Cablegate: Sbv Tries to Slow Credit Growth to Fight Inflation

DE RUEHHI #0248/01 0601021
R 291021Z FEB 08





E.O. 12958: N/A

HANOI 00000248 001.2 OF 003

REFTEL: A) 07 HANOI 1729
B) 07 HANOI 2013
C) HANOI 193
D) HANOI 210

1. (SBU) Summary: One of the main ways that the GNV is trying to
tackle the dramatic spike in inflation is by slowing the growth in
bank lending. Vietnamese bank lending has been growing at a
double-digit pace since 1994, with a larger share of the loan growth
coming from joint-stock commercial banks and being given to private
enterprises. In an effort to curb lending growth, the GVN so far
this year has hiked the official policy interest rates, increased
the required reserve ratio, limited bank loans for security-related
purchases, and most recently, announced its intention to require
larger banks and credit institutions to buy mandatory one-year
treasury bills. Notwithstanding these efforts, many analysts
expect credit growth to continue the acceleration begun in 2007 into
this year. End Summary.

Credit growth re-accelerated in 2007

2. (U) Vietnam's banks have been expanding their loan books at a
double-digit pace since 1994. Prior to the Asian financial crisis,
credit in Vietnam grew at about 20 percent per year. Credit growth
peaked in 1999 at 55.3 percent as infrastructure and investment
spending took off but moderated thereafter on concerns of too rapid
credit growth. From 2004 till 2006, for example, the pace of loan
growth slowed from 41.7 percent to 25.4 percent as the SBV raised
interest rates to fight a sharp increase in inflation and credit
growth. However, credit growth resumed its high growth in 2007,
with some analysts estimating credit growth of around 40 percent.
Expectations of continuing strong economic growth this year has led
Vietnamese banks and financial analysts to project similar credit
growth rate in 2008.

Figure: Vietnam's Loan Growth By Type of Borrower
--------------------------------------------- ----
(VND billion)

Total Growth Loans to State Growth Loans to Growth
Year Loan (%) Enterprises (%) Other Sectors (%)
---- ----- ------ -------------- ------ ------------- ------

1994 33345 n.a. 21004 n.a. 12341 n.a.

1995 42277 26.8 24079 14.6 18198 47.5

1996 50751 20.0 26810 11.3 23941 31.6

1997 62201 22.6 31222 16.5 30979 29.4

1998 72597 16.7 38076 22.0 34521 11.4

1999 112730 55.3 54335 42.7 58395 69.2

2000 155720 38.1 69918 28.7 85802 46.9

2001 189103 21.4 79745 14.1 109358 27.5

2002 231078 22.2 89500 12.2 141578 29.5

2003 296737 28.4 105400 17.8 191337 35.1

2004 420335 41.7 142900 35.6 277435 45.0

2005 553106 31.6 181306 26.9 371800 34.0

2006 693800 25.4 218547 20.5 475253 27.8

Source: CEIC Data Company Ltd.

3. (U) Prior to 1999, the bulk of loans were to state enterprises.
This is not surprising given that lending decision was
state-directed rather than commercially-based. This lopsided lending
changed from 1999 onwards as the government reportedly began to
withdraw its involvement in the lending decisions of state-owned
commercial banks (SOCBs), leading to the private sector gaining a
higher share in bank lending than state enterprises. The share of
loans going to the private sector was 68.5 percent in 2006 compared
to less than 50 percent in the 1990s. Deutsche Bank analysts
believe the key segments of credit growth opportunity are private
companies, SMEs and consumers and that the historic dependence on
SOE borrowing will continue to diminish.

Private banks catching up with SOCBs

HANOI 00000248 002.2 OF 003


4. (U) Vietnam's SOCBs are individually and collectively quite
large, accounting for almost two thirds of loans outstanding (see
figure 2). Many are growing their loans quite rapidly in an effort
to enhance their potential profitability, particularly prior to
equitization and listing of their shares. For example, in a recent
FINATT trip to Vietnam, Vietcombank said that its loans grew by 49
percent in 2007 as compared to 39 percent in 2006 and the industry
average of 40 percent in 2007.

Figure 2: Lending market share by type of bank
--------------------------------------------- -
1994 2000 2001 2002 2003 2004 2005 2006

SOCBs 82.8 73.3 75.8 75.9 72.4 75.0 69.0 63.5
Other Banks - 17.2 26.7 24.2 24.1 27.6 25.0 31.0 36.5
JV Banks)

Source: CEIC Data Company, Ltd.

5. (U) Joint-stock commercial banks (JSCBs), foreign bank branches
and joint venture banks (FBB and JV Banks) - are relative newcomers,
but their share of bank loans has increased from a fifth to more
than a third since 1994. Lending by these banks has grown by leaps
and bounds. Looking ahead, this trend is likely to continue as
these banks push aggressively to build up their franchises in

Figure 3: Lending by SOCBs versus Other Banks
--------------------------------------------- ----
(VND billion)

Total Lending by Growth Lending by Growth
Year Loan State Banks (%) Other Banks (%)
---- ----- ----------- ------ ----------- ------

2001 189103 143355 25.5 45748 10.2

2002 231078 175489 22.4 55589 21.5

2003 296737 214800 22.4 81937 47.4

2004 420335 315335 46.8 105000 28.1

2005 553106 381406 21.0 171700 63.5

2006 693800 440500 15.5 253300 47.5

Source: CEIC Data Company, Ltd.

Policy Response by the Government

6. (SBU) In response to increasing inflationary pressures and to
curb excessive credit expansion, the State Bank of Vietnam (SBV) has
been raising the three official interest rates-- the prime, discount
and refinancing rates--in Vietnam since 2007. The SBV's most recent
action came in early February when it lifted the prime, discount and
refinancing rates to 8.75 percent, 6.0 percent and 7.5 percent
respectively. In theory, these rates would be the policy rate, the
rate the banks can borrow from the central bank and the rate that
banks can borrow for collateralized loans, respectively. According
to the IMF Resident Representative, however, none of these rates are
"operational" for monetary policy purposes: instead, the SBV
carries out its monetary policy by buying and selling SBV bills,
which have yields well above all of the "official" rates mentioned
above. Thus, while the increases in these official rates provide a
signal to the market, they are not actually used to price any
transactions between the financial institutions and the central

7. (U) The SBV also raised the reserve requirement ratio by an
additional one percent to 11 percent in February - after doubling
them from 5 percent to 10 percent in the summer of 2007.

8. (U) Lastly, and most recently, the SBV announced its intention to
require banks and credit institutions with more than VND1 trillion
of deposit to buy mandatory treasury bills with the interest rate of
7.8 percent by March 17 (Reftel D). Analysts say this move should
withdraw VND20.3 trillion (US$1.26 billion) from the market. Even
in advance of this sale, some companies, including banks, are

HANOI 00000248 003.2 OF 003

reporting that they are having difficulty acquiring dong from the

9. (U) In addition to these monetary tools, the SBV has announced
changes to banks' lending policy for the purchase of shares.
Previously, banks were limited to lending no more than 3 percent of
all their lending for shares. Commercial bankers told FINATT that
this policy failed to contain credit growth, especially to the stock
market, as banks sought to increase their total lending in order to
have more to lend for shares. To remedy this situation, the SBV
announced in February that banks can make securities-related loans
equivalent to 15-20 percent of their chartered capital. HSBC
analysts calculated that this will cut the maximum
securities-related lending from VND6.5 trillion to VND4.6 trillion.
There are now fears that banks will try to get around this new rule
by raising their chartered capital, which would create more capacity
to increase overall loans, frustrating the SBV's macro-economic goal
of slowing credit growth.

10. (SBU) Comment: It is natural for credit growth to expand
strongly amid robust economic growth and an under-penetrated
financial market. The very rapid growth at the smaller private
banks is worrisome, however, not only contributing to inflation, but
also building up potentially bad debts that will have to be
addressed in the future. Given the banks' ingenious efforts to get
around the rules set by the SBV so far, SBV will have to vastly
improve its inspection, supervision and enforcement of prudential
lending rules to guard against inappropriate levels of lending
growth. While the SBV is saying the right things, institutional
weaknesses are likely to hamper its ability to fight inflation
solely by slowing loan growth. End Comment.


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