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  • Writer's pictureChloe Chu

Interest rates have been reduced four times consecutively, yet credit growth remains low

Updated: Oct 20, 2023

As of June 19, 2023, the State Bank of Vietnam has decided to adjust downwards the regulatory interest rates by 0.5% per annum. Consequently, this marks the fourth occasion this year that the State Bank of Vietnam has lowered this figure in support of economic recovery. This move is aligned with the directives of the National Assembly, the Government, and the Prime Minister to enhance accessibility to capital for individuals and businesses, thereby contributing to the restoration of production and business activities.


Despite the decrease in interest rates, new credit outstanding has increased by 4.2% until the end of June 2023, while the credit growth target for the entire year of 2023 is anticipated to range between 14-15%. Presently, the outstanding loan balance stands at approximately VND 12.4 trillion, with deposit balances totaling VND 12.6 trillion. There remains ample room for banks to extend lending activities. Deputy Governor of the State Bank of Vietnam, Dao Minh Tu, has noted.


Several factors can be cited to explain this situation, including but not limited to:


1. Credit expansion without a corresponding adjustment in credit standards

Lowering credit standards entails associated risks, particularly concerning non-performing loans. Failure to maintain appropriate credit standards may lead to an escalation of non-performing loans. Although the incidence of non-performing loans is currently relatively low, latent risks persist, particularly in certain banking institutions. The management of risk, both at the central State Bank of Vietnam level and within individual commercial banks, remains a paramount concern.


2. Challenges faced by enterprises in debt repayment planning

In the short term, the economy continues to grapple with numerous difficulties, with many enterprises contending with high inventory levels. Steep declines in revenue are witnessed due to weakened purchasing power, both domestically and globally. Additionally, a multitude of enterprises are undergoing restructuring efforts and implementing personnel reduction measures. These challenges present significant impediments for enterprises in substantiating their debt repayment capacity in the future.


3. Heightened expectations for further interest rate reduction

A number of enterprises anticipate a continued decrease in interest rates, seeking to access capital at the most favorable costs. The State Bank of Vietnam has acknowledged these viewpoints and is carefully reviewing them for appropriate adjustments in the near future.


4. The purpose of borrowing during challenging economic market conditions

Due to apprehensions regarding the economic outlook, only a limited number of enterprises and individuals are seeking loans for the expansion of production and business activities, acquisition of assets, or development of infrastructure at present. In cases where development plans lack potential, there is even the risk of capital loss, not to mention meeting timely principal and interest repayments to banks.


5. Funds have not reached their intended destinations

Following the aforementioned hurdles, many enterprises and individuals, upon accessing capital sources, may opt to invest in securities, gold, foreign currencies, or other risk-averse asset classes, as opposed to focusing on the development of production and business activities.


The aforementioned are some of the primary reasons accounting for the current low credit growth in 2023. There are additional objective and subjective factors at play. Nevertheless, given the resolute stance of the Government and the State Bank of Vietnam, coupled with expectations for economic recovery towards the end of 2023 and the beginning of 2024, it is anticipated that the existing challenges and barriers will gradually recede for our national economy.


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