What is credit growth? Credit growth limit?

The State Bank has regulations on annual credit growth limit to limit commercial banks from maximizing profits by increasing the amount of loans to infinity, which leads to bad debts of banks. So what is credit growth and credit growth limit?

1. What is credit growth?

According to research by Lane PR, McQuade P. (2014), credit growth is an increase in the value of outstanding loans in the private sector (individuals and institutions). Once the credit scale increases, customers can borrow more money to use for different purposes.

According to some studies, credit growth is the application of policies by commercial banks to increase mobilized capital, provide credit, discount, and invest in economic organizations. , individuals, ... those who have a need to borrow capital, thereby gradually improving profits, market share, and brand name in the market.

Thus, credit growth is the increase in credits provided by banks to organizations and individuals in the economy. The increase in bank credits is essential to match the increasing capital needs of organizations and individuals in the development process of society.

From a calculation perspective, credit growth is the percentage increase (or decrease) of the monetary value that the bank provides to its other individuals and organizations in the economy in this period. with the previous period. When credit grows positively, the economy has a corresponding amount of money circulating in the form of pen currency. If, negative credit growth represents a narrower trend in the money supply, leading to a certain impact on the economy.

2. What is the credit growth limit?

The line of credit is the maximum amount of loan that banks can issue, and it is a way to control the amount of credit during restrictive monetary policy. Credit line control is divided into full credit control and partial loan amount control. In case of excessive demand for credit, to control the amount of credit, the monetary authority restricts the credit supply of commercial banks through laws and regulations related to quotas or quotas. The credit limit can be determined on the basis of the loan balance in the base period plus a specified growth rate. Different types of loans can be handled differently.

Annual the bank of Viet Nam will set a credit limit suitable for each bank through the factors of the size and reputation of that bank.

3. Why is it limited? credit growth?

The granting of credit lines to credit institutions is done based on a number of technical criteria specified in Circular 52 issued in 2018.

Limiting credit growth started in 2011 together with Resolution 11 on macroeconomic stability and inflation control. In the following years, when Vietnam joined the WTO in 2006, the economy witnessed overheating with the explosion of the private sector, the state and foreign investment.

In the 2007-2011 period, credit grew by 33%/year and reached a record high growth rate of 53% in 2007.

To some extent, the credit limit mechanism has helped limit the situation of hot credit growth when capital adequacy standards and the application of Basel 2 standards are not yet popular.

Before that, in the mid-1980s, when Vietnam followed the centrally planned economic model, the credit growth limit was never mentioned as a solution to combat hyperinflation up to 800%.

From 2011 to now, besides administrative measures such as credit growth limit, the State Bank has applied many market measures, especially Basel II with clear quantitative criteria on capital adequacy, so many problems have arisen. The problem of the banking system has been gradually solved. .

The Government's report submitted to the National Assembly at the latest session showed that the bad debt ratio was below 2% (1,53% as of the end of March).

4. Is the credit growth limit still appropriate?

Reaching the credit growth limit is no longer appropriate in the current context

The State Bank of Vietnam (SBV) said it has adjusted the credit growth limit of some commercial banks in 2022. As usual, the adjustments are not made public.

Decision 986/QD-TTg of the Prime Minister directed to remove the credit limit to use more market tools to implement development strategy modern central bank.

Moreover, for many years, the State Bank of Vietnam has been applying Basel II to commercial banks. Up to now, nearly 20 banks have met the standard. Banks control lending rates based on capital mobilized in the tier 1 market, ie only lending 80% the amount of capital raised from businesses and individuals.

This is a barrier to high credit growth if commercial banks cannot mobilize capital from the economy. Meanwhile, the State Bank of Vietnam has not yet injected more capital into circulation, meaning that the money supply will not be too high, causing concerns about inflation.

Also according to Basel II, according to Circular 41/TT-NHNN, credit institutions must maintain CAR (capital adequacy ratio) to control lending to high-risk areas when lending according to the conversion coefficient. risk. For example, in the real estate sector, the coefficient applied by the State Bank of Vietnam is up to 200%.