The current line of credit is no longer suitable | Company

Association Teacher. Dr. DANG NGOC DUC, former Director of Banking and Finance Institute of National University of Economics recently shared his thoughts on this issue with Saigon Investment.

JOURNALIST: – Sir, many commercial banks are short of credit line while needing to increase their 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?

Association 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 he acts as a very effective measure to keep the credit market stable and has prevented interest rates from increasing the scale of deposits and loans.

The use of credit limit tools for commercial banks is based on three fundamental objectives. First, to prevent credit growth from getting too high, which could pose systemic risks. At the same time, credit growth can promote economic growth and an excessive appreciation of the exchange rate. Second, deploy commercial banks with safe business operations to deal with higher level of risk. Third, control the structure of capital investment in the economy.

It is true that this tool has been effective, especially during the years 2011 to 2015. The banking sector or the operation of commercial banks belongs to the official financial sector of the economy, so the credit control of the Bank of State of Vietnam is valid and appropriate. However, the methods and tools used for control and intervention must evolve according to the different stages.

During the question-and-answer session, the President of the National Assembly talked about limiting research and moving towards the abolition of the current management of administrative credit lines. This is not false, because the line of credit is precisely a direct and rigid administrative tool. This tool affects the size of the credit market and is very difficult to guarantee fairness and transparency.

It is true that setting credit growth targets in the banking sector is based on growth targets and other indicators of socio-economic development, 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 state of the bank’s credit risk, we do not currently have a clear evaluation criteria system for allocating limits. Therefore, the credit chamber easily becomes a form of sublicensing 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, lines of credit are applied through indirect and flexible tools, such as discount windows and reset interest rates. When it wants to limit credit growth, the central bank narrows the discount window and adjusts the discount interest rate. When you want to reduce the structure of investment capital flows to real estate or the stock market, tools and interest rate policies that affect investors’ income will work. In other words, developed market economies still favor 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 request a room extension. Like TPBank, BPBank and Techcombank notified borrowers that their credit room or limit had expired. Does it force the State Bank of Vietnam to follow commercial banks?

– When customers need to borrow capital, and capital from these banks is still available to lend, their desire to expand their room is understandable. Under the pressure of a faster economic recovery from the Covid-19 pandemic, the needs of borrowers and the proposition of many bank credit houses could be relaxed.

However, this must be viewed with great caution, because firstly, by making the credit margin more flexible at the request of banks, it could reduce the effectiveness of this policy tool in the near future if it continues to be applied. Second, the risk of runaway credit growth and the pressure to control where credit flows go so as not to enter the stock, real estate and gold markets. Third, difficulties in explaining goals, how room allocation is relaxed, and target standards are relaxed.

In my opinion, the line of credit tool should be abandoned and replaced by indirect tools as many countries do, for five reasons. First, banks must be autonomous and responsible for their business activities, including profits and risks. On the other hand, it is time to trust the banks and this will motivate them to promote their autonomy and social responsibility.

Secondly, the scale of operations of banks was controlled by criteria such as capital size, capital adequacy ratio as well as other safety criteria according to Bank of India Circular 41/2016. State of Vietnam, effective from January 1, 2020. Third, the inspection and supervision activities by the State Bank of Vietnam shall ensure the legitimacy, efficiency and safety of commercial banks on the basis of compliance and risks.

Fourth, the allocation of lines of credit is still a direct administrative tool, adapted to a certain period, and must be replaced by another more indirect and efficient tool. Replacing the credit limit allocation tool will limit management that causes shocks to the financial market and the economy, while helping to enhance fairness and transparency. Fifth, the removal of the credit limit will create an incentive to maximize each commercial bank‘s capacity and resources in transferring capital while being able to ensure basic compliance, as well as security of commercial operations and building a stable customer base.

– Thanks a lot.

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