High NPL limits rate reduction's support

According to the SBV, the credit growth declined 1.66 per cent in the first two months this year. In your view, what do you see are the reasons for the decline?

In our view, the decline in outstanding credit is due to banks unwinding short term loans that were offered in the last two months of 2013. We believe a significant portion of the loan growth in November and December 2013 had been offered in response to the regulations set by the SBV at the latter part of the year to achieve full-year credit growth target. Without these temporary incentives which expired at the end of 2013, we believe the credit growth target of 12 per cent would not have been met. Hence, the contraction in outstanding loans in the first two months of 2014 reflects what happened in end-2013.

The SBV yesterday cut rates to spur credit growth. In your opinion, how is this action effective?

We see the latest reduction in interest rates as having a limited effect on credit growth. Since the start of 2014, banks have initiated a series of deposit rate cuts, while loan rates have remained broadly stable since November 2013. We reiterate our view that the sluggish credit growth is more a reflection of tight credit supply due to high nonperforming loans.

How will the rate reduction affect the fund mobilisation of banking sector?

We expect the recent rate reduction to have a limited effect on fund mobilisation in the banking sector. The SBV has been on an easing bias since 2012. Despite cutting various interest rates by more than 850 basis points, credit growth remains soft reflecting lackluster domestic demand.

We believe cutting deposit rates would further drive local depositors into Vietnam's stock market as deposit accountholders search for higher yield. However, we still expect credit growth to remain muted until much more is done in solving the structural problem of high non performing loans.

Since last year, Vietnamese government has taken some actions to deal with bad debts like the establishment of VAMC. But you mentioned the rate reduction would provide limited support to credit growth and the structural problem of high non-performing loans continued to limit domestic demand keeping credit growth soft. How effective do you see government's recent actions to the economy?

We see the establishment of the VAMC as positive in improving sentiment in the banking sector. However, in our view, the capital allotted to the VAMC is not sufficient to fully solve the structural problem of bad debts in the system. We believe the implementation of Circular No.2 without further delays should shed light on the true level of non-performing loans in the system. Unless, there is more transparency on the matter, we believe banks will continue to ration credit, thereby denying credit to certain sectors of the economy.

To further spur the credit growth, what should SBV do in upcoming time?

To spur credit growth, we believe more transparency on the level of nonperforming loans is required. To this end, we are constructive in our view on Circular No.2 which should standardise the classification of debt in banks' balance sheets. However, we believe the announced delay of at least 6 months with regard to the classification of bad debts is a step back in policy.

In the meantime, we think the SBV should promote credit growth to small and medium enterprises and the agricultural sector, while maintaining credit standards. In 2013, it was reported that most of the credit was still focused on large entities and state-owned enterprises, depriving small and medium enterprises of much-needed capital.