Higher SMLR cap raises banks’ funding, liquidity risks

Higher SMLR cap raises banks’ funding, liquidity risks

Banks with rapid long-term loan growth, sizeable real estate-related exposure or reliance on less stable corporate deposits face the largest stable funding gaps.

The SBV has recently raised the short-term funding for the medium-and long-term lending ratio cap from 30 to 40 per cent, and introduced broader credit support for selected infrastructure lending. —VNA/VNS Photo

The State Bank of Vietnam (SBV)’s decision to raise the short-term funding for the medium-and long-term lending ratio (SMLR) cap could increase funding and liquidity risks of banks, analysts said.

The SBV has recently raised the SMLR cap from 30 to 40 per cent, and introduced broader credit support for selected infrastructure lending. These measures aim to provide banks with more flexibility to extend longer-tenor credit, particularly to infrastructure and real estate-related segments, as several fast-growing banks are already approaching the SMLR cap.

Analysts from Vietnam Investors Service Rating, an affiliate of Moody’s, said: “We view the higher SMLR cap as credit negative for banks, as it allows greater use of short-term, confidence-sensitive market funds to support longer-term loans, increasing funding mismatch and refinancing risks.”

According to the analysts, the regulatory easing comes amid weak sector deposit growth and policy-led credit expansion, exacerbating sector liquidity risk. 

Banks close to the previous 30 per cent cap, such as MBB, OCB, VPB, BVB and VIB, are particularly exposed given their rapid growth in long-term lending to real estate-related sectors. These banks are more vulnerable to deposit competition and higher funding costs during market tightening, as seen during the 2022 liquidity crunch.

In addition, the credit limit exemptions for selected infrastructure loans — covering VNĐ752 trillion (US$28.6 billion) of projects through 2033, including airports and railways — will lift annual sector credit growth by around 1.2 percentage points over the next 12–18 months, further increasing banks’ funding needs.

These near-term pressures highlight structural funding constraints and underscore the need for a more robust liquidity framework.

Against this backdrop, the SBV proposed tighter liquidity rules in May to gradually align banks with Basel III standards. The proposed framework replaces the traditional loan-to-deposit ratio with a broader credit-to-deposit ratio (CDR), alongside the phased transition of liquidity coverage ratio (LCR), net stable funding ratio (NSFR) and leverage ratio requirements starting in 2028.

Tighter liquidity requirements will promote more stable, deposit-driven funding structures, reduce reliance on confidence-sensitive wholesale funding and support stronger liquidity buffers over time.

According to the analysts, banks with rapid long-term loan growth, sizeable real estate-related exposure (such as VPB, OCB and VIB) or reliance on less stable corporate deposits (such as MSB) will face the largest stable funding gaps.

In contrast, banks with more granular retail deposits (such as HDB, ACB and LPB) and stable long-term funding profiles (such as MBB and TCB) are better positioned to meet new requirements.

While several private banks have begun developing LCR and NSFR capabilities in recent years, only TPB currently discloses Basel III-aligned metrics.

CDR compliance will likely tighten funding conditions during the transition, with unintended strains on sector liquidity. The analysts said that under stricter CDR, most banks exceed the 85 per cent ceiling. As a result, deposit competition is expected to intensify, keeping funding costs elevated and weighing on net interest margins in the near term.

“Overall, while SBV’s reforms will strengthen banks’ liquidity profiles over the long run, the combination of SMLR easing and tighter CDR compliance is likely to heighten near-term funding and liquidity risks, particularly for fast-growing banks with greater reliance on wholesale or less stable funding sources,” the analysts concluded. 

Bizhub