Banks must compete by interest rate cut when removing credit room

Banks must compete by interest rate cut when removing credit room

PM Chính early this month directed the State Bank of Vietnam (SBV) to urgently consider removing the credit growth cap regulation imposed on commercial banks and replacing the administrative management tool with a market mechanism.

The credit growth quota policy for a long time has caused bottlenecks that need to be removed, especially the negative impact on competition and customers. Photo vietnambiz.vn

The removal of the credit growth quota mechanism not only requires banks to effectively control capital flows, but also gain market share by real capacity, including interest rate reduction, experts said.

Prime Minister Phạm Minh Chính early this month directed the State Bank of Vietnam (SBV) to urgently consider removing the credit growth cap regulation imposed on commercial banks and replacing the administrative management tool with a market mechanism.

The credit growth quota system, which puts a cap on the credit expansion of each bank, has been maintained by the SBV since 2011, when Việt Nam’s economy was experiencing hyperinflation stemming from excessive money supply. The tool was used to successfully control the quality of lending and ensure the safety of the banking system and macroeconomic stability.

Nguyễn Quốc Hùng, Vice Chairman and General Secretary of the Vietnam Banks Association (VBA) said that the application of the credit growth quota system had brought many positive results in capital injection speed and exchange rate stability. The past decade was also a period when banks improved their financial strength, raised their capital adequacy ratio (CAR) and increased the safety level of the banking system.

Nguyễn Tú Anh, Director of VinUni University’s Research Division, and former Deputy Director of the SBV’s Monetary Policy Department, said the application of the credit growth quota policy along with the issuance of Circular 36 played the role of a necessary ‘stopper’ and gained remarkable achievements, helping to control money supply, inflation, interest rates and exchange rates, as well as stabilise the macro economy.

However, according to Anh, each tool has its own historical mission. Maintaining the credit growth quota policy for a long time has also caused bottlenecks that need to be removed, especially the negative impact on competition and customers. He gave the example of short-term (three to six months) loans: when it was time to refinance the loan, the bank announced that its credit growth quota was full so it was not allowed to lend. This put customers in a difficult position, because it was very difficult to find new capital in a short time.

Notably, according to Anh, in fact, some banks currently do not want to abandon the credit room mechanism, because the mechanism means market share of banks is ‘pre-allocated’. Therefore, when there is no need to compete to attract customers and increase market share, banks will lack the motivation to lower interest rates.

Anh said: "Why has the SBV injected a lot of money into the market but interest rates still do not decrease? It is because when the market share has been ‘pre-allocated’, banks do not need to reduce interest rates to attract customers. If the credit quota is removed, competition will be activated, and that is good for the economy."

According to Anh, State-owned banks currently have a capital adequacy ratio (CAR) lower than that of the banking system average. If the room mechanism is abolished, these banks will have to compete fiercely to maintain market share.

After removing the credit room mechanism, Anh said, the SBV would still have many management tools to ensure system safety such as adjusting the warning coefficient, required reserve ratio, and interest rate on required reserves.

Besides, Phạm Xuân Hòe, General Secretary of the Vietnam Financial Leasing Association also added management tools such as mandatory SBV bills, medium- and long-term capital buffer when lending medium- and long-term, or the ratio of total raised capital to equity.

"With these management tools, we can be completely assured when entering the stage of no longer having a credit growth quota," Hòe said. 

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