Vietnam takes on inflation by expanding credit

The State Bank of Vietnam’s Directive, issued this week, detailed the central bank's policies to support commercial banks in expanding credit and to relocate loans to the prioritised sectors of agriculture, rural development, exports, auxiliary industries, small and medium enterprises and applied technologies.

Although the policies fall in line with the 12-14% credit growth target, the central bank affirmed it will be flexible in order to reflect actual changes in the economy.

This level of caution is advisable since the entire banking system made a concerted effort to reach the target of 12% credit growth last year.

SBV will also maintain a close watch on foreign loans to stabilise and minimise the long-standing problems with foreign exchange.

Spotlight on debt control

The central bank's strategy will focus on debt control this year. The bank is determined to finalise the legal framework and the inspection and supervision mechanism to handle non-performing loans (NPLs) in the system.

Recognising the need to apply regulations to secure the banking system under international standards, the central bank announced earlier this year that it would not delay the deadline for implementing NPL regulations any further.

However, road maps for certain criteria will be amended, so banks can be better prepared. Circular 02/2013/TT-NHNN is scheduled to go into effect on June 1, 2014.

Circular 02, which strictly regulates asset classifications, levels and methods of risk provisioning, and the use of provisions to handle risk in the operation of credit institutions and the branches of foreign banks, was initially planned to be implemented on June 1, 2013.

While lobbying hard and pushing enquiries at the central bank, commercial banks have also attempted to clean up their balance sheets by selling debts to the Vietnam Asset Management Company (VAMC), a wholly State owned company managed by SBV.

In the Directive, the State Bank of Vietnam declared it will issue policies to facilitate VAMC's operation.

Shift in models

In order to stabilise the foreign exchange market, the central bank aims to encourage a shift from the "mobilising-lending" model to the "buying-selling" model.

Central bank governor Nguyen Van Binh announced last month that he will manage the foreign exchange rate flexibly, within a 2% margin, this year.

In 2013, SBV planned for a 1% margin in foreign exchange management, but the actual margin was about 0.6%.

This year, SBV will maintain tight control over the gold market, especially for gold bullion. Policies are expected to be created to secure the legal rights of gold ingot holders while encouraging the public to sell their gold holdings in order to mobilise these holdings for use on socio-economic development initiatives. In 2013, the central bank sold 1.82 million taels (69.9 tonnes) of gold bars through 76 auctions. They will continue the sales this year in an attempt to further stabilise the domestic market and address imbalances between supply and demand.

Almost all of the auction proceeds went to credit institutions to help close their outstanding gold deposits. Part of the proceeds was sold to gold firms to meet market demand.

These regulatory attempts slashed the local value of gold to VND34.6-34.7 million (US$1,641-1,646) per tael at the end of 2013, down VND12 million (US$569.28) per tael, or 24%, compared with the same period in 2012.