Some believe that if credit limits are abolished, a mechanism must be established to allow the State Bank of Vietnam (SBV) to independently manage interest rates based on market signals. What is your view?

Abolishing the credit quota mechanism is a reasonable and well-grounded approach, provided that the SBV is capable and authorized to operate interest rates independently in line with market signals.

Credit limits are essentially an administrative tool that helps regulators control credit growth, particularly when the banking system remains fragile, risk management capabilities are limited, and the monetary policy transmission mechanism is still underdeveloped.

However, prolonged use of this tool can distort the market, hinder the development of healthy credit practices, weaken competition, and reduce banks’ motivation to improve internal governance. That is why developed economies and several countries in the region have shifted towards indirect tools such as policy interest rates, open market operations, and reserve requirements to manage credit growth more flexibly.

Once interest rates are truly governed by market mechanisms, they become the primary instrument for regulating capital costs, directing credit into efficient sectors, and mitigating risks linked to loose lending practices.

From a market perspective, policy rates and indirect tools not only promote competition but also support the more efficient allocation of resources, reducing rent-seeking behavior, lobbying for credit limits, and unhealthy competition between banks. For this mechanism to function effectively, a sound banking system, a sufficiently deep financial market, transparent information, and a clear legal framework are essential. The SBV must also enhance its capacity for analysis and forecasting to proactively respond to unexpected external developments.

Could lifting credit ceilings heighten inflation risks by fueling market sentiment, especially alongside rising global commodity prices and expansionary fiscal policy?

When a measure such as removing credit ceilings is introduced, even if it is a technical adjustment in credit management, it can easily be perceived by the market as a signal of monetary loosening. If the public and markets believe that credit will expand rapidly and money will become easier to access, inflation expectations may rise swiftly.

In an environment of elevated inflation expectations, businesses may raise prices earlier in anticipation of higher input costs, while consumers may increase spending or shift their assets into inflation-resistant options such as real estate or gold. This creates a self-reinforcing effect, where actual inflation exceeds what conventional monetary policy alone can account for.

This effect is amplified if global commodity prices are volatile, for example with rising prices of oil, food, or essential raw materials, which already lay the foundation for inflation. Domestic expectations then combine with external pressures, resulting in a price spiral that is difficult to contain.

If accompanied by expansionary fiscal policy, including increased public spending, strong demand stimulus, and high budget deficits, overall demand in the economy would rise further. These three factors, including market sentiment, global commodity prices, and fiscal expansion, could compound one another, leading to a wave of double-shock inflation and disrupting both price stability and medium to long-term market expectations.

What is particularly concerning is that shifts in market sentiment can spread rapidly, often beyond the reach of conventional tools like interest rates or reserve requirements. Once confidence in the currency’s value is undermined, businesses and households move from a wait-and-see stance to a defensive position, leading to deeply entrenched inflation expectations that are hard to reverse.

That is why effective policy communication, along with transparency, timeliness, and consistency in the SBV’s actions, is essential to maintaining public trust and managing expectations. Historical experience in countries such as the US during the 1970s or in several recently-emerging markets show that a psychological shock, combined with unfavorable macro-economic conditions, can drive inflation far beyond what money supply growth alone would predict, causing long-lasting damage to the economy.

Could unchecked credit liberalization trigger a repeat of the 2007-2010 asset bubble, driving capital into speculation and raising systemic risk?

Concerns about speculative capital flows following the removal of credit ceilings are well-founded. Vietnam has experienced this before, with the asset bubble between 2007 and 2010 leading to years of high non-performing loans (NPLs).

However, removing credit ceilings does not mean allowing credit growth to run unchecked, nor does it imply weakening regulatory control. The reform aims to shift from direct administrative tools to more modern, market-based instruments. Instead of setting fixed credit quotas for each bank, the SBV would rely on indirect tools such as policy rates, open market operations, reserve requirements, lending caps for high-risk sectors, credit quality oversight, and stronger supervision.

Credit growth would still be carefully guided in line with monetary policy goals and financial safety. The real risk lies not in removing the quota itself but in how well these market tools are implemented. If used flexibly and decisively, raising interest rates or tightening liquidity when capital flows into risky sectors, or applying stricter capital requirements to banks heavily exposed to real estate, the system will be better protected than under rigid quota controls.

Monetary policy remains the key to managing credit, regardless of whether quotas exist. When tightening is necessary, the SBV can use rates, liquidity tools, or lending limits. When stimulus is needed, the same tools allow for flexible easing without undermining systemic stability.

In short, asset bubbles and bad debts only become a threat if market tools are poorly executed or if supervision is weak. What matters is improving regulatory capacity, forecasting capital flows, enhancing transparency, and enforcing market discipline. If done properly, lifting credit ceilings could strengthen the effectiveness of monetary policy and improve long-term system stability.

Some international credit rating agencies have warned that liberalizing credit could pose systemic risks and impact Vietnam’s banking sector ratings. What do you think?

This is a valid concern. Credit rating agencies like Moody’s, S&P, and Fitch closely monitor macro policy changes and their implications for banking sector stability, especially in emerging markets.

If the removal of credit ceilings lacks a clear roadmap and strong regulatory safeguards, ratings may be downgraded for several reasons.

First, uncontrolled credit growth is the biggest concern. Without effective oversight, capital may again flow into speculative sectors, inflating asset prices and raising bad debt levels. This would weaken the banking sector’s resilience, especially given uneven asset quality and the presence of structurally weaker institutions.

Second, the risk management capabilities of banks are still mixed. Not all Vietnamese credit institutions meet international standards, such as Basel II or III, for internal controls and risk frameworks.

Third, removing credit quotas would increase the burden on the SBV’s supervisory system. It must be able to monitor capital flows, detect risks early, and act promptly. Without sufficient capacity, regulatory gaps may emerge, eroding investor confidence.

Transparency and market discipline are also critical. If data on credit, bad debt, or exposure to risky sectors is delayed or incomplete, investors may view it as a warning sign, affecting credit ratings and increasing system-wide funding costs.

Finally, the SBV’s ability to conduct monetary policy using market-based tools is essential. Weak instruments, poor coordination between monetary, fiscal, and macro-prudential policies, or delayed responses would raise inflation, exchange rate, and capital flow risks, potentially damaging both sovereign and banking sector ratings.

How would you assess the readiness of Vietnamese commercial banks if they were allowed to expand credit without direct administrative intervention from the central bank?

From a financial capacity and risk management perspective, I believe most Vietnamese commercial banks have significantly improved compared to previous periods, particularly following the banking sector restructuring, the adoption of Basel II standards, capital increases, and internal governance enhancements. Most medium and large banks now maintain capital adequacy ratios (CAR) at or above regulatory thresholds, with asset quality and NPL ratios kept at manageable levels. Internal audit and risk management systems have also become more professional.

Notably, the SBV has tightened its credit oversight in recent years, including asset quality control, monitoring credit flows into high-risk sectors, and raising transparency and management standards. This supervisory framework serves as an effective safeguard, even in the absence of credit ceilings.

That said, disparities in risk management capabilities still exist at some banks. I believe that if Vietnam’s banking system continues to adopt advanced management tools, such as AI, big data, and early warning systems, alongside stronger risk governance standards and sustained SBV oversight, credit risks can be effectively managed without the need for administrative caps. This would allow for greater development flexibility while ensuring system safety and alignment with international best practices.

If credit liberalization removes the quota advantage for restructuring banks, what policy tools should the government adopt to maintain fair support?

In that case, the government should introduce transparent, targeted support mechanisms that are separate from credit quota incentives, to encourage banks taking part in restructuring without distorting competition.

Several options could be considered.

First, rather than giving preferential credit space, the SBV and the government could provide direct financial incentives such as low-cost funding, refinancing rate support, liquidity guarantees, or waivers on compliance costs tied to the distressed assets these banks are managing. These measures should be clearly defined, time-bound, and conditional to avoid misuse.

Second, tax or fee exemptions, or allowing delayed provisioning in special cases, could help ease financial pressure. However, such policies must be transparent, regularly monitored, and publicly disclosed.

Third, the government could promote risk-sharing models between the public and banking sector through restructuring support funds, capital preservation mechanisms, or public-private partnerships for bad debt resolution, while strengthening the role of asset management companies like VAMC.

Most importantly, all support policies must be transparent, with clear criteria and impact assessments to ensure they incentivize restructuring efforts without undermining fair competition across the system.