Lenders shift to cautious moves

Two months is a long time in the financial management of the economy.

In May during a government month-end press conference, Prime Minister Nguyen Tan Dung said: “Pro-growth monetary policies always come with inflation risks, but why should we be afraid of this?”

This statement was translated that supporting economic growth should be the first priority of the monetary policies. By that time, no credit growth limit was mentioned. But, things have changed now. In July the government ordered the State Bank to curb this year’s credit growth to 25-27 per cent.

“The economy has started recovering and the priority now shifts to reining in inflation,” said Nguyen Thi Kim Thanh, head of the State Bank’s Banking Development Institute. Over the first half of the year, the banking system’s credit growth hit roughly 17 per cent, with scope to hit 8-10 per cent in the second half of the year. “The monetary policy coin has started flipping,” Thanh added.

In the second quarter of the year, the country’s gross domestic product (GDP) expanded by 4.5 per cent year-on-year. This means, on seasonally adjusted basis, the economy grew by 2.3 per cent quarter-on-quarter, well better than the 1.7 per cent contraction by the end of the first quarter.

“Taking into account the second-quarter GDP numbers our 2009 average growth forecast stands at just under 5 per cent. We believe that the recovery which is currently under way will gain momentum through the year, with GDP ticking up to 6 per cent by the year’s end. For 2010 we are looking for the economy to expand by 6.5 per cent,” HSBC economist Prakriti Sofat said.

Meanwhile, inflation continues to head south with the consumer price index (CPI) rose by just 3.9 per cent year-on-year in June, the lowest level since February 2004 and well lower than the peak of 28.3 per cent in August, 2008. “Despite inflation proving controllable, inflation risks are looming and curbing credit growth is needed,” said Thanh.

Asia Commercial Bank deputy general director Nguyen Thanh Toai said that with this move, local lenders would be more cautious in extending loans during the rest of the year. Eximbank’s deputy general director Dao Hong Chau said that the bank had tightened borrowing conditions for consumer lending.

“Of course, tightening credit extension could negatively affect banks’ profits as it makes up around 70 per cent of [our] earnings. But, it will keep the banking system in check and better control bad debts,” said Chau.

According to the State Bank governor Nguyen Van Giau, the banking system’s bad debt ratio was 2.62 per cent at the end of April, considerably higher than the 2.2 per cent reported at the end of 2008