Removing credit growth limits (known as credit "room") has once again come into focus, with hopes that doing so will create a more competitive banking environment.

Currently, the system divides annual credit growth quotas among banks, limiting their ability to lend beyond state-set ceilings.

This restricts competition, as banks only strive to lend within their assigned limits. If the system is abolished, banks would be free to compete. Naturally, they would be forced to focus on credit quality, financial capacity, and service delivery.

An outdated tool with growing limitations

Since 2011, after a period of overheated banking expansion and double-digit inflation, the State Bank of Vietnam (SBV) has maintained credit quotas as an effective administrative tool to manage loan balances and serve macroeconomic targets such as inflation and money supply.

However, during this time, even creditworthy businesses with feasible production plans were sometimes denied loans because banks had exhausted their credit room. Many had to cut profits or absorb unofficial costs to secure capital for operations.

Even individual customers faced issues. Nguyen Phuong Minh, a resident of Hanoi’s Phu Dien ward, recalled being penalized on her apartment purchase because the bank couldn’t disburse her loan on time due to hitting its credit limit.

While the quota system once played a necessary role, its limitations have become clear - especially as Vietnam’s banks have begun operating under the international Basel II and III risk frameworks. The system now risks becoming a barrier to economic recovery and growth.

At the June 2025 government meeting, Prime Minister Pham Minh Chinh instructed the SBV to urgently consider phasing out the credit cap mechanism and replacing it with a market-based system. He also asked for a framework of credit safety criteria to be submitted within July 2025.

Careful testing needed

In 2025, based on macroeconomic targets, the SBV has projected total system-wide credit growth at about 16%, with room for adjustment depending on actual conditions.

As of June 30, credit in the economy had reached more than 17.2 quadrillion VND (approximately 678 billion USD), up 9.9% from the end of 2024. According to Pham Chi Quang, Director of the SBV’s Monetary Policy Department, although credit growth is focused on key areas like manufacturing and business, inflation risks remain.

Notably, the SBV allocated full-year credit limits to banks at the start of 2025, with clear and transparent criteria. However, analysts warn that removing credit quotas entirely could reignite the race to raise deposit and lending rates, and spike bad debts - as seen before 2011.

Fortunately, the SBV now has stronger market-based tools. These include capital adequacy ratio (CAR) requirements and Basel II compliance, which serve as clear, legally enforceable benchmarks. Additionally, the central bank can manage liquidity through open market operations, issuing or redeeming treasury bills as needed, without relying on administrative orders.

From the banks' perspective, according to Tran Hoai Phuong, Head of Corporate Banking at HDBank, eliminating credit limits would at least boost market optimism. He expects credit to surge in the second half of the year as lending hits its seasonal peak and interest rates remain stable. Removing credit quotas by Q3 2025 would thus be timely.

Economist Dr. Nguyen Tu Anh supports the removal but suggests a cautious pilot approach - initially allowing only banks with strong credit profiles to grow freely, while others remain under quota rules. This would foster fair competition and push banks to improve service and risk management. “Freedom in credit growth is beneficial, but it must be earned through meeting strict standards,” Dr. Anh said.

According to Deputy Governor of the SBV Dao Minh Tu, the central bank is working on gradually phasing out the credit cap system. In the meantime, additional credit allowances will be granted based on actual performance, without requiring formal requests from banks.

PV