Time to remove credit limit?

At the conference on “Monetary and financial policy to promote economic growth in the last six months of 2017″ held by the Ministry of Planning and Investment (MPI) this morning (July 14), Dr Can Van Luc, a finance and banking expert, said that in the second half of the year, the monetary and financial risk is high due to the global impact such as the Fed’s likelihood to raise interest rates one more time in 2017 and twice in 2018.

Meanwhile, the pursuit of high growth target in the short term and the lack of sustainable growth drivers will pose many risks to the macro economy and the financial and banking system in the long run.

Accordingly, Dr Can Van Luc argues that support measures such as expansion of money supply and credit growth should be implemented at reasonable level of 16 percent-18 percent in 2017, coordinating between monetary policy and fiscal policy to ensure the slight decrease of interest rates and price control.

Remarkably, the expert proposed to consider reducing administrative methods, including the removal of credit limit.

“The allocation of credit limit to banks is clearly an administrative measure. We should operate under market mechanism, which means to remove this limit, and instead, to closely control banks by capital adequacy ratio (CAR) because the numerator of this coefficient is equity and the denominator of this coefficient is credit and investment, whereby controlling this coefficient will be more feasible and not too much administrative”, said Luc.

Through survey, the expert said credit limit is one of the few administrative tools that the world still applies. Instead, we should depend on the capability and decision of each bank.

Reportedly, since 1994, the State Bank applied credit limit for four State-owned commercial banks (SOCBs). Subsequently, the application was extended to joint stock commercial banks and large foreign bank branches to limit lending speed and to control inflation.

However, as credit limit is an administrative regulation instrument, directly interfering and is only allocated to some commercial banks, it somewhat limits the fairness in competition.

At the same time, this limit is also not adjusted flexibly following market signals, thus affecting the satisfaction of capital demand for the economy. Thus, in 1998, the State Bank decided not to use credit limit as a consistent tool in regulating monetary policy, but only use when it is necessary to limit rapid credit growth, leading to high inflation risk.

After 13 years of removing, this tool was used again by the State Bank in 2011. The reason was the crisis in 2009 led to overheating credit growth. The credit/GDP ratio amounted to 158 percent at times, causing loss of control of inflation.

However, at the current moment when the situation has basically stabilised again, experts said that the abandonment of this measure is one of the worth discussing options.