Developing capital market, reducing dependence on bank capital


In recent years, Vietnam’s capital market has had considerable development steps, but its scale is still small compared to that of other markets in the region. There is still imbalance between the channel of supplying capital through the money market (mainly implemented through the banking system) and the channel of supplying capital through the capital market. In that context, the banking sector has always strived to provide capital for the economy.

High ratio of credit to GDP in Vietnam

In recent years, credit has made more effective contributions to the economic development.

Accordingly, in 2018, credit increased by nearly 14%, the lowest growth rate since 2014, while the economy grew by 7.08%, the highest level since 2008. This shows that the economy tends to rely less on the bank capital in the context of the disbursed FDI growing sustainably (by 9.1% in 2018) and the continuous increase in capitalization value of the stock market, which, in 2018 reached up to 75% of GDP, higher than the level of 70.2% of GDP in 2017.

However, there exist a lot of unexpected factors regarding the macro-economic, monetary conditions at home and abroad. Therefore, the State Bank of Vietnam (SBV) has always closely supervised the development of the money, credit markets to make suitable adjustments to the targeted overall credit growth rate.

Besides, there are some challenges to the credit management by the SBV in 2019. Especially, though the effectiveness of credit allocation and credit quality have been recently improved and the rate of credit growth has been controlled at lower level than in previous years, the ratio of credit to GDP in Vietnam is still quite high, at about 130% as the capital for development of the economy mainly depends on bank capital.

Specifically, at the end of 2017, the ratio of credit to GDP was reported at 130%. Accordingly, credit including investment in special bonds issued by VAMC and balances of lending, investment through trust contracts. Since 2018, the SBV has adjusted the credit criteria towards exclusion of investment in special bonds issued by VAMC and balances of lending, investment through trust contracts. The ratio of credit to GDP of Vietnam compared to that of some countries in the region was at high level, according to many international organizations, credit ranking organizations (WB, IMF, Moody’s).If the scope of credit balance is applied for 2017, the ratio of credit balance to GDP at the end of 2017 was about 126%. At the end of 2018, the ratio of credit to GDP of Vietnam was above 130%. This is the reason why international organizations have been warning Vietnam of financial and macroeconomic risks.

It entails prudently conducting credit policy toward macroeconomic stability, inflation control and banking operational safety; as well as undertaking measures to synchronously develop the financial and money markets for the economy. In 2019, based on objectives set by the National Assembly, the Government and macroeconomic, monetary projections, the SBV has set the credit growth rate of about 14%, with adjustments suitable for the actual situations. Credit management must be in accordance with the oriented criteria, together with improvement of credit quality with a view to controlling inflation with the targeted level, keeping the macro economy stable, supporting reasonable economic growth, stabilizing the money and forex markets.

With close instructions of the Government, the SBV and the active implementation by commercial banks, credit up to the middle of July 2019 increased by over 7% against the end of 2018. Credit was focused on business and production, priority sectors, of which credit for small and medium-sized enterprises by the end of May, 2019 increased by 6.03% against the end of 2018, accounting for about 18.2% of the total credit in the economy; Credit for agricultural, rural development by the end of June 2019 increased by 5.48% against the end of 2018 and accounted for about 25% of the total credit balance in the economy.

Therefore, bank capital has still brought into full play its main role in the economy, contributing to supporting business and production, promoting economic growth. It is necessary to develop more channels of supplying capital because the money market is mainly a place where short-term capital is supplied while the demand for capital is often mid-term and long-term.

Need for a lot of synchronous measures

Nowadays, in Vietnam, there still exists imbalance between the channel of capital supply in the money market (implemented through the banking system) and the channel of capital supply through the capital market. By nature, the money market is a place where short-term capital with the term ranging from overnight to below 1 year is supplied, while the capital market is a place where long-term capital with the term of over 1 year is provided. The money market plays a role of meeting the demand for short-term capital which is urgent, seasonal to ensure liquidity and operation of market players. On the contrary, the capital market is a channel of supplying long-term capital to carry out investment projects like building factories, purchasing machines, changing technological lines, developing new products, fields etc.

Although the capital market of Vietnam has had considerable development steps in recent years, its scale is still small compared to that of other countries in the region. Specifically, the capitalization ratio of the stock market to GDP and the ratio of corporate bond balances to GDP in 2018 achieved only 71.57% and 8.57% respectively (the ratio of market capitalization to GDP in 2018 in Indonesia: shares 47.3%, bonds 19.13%; in Philippines: shares 92.7%, bonds 35%; in Thailand: shares 97.9%, bonds 76.27%).

In that context, the banking sector has always strived to provide a main source of capital for the economy, compensating for a large amount of capital that the capital market has not provided.

By the end of 2018, the ratio of credit to GDP gained 130% with mid-term and long-term credit making up 50.7% of total credit balance. On the one hand, this helped to compensate for the amount of mid-term and long-term capital which has not yet been mobilized through the capital market, on the other hand, it posed implicit risks to the banking sector in particular and the financial sector in general against the background of the system of credit institutions mainly mobilizing short-term capital in the money market. Besides, the capital market has not developed, interconnection among market segments is not high because access to the capital market of enterprises is still limited, enterprises mainly depend on bank capital, which makes it difficult to reduce lending interest rates and not reflect capital supply-demand in the market. Being aware of the above-mentioned shortcomings and disadvantages of the financial system, the Party gave the directions in the Resolution No 10-NQ/TW issued at the Fifth Conference of the Central Executive Committee Session XII on developing the private sector into an important driver for the socialist-oriented market economy as follows: “Restructuring and developing financial markets in a rapid, safe, efficient way, especially the money and capital markets; creating equal, favorable conditions for the private sector to access bank credit, mobilize capital in the stock market, especially issue corporate bonds and use financial services at reasonable prices”. On the basis of closely keeping up with the guidance of the Party and the State, the Government had the policy of developing capital and money markets in the Decision No 1911/TTg dated  August 14, 2017 on approving “The road map of developing the bond market in the period of 2017-2020 and the orientation up to 2030”, the Decision No. 242/QD-Tag dated February 28, 2019 on approving the Scheme “Restructuring the stock market and the insurance market up to 2020 and orientation up to 2025”, the Decree 163/ND-CP dated December 4, 2018 on stipulating the issuance of corporate bonds, the Draft of the amended Securities Law…As for the banking sector in particular, the Prime Minister promulgated the Decision No 986/QD-TTg on approving “The Strategy of developing the banking sector in Vietnam up to 2025 and the orientation up to 2030”, which stresses “Developing a stable, transparent monetary market in accordance with the orientations and road map of restructuring the financial market, ensuring the market structure is suitable for and compatible with the capital market and the insurance market”.

Some above-mentioned specific objectives have been actively realized by the Government, the SBV and initially, there have been remarkable results. In following the orientations set by the Party and the Government, the banking sector has strived to fulfill the assigned tasks, and at the same time to actively use monetary policy tools to ensure the objectives of macroeconomic stability and to supply enough capital to support sustainable economic growth.

Research and International Cooperation Department