Unlike most years, credit growth during the first five months of 2017 has been stable, as the government directed banks to equally split credit growth into every month, avoiding a massive boom in the closing months of the year.
As a result, banks have gained momentum in boosting consumer lending since the start of the year, especially at a time when liquidity remains stable.
A change in policy also made a difference. With the maximum ratio of short-term funds used for medium- and long-term loans cut from 60 per cent to 50 per cent from January 1, the State Bank of Vietnam (SBV) has successfully prevented banks’ medium and long-term lending from growing too quickly, as has been the case previously. Rather, banks have been forced to focus on increasing credit growth via short-term loans to optimize their lending cycle.
Assuming a bank has boosted its lending since the start of this year, a short-term loan with a three- to six-month term could translate into to two or four successful lending cycles a year, helping to boost interest income on loans and making capital sources more productive.
The National Financial Supervision Commission (NFSC) said in its April report that there has been a transition within the proportion of credit. “While short-term credit growth has risen from 44.9 per cent in December 2016 to 45.5 per cent as at the end March, the opposite has applied to medium- and long-term loans,” it noted.
On top of that, a rather flexible target set for credit growth at banks has been applied by the central bank this year, which is set to avoid aggressive credit expansion in the closing months of the year. The move is in contrast to past years, when the central bank was stubborn enough to keep its credit growth target unchanged throughout the year, which in turn has made credit growth in the first five months became more realistic.
Strong capital flows to real estate and stocks
Though credit demand increased strongly after Tet, there are many signs that credit growth has surged since mid-March. While the rate stood at just 2.81 per cent as at March 20, it rose to 4.06 per cent as at end-March before heading to 5.76 per cent at end-April.
The SBV’s Circular No.39/2016, which came into effect on March 15, allows banks to restructure customer loans, under the condition that customers are fully capable of repayment in the future, while regulating that loan term restructuring be implemented prior to or within ten days from the date of maturity or the repayment term.
A recovery in the real estate market together with strong growth in the stock market during the opening months of the year may have also stimulated a flow of capital into these investment channels. The National Assembly Economic Committee noted on May 22 that it believed it is necessary to continue enhancing control over lending to the real estate sector, particularly to the high-end segment. Vietnam saw 3,126 new real estate businesses last year, up 83.9 per cent compared to 2015.
High demand for foreign currency loans
Within the 5.76 per cent credit growth during the first four months of the year, loans in VND and foreign currencies grew 5.87 per cent and 4.64 per cent, respectively. While growth in foreign currency loans was lower than those in VND, it was nonetheless a massive gain compared to the negative growth recorded in the same period last year.
Export businesses, at the time, were forced to repay all of their foreign currency loans to credit institutions before March 31, 2016, in accordance with Circular No.24/2015. It was not until June, when the central bank’s Circular No.07/2016 came into effect, that they were allowed to approach foreign currency loans again.
Meanwhile, with the SBV’s Circular No.31/2016 permitting banks to conduct foreign currency lending to end-2017, export businesses have utilized the discrepancy in foreign exchange rates since the start of this year, especially since the USD/VND rate has seen stability and been estimated to have fluctuated by no more than 3 per cent.
Finally, the $2.7 billion trade deficit posted during the opening four months of the year, in which imports rose 24.9 per cent year-on-year to more than $64 billion, expresses the high demand for foreign currency loans among export businesses.
Vietnam targets credit growth to expand at the same rate in 2017 as last year, at 18 per cent.