Give credit where it’s due. That’s the latest policy from Vietnam’s central bank to try to resolve the deep-seated problems in the banking sector.

Years of rapid credit growth have led to persistently high inflation and rising bad debts in the corporate sector. Last year, the State Bank of Vietnam, the central bank, introduced a 20 per cent cap on credit growth for every bank, in an attempt to stabilise the financial system. This year the SBV has opted for differential credit growth limits, depending on the respective strength of the financial institution.

“Healthy” banks will be allowed to grow their lending activities by 17 per cent, while “average” banks face a 15 per cent cap, “below-average” banks face an 8 per cent cap and “weak” banks will not be allowed any credit growth.

Moody’s Investors Service, the credit rating agency, said in its weekly outlook note on Monday that this tiered approach is “credit positive” for the seven Vietnamese banks that it covers.

Analyst Karolyn Seet wrote:

The SBV’s credit growth caps in 2012 address some of these banks’ credit challenges by steering them to focus their efforts on improving asset quality and underwriting practices. While it is hard to estimate the true extent of the system’s non-performing loans owing to poor data transparency, we believe that the system currently overstates its asset quality and that it is weakening, as we observe rising production costs and interest expenses weakening cash flows among borrowers.

State-controlled media have quoted a deputy governor of the SBV saying there are around 10 banks in the weak category but the SBV has not named them.

A number of the banks in the “healthy” category have not-so-humbly outed themselves but none of the weak banks have thus far stepped forward or been named publicly.

Little wonder, given that many small banks are reliant on deposits for short-term funding and, with deposit rates capped at 14 per cent across the system, they would struggle to win customers from the healthy banks.

As Seet noted:

Vietnamese banks generally face more challenges in their funding and liquidity management compared with banks in other Asian markets owing to less deposit stability and more frequent changes in the government’s monetary policies, both reflections of the country’s poor inflation history.

In rumour-driven, authoritarian Vietnam, the lack of transparency about the identity of the bad banks has prompted something of a whispering campaign.

The SBV will be hoping that the pressure forces the weak banks to address their bad debts or find new capital rather than just destabilising the system.

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