Second amendments to Circular 36: suitability but market discipline
The State Bank of Viet Nam (SBV) has issued a draft amendment updating a new circular regulating capital ratios for the operation of credit institutions and foreign bank branches.
According to the draft document, which is being circulated for public opinions, the maximum ratio of short-term funds that may be used for medium- and long-term loans will be 45 per cent in 2018 and 40 per cent in 2019.
This is the second time that the roadmap for the regulations are being revised. The first amendments to the circular were made in May last year, with the ratio reduced from 60 per cent in 2016 to 50 per cent in 2017. It will drop to 40 per cent from the beginning of 2018.
SBV said the second adjustment is based on its assessment and scrutiny of the country’s economic indicators in the first months of 2017 as well as the Government’s macro-economic plans in the last months of the year.
With the new regulations, the SBV errs on the side of increasing credit access and stoking growth, while sacrificing a bit of macroeconomic discipline and risk limitation. In order to evaluate whether the second amendments are a good step, we first have to look back to the rationale of the original circular and ask why it needed to be revised at all.
Circular 36
The Circular No 36/2014/TT-NHNN was issued on November 20th, 2014 to provide guidance on the implementation of the 2010 Law on Credit Institutions. The Circular became effective on January 1, 2015, replacing all relevant applicable regulations on capital adequacy ratio, credit extension limits, solvency ratio, maximum ratio of short-term capital sources used to provide medium- and long-term loans, limits on capital contribution and share purchase, and loan-to-deposit ratio.
One of the most critical regulations was the maximum ratio of short-term capital used to provide medium- and long-term loans of 60 per cent, because it aimed to prevent maturity mismatches in banks’ balance sheets.
A maturity mismatch as defined by Investopedia as “the tendency of a business to mismatch its balance sheet by possessing more short-term liabilities than short-term assets and having more assets than liabilities for medium- and long-term obligations.”
The mismatch naturally occurs in the banking system because, as we know, most of the capital mobilised by commercial banks is short-term deposits. So if medium- and long-term lending is not controlled and supervised closely, it can lead to excessive mismatch.
This is really a dangerous situation for the banking sector, especially in Viet Nam. Here, the bond market has yet to develop and funds for infrastructure projects are mostly sourced from banks and need to be available over a long period of time.
The maturity mismatch, along with currency mismatch—together they are called a double mismatch—was the root cause of the Asian financial crisis in 1997. Viet Nam, in late 2011 and early 2012, also faced a banking liquidity shortage due to the maturity mismatch. The SBV had to interfere to protect several commercial banks from collapse.
SBV’s statistics revealed that by the end of April this year, medium and long-term loans accounted for 53 per cent of the loans made with short-term deposits, while medium- and long-term mobilised capital was only 15 per cent of total mobilised capital.
Therefore, besides applying good international practice in banking governance, SBV needs to strengthen supervision of the mismatch by issuing regulations on the maximum ratio of short-term capital sources used to provide medium- and long-term loans and the minimum capital adequacy ratio.
However, a policy made leaning towards tightening the credit supply might have negative impact on production and business activities. Thus, to minimise the impacts, the SBV had to build a roadmap for the ratio to avoid a shock.
Circular No 06/2016/TT-NHNN, dated May 27, 2016, on revising and supplementing several contents of Circular No 36, helped set the roadmap, marking the first amendments.
The second amendments
The newly drafted roadmap was released following the Government’s cabinet meeting in early August, in which the Prime Minister requested the SBV make a plan so that the credit growth of the year would reach 21-22 per cent. This is one of the driving forces to realise the annual GDP target of 6.7 per cent.
If the draft circular was approved, local credit institutions would not have to increase the medium- and long-term interest rates in the upcoming months to mobilise enough medium- and long-term capital, which is necessary to bring the ratio of short-term funds to finance medium- and long-term loans to 40 per cent at the beginning of next year as stipulated in Circular 06.
In other words, from this point onwards, credit institutions will have one year and four months to achieve this 40 per cent ratio, instead of only four months rushing to the fulfillment of the requirement.
Without being forced to increase deposit interest rates to change the capital structure, credit institutions would have no reason to hike lending interest rates to maintain an acceptable net interest margin level.
This is a prerequisite for keeping the lending interest rates stable, which would create favourable conditions for individuals and enterprises to borrow more to invest in production and businesses. The credit and the economy will have ground to grow faster in the last quarter of the year.
The SBV’s draft might be suitable in a sense that it reflects the Government’s determination. But it also proved that the SBV has still been cautious in taking measures to stabilise the macro-economy and reduce risks for the banking system, particularly at a time when the Government is making efforts to settle bad debts and improve transparency.
However, the amendments to the Circular 36 would also bring some side-effects. It shows that we are under pressure to reach a short-term growth target while trying to maintaining a long-term economic and financial stability.
Although the second amendment may be reasonable at the moment as I said above, it could harm market discipline – an important factor for the market to function well. If we keep changing policies without satisfactory explanation, we might risk losing market discipline and reducing the predictability of policies.
Last but not least, the SBV, despite being a government member, still needs to exercise greater self-control in ensuring the macro-economic economic stability – a trend that we should embrace while we are revising laws related to the SBV. — VNS
* Vo Tri Thanh is a senior economist at the Central Institute for Economic Management (CIEM) and a member of the National Financial and Monetary Policy Advisory Council. A doctorate holder in economics from the Australian National University, Thanh mainly undertakes research and provides consultation on issues related to macroeconomic policies, trade liberalisation and international economic integration. Other areas of interest include institutional reforms and financial systems.
