Credit growth cap faces calls for reform towards risk-based lending

Credit growth cap faces calls for reform towards risk-based lending

Le Hoai An, certified financial analyst and founder of Integrated Financial Solutions JSC, told Nhue Man why it's time to phase out Vietnam’s credit growth cap and shift towards a risk-based, market-driven lending framework.

Why do you propose removing the credit growth cap now?

The cap fulfilled its role when curbing rapid credit expansion was critical. As policy now prioritises the quality of growth and data and technology improve risk measurement, administrative limits reveal clear drawbacks: they encourage year-end target chasing, skew portfolio structure, delay disbursements for projects that require thorough appraisal, and erode net interest margin (NIM).

Since 2022, sector-wide NIM has trended lower. Retail margins have fallen, and corporate lending margins have also narrowed. State-owned banks have seen faster compression because lending rates are lower while funding costs face intense competition. These dynamics reflect the rate cycle and the way disbursements are rationed around annual quotas.

At the same time, policy guidance positions the private sector as the primary growth driver. Capital should flow to viable projects that create jobs and value added. That objective is better served by a risk-based framework and market discipline than by top-down credit ceilings.

In practical terms, how does the cap distort capital allocation and NIM?

Operationally, when a bank is near its quota while credit demand remains strong, it faces three suboptimal choices: postpone disbursement until the next adjustment window, cut lending rates to keep customers whose files look safe on paper, or bid up short-term funding to grab late-cycle market share. Each option puts pressure on NIM and complicates liquidity management.

In allocation terms, the cap pushes lending towards large, quick-to-disburse tickets with preferential rates. NIM at large banks therefore compresses faster, while small and medium-size enterprises struggle to access working capital, despite being the backbone of job creation. As a result, credit growth may still hit the headline target, but the spillover to production, innovation, and employment is underwhelming.

For corporate-focused lenders, target pressure channels funds into real estate given loan size and clearer collateral. Even when the property market is sluggish, outstanding balances tend to bunch up towards year-end to comply with quotas, causing rate volatility and maturity risk. In parallel, margins narrow as banks compete aggressively on price to accelerate disbursement.

Finally, when a quota becomes a strategic KPI, some prudential guardrails can loosen in the rush to meet numbers, lifting future credit risk and provisioning needs. Net profit declines slow the accumulation of capital, constraining growth capacity in the following year. That is the loop of quota, NIM, and capital we should unwind.

What would small- and medium-sized enterprises (SMEs) and smaller banks gain or lose if the cap was removed?

Smaller banks are primary channels of credit to SMEs, yet they often receive modest quotas due to capital and track-record considerations. Once they hit the ceiling, they must prioritise lower-risk customers, leaving many SMEs outside the gate, especially those short on collateral or standardised data. In 2018–2023, growth at many small banks lagged the sector average, even though SMEs are precisely the segment with the highest marginal demand for flexible working capital.

In recent months, SME credit has shown signs of improvement thanks to policy emphasis on the private sector and better data infrastructure: tax interfaces, e-invoices, and behavioural scoring. This makes cash-flow-based lending more feasible. Although small-bank NIM remains thin, there is room to improve if the administrative ceiling is replaced by a growth regime tied to genuine risk.

I expect a well-governed removal of the cap to unlock SME financing through three levers:

(i) Preferential capital treatment for exposures with lower risk weights when SMEs meet data standards;

(ii) Co-lending and co-supervision with credit guarantee funds to share risk;

(iii) Quantitative incentives tied to loan quality metrics such as cash-flow coverage and tax and e-invoice compliance. This channels credit to the right recipients at a reasonable cost of funds while keeping risks contained.

Without the cap, what safeguards ensure system safety?

The core shift is from administrative ceilings to discipline grounded in risk, data, and transparency. I propose three mutually reinforcing pillars:

Risk-weighted capital requirements

Credit growth must be anchored to asset quality. Portfolios with higher risk consume more capital; healthier books earn proportionate growth headroom. This aligns incentives to strengthen risk management at the bank level and improves system-wide capital allocation.

Internal capital adequacy assessment process and mandatory liquidity stress testing

Banks should regularly test resilience to scenarios involving interest-rate shocks, deposit outflows, and asset-quality deterioration. Selected disclosures of results enable market discipline, reducing reliance on administrative targets.

Conditional incentives for SME lending built on standardised data

Lower risk weights and funding costs for loans that meet data standards and interface with the tax–e-invoice–banking ecosystem, combined with co-lending and co-monitoring with guarantee funds to curb moral hazard. When these pillars operate consistently, capital will flow to the right places without the need for a credit ceiling.

Overall, a controlled phase-out of the cap aligns with current policy direction, restores the market’s role in allocating capital, and encourages higher standards of risk governance and transparency.

This is the foundation for quality-driven NIM recovery, more effective credit distribution to value-creating sectors, and a private economy that genuinely leads growth.

The credit growth cap was useful in turbulent times, but it has become a constraint on efficient capital allocation and bank profitability.

Transitioning to a risk-based framework built on the three pillars above can simultaneously unlock real capital flows and preserve system safety. It is a coherent path to higher efficiency, stronger market discipline, and more sustainable growth.

VIR