiting the situation of credit growth from being too high, potentially posing systemic risks. At the same time, credit growth can promote economic growth and excessive exchange rate rise. Second, deploying commercial banks with safe business operations to tackle higher level of risks. Third, controlling the capital investment structure in the economy.
It is true that this tool has been effective, especially during the years 2011 until 2015. The banking industry or the operation of commercial banks belongs to the official financial sector of the economy, so the credit control of the State Bank of Vietnam is valid and appropriate. However, the methods and tools used for control and intervention need to change in accordance with different stages.
At the question-and-answer session, the National Assembly Chairperson spoke about limiting research and moving towards abolishing the current administrative credit line management. This is not wrong, because the credit line is precisely a direct administrative and rigid tool. This tool affects the size of the credit market and is very difficult to ensure fairness and transparency.
It is true that the establishment of credit growth targets in the banking sector has a basis from growth goals and other socio-economic development indicators, but the annual credit limit allocation to commercial banks is currently mainly based on commercial bank ratings, which is not really objective or comprehensive. In addition to the past historical status of the bank’s credit risk, so far, we do not have a clear evaluation criteria system to allocate limits. Therefore, the credit room easily becomes a form of sublicense like other administrative regulations.
In my opinion, it is time to consider replacing the credit room with more flexible and indirect management tools. In developed market economies, credit lines are applied through indirect and flexible tools, such as discount windows and revised interest rates. When it wants to limit the credit growth, the central bank will narrow the discount window and adjust the interest discount rate. When you want to reduce the structure of investment capital flow into the real estate or stock market, interest rate tools and policies affecting investor income will operate. In other words, developed market economies always give preference to indirect tools over the use of credit lines, administrative tools, and direct capital, with many potential consequences.
- Sir, it is realistic for many banks to ask for room expansion. Like TPBank, BPBank, and Techcombank have told borrowers that their room or credit limit has expired. Is this forcing the State Bank of Vietnam to follow commercial banks?
- When customers have a need to borrow capital, and the capital of these banks is still available for lending, their desire to expand their room is understandable. Under pressure of faster economic recovery after the Covid-19 pandemic, the needs of borrowers and the proposal of many bank credit rooms may be eased.
However, this should be considered very carefully, because firstly by loosening the credit room at the request of banks it may reduce the effectiveness of this policy tool in the near future if continues to be applied. Secondly, the risk of hot credit growth and the pressure to control the destination of credit flow so as not to enter the stock, real estate, and gold markets. Thirdly, difficulties in explaining the targets, the way the room allocation is loosened, and the target standards are relaxed.
In my opinion, the credit line tool should be abandoned and replaced by indirect tools like many countries are doing, for five reasons. First, banks must be autonomous and self-responsible for their business activities, including profits and risks. On the other hand, it is time to put trust in banks and this will motivate them to promote their autonomy and social responsibility.
Second, the operation scale of banks was controlled by such criteria as equity size, capital adequacy ratio as well as other safety criteria according to Circular 41/2016 of the State Bank of Vietnam, effective from 1 January 2020. Third, inspection and supervision activities by the State Bank of Vietnam must ensure the legitimacy, effectiveness, and safety of commercial banks on compliance and risk basis.
Four, credit line allocation is always a direct administrative tool, suitable for a certain period, and needs to be replaced by another tool that is more indirect and effective. Replacing the credit limit allocation tool will limit the management that causes shocks in the financial market and the economy, and at the same time contribute to enhancing fairness and transparency. Five, removing the credit limit will create a motivation to maximize the capacity and resources of each commercial bank in the transfer of capital while still being able to ensure basic compliance, as well as the safety of business operations and building a core stable customer base.
- Thank you very much.
