The credit quota system applied to commercial banks in Vietnam is in need of an update.

Bank credit has long been the “artery” of Vietnam’s economy. For more than
a decade, the State Bank of Vietnam (SBV) has managed lending through the “credit
space” system, which sets quotas for each commercial bank. In 2025, the SBV raised
its target for system-wide credit growth to 19-20 per cent to support economic recovery,
up from the initially-planned 16 per cent.

The system allows the SBV to directly control the flow of capital, particularly
in a banking sector still grappling with weaknesses and high non-performing loan
(NPL) ratios. But as the sector evolves, with many banks meeting Basel II standards
and moving towards Basel III under Circular No. 14/2025/TT-NHNN, issued June 30,
2025, and with major banks maintaining capital adequacy ratios that are 3-4 per
cent above the minimum, the rigid credit quota mechanism is increasingly seen as
inflexible and out of step with market realities.

From quotas to risk

Under the current system, the SBV allocates annual credit space to each commercial
bank, depending on financial capacity and regulatory compliance. Once a bank’s credit
exposure reaches its allocated limit, it cannot lend further, even if market demand
for capital remains strong.

In 2025, under this expanded credit space, some large banks posted credit growth
of over 18 per cent in just the first half of the year. Smaller banks,
meanwhile, face strict credit limits, making it harder for many businesses, especially
high-quality borrowers, to access their funding.

This approach allows quick risk control but also creates drawbacks: weaker
banks are restricted in lending, which makes sense from a risk management perspective,
while strong banks are capped by the same growth ceiling. As a result, financially-sound
companies may still be unable to secure loans simply because their bank’s credit
space has been exhausted.

Many banking experts argue that Vietnam should gradually move from a “hard
quota” system to a risk-based supervision model. Instead of applying absolute limits,
the SBV could use financial safety indicators to automatically adjust each bank’s
lending capacity according to its risk level and management capability. Four key
indicators need strict monitoring.

First, the CAR, which reflects
a bank’s ability to withstand risk. Under Basel III, the minimum CAR is 8 per cent.
If a bank exceeds allowable risk, for example by expanding real estate lending,
its CAR falls, forcing it to halt further credit growth. This acts as a “natural
brake” replacing administrative quotas.

Second, the Loan-to-Deposit Ratio
(LDR), which measures how much deposited capital is used for lending.
If the LDR exceeds 85-90 per cent, the bank risks liquidity shortages and must adjust
credit growth accordingly.

Third, risk weights under Basel III.
Different loans carry different risk weights, for example real estate
loans may have a 150 per cent risk weight while government lending would be 0 per
cent. This mechanism forces banks to optimize their loan portfolios according to
safety levels.

Fourth, high-risk sector lending limits.
The SBV can still maintain lending caps for sensitive sectors like
real estate and corporate bonds, containing risk without imposing growth limits
across the entire banking system.

Caution ahead

Many bank leaders and experts
believe Vietnam is not yet ready to fully abolish credit space limits, with at least
five valid reasons behind their caution.

First, the financial system remains
heavily reliant on bank credit. In an environment where capital
markets are still underdeveloped, removing credit quotas too soon could channel
funds into speculative sectors like real estate and equities, destabilizing the
macro-economy.

Second, risk management capacity is
still weak at some banks. Many smaller banks continue to chase rapid
growth to expand market share. With Basel III not yet fully implemented and NPL
ratios at some banks reaching 14 per cent in the first quarter of this year, loosening
credit could threaten overall system safety.

Third, supervisory infrastructure
and data remain limited. The Credit Information Center (CIC) cannot
yet track real-time data, making it difficult for the SBV to detect banks exceeding
their lending capacity or deviating from policy directions early.

Credit space remains an effective macro-management tool because it allows the
SBV to respond quickly to economic fluctuations. When growth needs stimulation,
quotas can be expanded; when inflation needs control, quotas can be tightened immediately.
Indirect tools cannot match this short-term flexibility.

A full abolition of credit space would only be appropriate once financial markets
are fully developed and supervisory infrastructure is strong. Acting prematurely
could lead to a “credit discipline breakdown”. Fitch Ratings has warned that easing
credit controls could push up NPL ratios, especially with GDP growth in 2025 projected
at only 5.6 per cent.

Risk-based roadmap

To minimize risks, regulators need to design clear response scenarios during
the transition towards abolishing credit space limits.

In the first scenario, heated localized growth could occur if smaller banks
exceed their quotas through indirect lending, via subsidiaries or corporate bonds,
causing NPLs to rise 20 per cent above current levels. The SBV could respond by
temporarily tightening additional credit space for these banks and requiring quarterly
reports on CARs and LDRs.

A second scenario involves a bubble in high-risk sectors. If capital floods
into real estate, pushing lending growth above 25 per cent and fueling asset inflation,
the SBV would apply Basel III’s 150 per cent risk weight, cap LDRs at 85 per cent,
and upgrade the CIC for real-time monitoring to prevent widespread NPLs, similar
to the current 3-14 per cent ratios seen in some banks.

The third scenario covers systemic risk. Fully removing credit space could
drive debt leverage (credit-to-GDP) above 140 per cent, threatening macro-economic
stability. In that case, the SBV would activate contingency measures such as raising
the reserve requirement by 2-3 per cent and coordinating with the Ministry of Finance
to develop bond markets as alternatives to bank credit.

In the early transition period (2025-2026), the credit space system would remain
but become more flexible, linking quotas to CARs, LDRs, NPL ratios, and internal
credit ratings. Strong banks could access higher quotas, up to 20 per cent, while
weaker banks would have lower limits. At the same time, the CIC would be upgraded
to support supervision.

By 2027-2028, credit space could be gradually replaced by a “dynamic risk weight”
mechanism. The SBV would no longer assign specific quotas but monitor banks’ safety
ratios. Institutions meeting Basel III standards with robust risk management could
manage lending independently within their capital limits.

After 2028, credit space could be fully phased out, with lending guided by
indirect tools like policy interest rates, reserve requirements, capital adequacy
standards, and real-time data monitoring. The SBV’s role would shift to guidance
and oversight rather than quota allocation.

Vietnam has come a long way in controlling credit, moving from periods of high
NPLs to a stable banking system. But as the economy grows and capital demand rises,
the “hard brake” of credit quotas should be replaced by a “soft brake” based on
safety standards and risk-based supervision.

VET-Hoang Le