Vietnam Should Keep its Credit Caps and Carry on Structural Reforms

Vietnam’s credit growth is already racing ahead of schedule. Despite the State Bank of Vietnam (SBV) setting a seemingly generous 16 per cent credit growth ceiling for 2025, lending surged by 10 per cent in just the first half — the fastest pace since the height of the pandemic. This front-loaded expansion is especially concerning given that credit growth typically accelerates in the year’s second half. The SBV’s governor, Nguyen Thi Hong, cautioned the National Assembly in June about the economy’s excessive reliance on bank lending, stressing the need to diversify funding to avoid overwhelming the financial system. Yet Prime Minister Pham Minh Chinh appears eager to open the credit floodgates wider still, recently instructing the central bank to scrap entirely the annual ceilings and accompanying quotas allocated to each bank.

The PM’s urgency reflects a difficult reality: with an ambitious 8 per cent GDP growth target for 2025 and limited policy options, monetary policy has become Hanoi’s last resort. Fiscal firepower is running low — public investment was set at a record US$33.2 billion for 2025, but by mid-year, less than a third (US$10.7 billion) had been disbursed due to bureaucratic bottlenecks. Trade uncertainties compound the pressure, notably potential American tariffs that could jeopardise crucial export earnings. In these circumstances, relaxing credit constraints might seem the only lever left to pull. Yet this strategy brings troubling echoes of Vietnam’s 2007–2011 economic turmoil, when unchecked credit growth — hitting an extraordinary 54 per cent in 2007, far above the IMF’s recommended 15 per cent — sent inflation spiralling to a ruinous 23 per cent by 2008. That painful episode gave rise to the lending limits PM Chinh now wants to dismantle.

The policy’s critics rightly point to its lack of transparency and the concentrated power it gives the SBV to pick winners and losers. The central bank’s scoring matrix and weighting criteria remain unpublished, leaving banks guessing why they receive high or low quotas. Yet, despite its flaws, this administrative tool has served as an essential safeguard for macroeconomic stability. Inflation has remained well-managed, consistently below 5 per cent since 2013, underpinning Vietnam’s steady economic growth.

The Van Thinh Phat Group scandal starkly illustrates the dangers of inadequate oversight. Through questionable financial practices, Saigon Commercial Bank (SCB) aggressively attracted deposits by offering unusually high interest rates. Weak regulatory oversight allowed Van Thinh Phat’s chairwoman, Truong My Lan, who was secretly controlling 91.5 per cent of SCB through numerous proxies, to divert US$12.5 billion from the bank. Between 2012 and October 2022, she orchestrated fraudulent loans totalling US$44 billion, a staggering 93 per cent of SCB’s lending over that period. Such cases underscore the critical need for robust regulatory frameworks rather than relaxed lending standards.

This is precisely why rushing to dismantle credit controls would be dangerous. Understandably, the PM seeks urgent economic momentum amidst mounting domestic and international pressures. But hasty liberalisation could trigger reckless competition among banks, undermining lending standards and increasing systemic risk. Fitch Ratings has flagged Vietnam’s high credit-to-GDP ratio, which reached 135 per cent by the end of 2024 — twice the level of countries in the same risk category.

Moreover, unbridled credit expansion may channel funds into speculative, non-productive sectors. Already, the real estate sector has attracted disproportionate credit flows, growing 18.5 per cent, well above the broader economy’s 10 per cent credit growth in the first half of this year. At Techcombank, one of Vietnam’s largest lenders, more than half of institutional lending during this period went to the property sector. Similarly, Vietnam’s recent stock market rally, amidst weakening export orders, raises questions about the sustainability and prudence of credit allocation. Meanwhile, the manufacturing and high-tech sectors that the government hopes to nurture might find themselves crowded out by easier, more lucrative lending opportunities.

Credit caps, imperfect as they are, remain necessary in a banking system still struggling with governance deficits, political interference, and insufficient risk management.

Rather than abandoning credit caps outright, Vietnam should focus on reforming the system and gradually transitioning toward greater market orientation. Publishing clear, objective criteria and transparent weightings for credit allocation is essential. Enhancing banking supervision is equally critical, ensuring banks maintain sound lending practices and rigorous risk management. Accelerating the adoption of international standards such as Basel III would equip regulators with robust tools to maintain stability without resorting exclusively to blunt credit ceilings.

Recent improvements offer hope. Since 2022-23, the SBV has enhanced transparency by allocating credit quotas at the beginning rather than in multiple tranches throughout the year. This reform eliminated the undignified spectacle of bank executives repeatedly petitioning regulators for additional credit room — a practice that not only wasted time but also created opportunities for favouritism and corruption. Banks now receive their annual quotas based on their financial health scores, allowing them to plan their lending strategies for the entire year. In a sign of growing confidence, the SBV lifted credit caps entirely for foreign bank branches in 2024, testing the waters for broader liberalisation. This calculated move carries minimal risk: foreign banks account for less than 5 per cent of Vietnam’s credit market and, crucially, all comply with Basel III standards. The policy signals the SBV’s roadmap; banks that meet international risk management norms may earn freedom from credit controls, creating incentives for local banks to accelerate their own reforms.

Simultaneously, the government must address underlying structural issues. Deepening capital markets would offer alternative funding beyond bank lending; improving the business environment can help attract foreign investment. Stronger social safety nets could encourage household spending by reducing precautionary savings. Although slower, these structural reforms offer far more sustainable and robust paths to prosperity than transient monetary stimulus.

Crucially, policymakers should also reconsider their rigid adherence to the politically-driven 8 per cent growth target, a figure increasingly unrealistic given severe trade disruptions and looming tariffs. While understandable from a political standpoint — especially with a critical Party Congress approaching — such uncompromising targets risk compelling short-sighted monetary expansion that endangers long-term stability. Credit caps, imperfect as they are, remain necessary in a banking system still struggling with governance deficits, political interference, and insufficient risk management. Rather than chasing the ephemeral gains of unrestrained monetary expansion, policymakers should accept that quality growth takes time. The foundations matter more than the speed.

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