(TBTCO) – Credit remains a pillar of growth, but also a “red line” for risk. Outstanding credit across the economy reached 134% of GDP at the end of 2024, far exceeding the warning thresholds of many international organizations. Speaking with a reporter, Prof. Dr. To Trung Thanh, Head of the Department of Research Management at National Economics University (NEU), warned against excessive reliance on credit and emphasized the role of fiscal policy as monetary policy space gradually runs out.

Source: State Bank of Vietnam. Graphic: Van Chung

Reporter: For many years, Vietnam’s outstanding credit has regularly exceeded the safety threshold recommended by the International Monetary Fund (IMF), reaching 134% of GDP at the end of 2024. How do you assess this situation?

Prof. Dr. To Trung Thanh: For many years, Vietnam has maintained high GDP growth, ranking among the fastest-growing economies in the region and the world. However, behind these positive figures lies a reality that deserves attention. Vietnam’s growth model relies primarily on expanding inputs, driven by investment and credit, but lacks a role for science, technology, and innovation. This issue has long been raised, yet the growth model has seen little improvement.

High growth is often supported by rapid credit expansion. By the end of 2024, outstanding credit across the economy reached VND 15.6 quadrillion, equivalent to 134% of GDP, far exceeding the IMF’s recommended safety threshold. Outstanding credit across the economy was estimated to have increased by 6.52% in the first five months of 2025, far above the growth recorded in the same period a year earlier (2.41%). This reflects two major issues in the economy’s growth.

First, the business sector, particularly the domestic private sector, depends heavily on credit because it lacks other channels for accessing medium- and long-term capital.

Second, the banking system remains responsible for “shouldering” growth through credit. However, the financial and banking system has yet to achieve lasting financial soundness: capital adequacy ratios (CAR) remain low, asset quality shows signs of deterioration, nonperforming loans are rising, and system-wide liquidity pressures persist. Continuing to expand credit rapidly and cut interest rates to support growth could come at the cost of macroeconomic instability.

Both issues result in an unsustainable growth model that carries risks.

Reporter: As demand for capital often rises sharply in the second half of the year and liquidity pressures become a major bottleneck, could you clarify the risks to macroeconomic stability when the banking system must still provide medium- and long-term capital, while its funding sources are primarily short-term or even demand deposits?

Prof. Dr. To Trung Thanh: Excessive dependence on bank credit creates many risks. The first is a mismatch between funding and lending maturities, also known as maturity risk. Banks primarily raise funds through short-term deposits or even demand deposits, while most outstanding loans are medium- and long-term. Currently, around 55% of total credit is medium- and long-term, while 80% of deposits are short-term or demand deposits. This leaves the system vulnerable to liquidity shocks, particularly when market confidence is affected.

Second is the risk of nonperforming loans. When credit grows rapidly but investment efficiency has yet to improve, the potential nonperforming loan ratio increases, threatening the stability of the financial and monetary system. Pressure to maintain high credit growth to support economic growth may lead to greater “relaxation of lending standards,” resulting in poor-quality loans. In addition, Vietnamese banks’ nonperforming loan coverage ratio fell from 150% in 2022 to around 83% in mid-2025. This indicates that the room to respond to credit risks is increasingly limited.

Third, the risk of macroeconomic instability is becoming increasingly apparent. Sharp increases in credit and the money supply, while capital use remains inefficient, will place substantial pressure on inflation; asset prices, particularly real estate prices, tend to be pushed higher; and the U.S. dollar exchange rate also faces mounting pressure. If not controlled promptly, this financial and macroeconomic instability will spread and negatively affect the real economy.

Reporter: Given high growth targets and substantial capital needs for long-term projects, do you think continued credit expansion remains a sustainable approach, considering the economy’s capacity to absorb capital, investment efficiency, and the banking system’s resilience?

Prof. Dr. To Trung Thanh: With other resources still limited, continued credit expansion is unavoidable as the economy needs to recover and grow rapidly. Given the risks outlined above, credit expansion must proceed cautiously, minimize risks, and rest on fundamental principles: the economy’s actual capacity to absorb capital, the quality of credit flows, and the banking system’s resilience.

Current credit measures are primarily short-term. Credit expansion can only be truly sustainable when integrated into an overall strategy for developing financial markets and restructuring the economic growth model.

To meet the economy’s medium- and long-term capital needs, Vietnam must simultaneously develop two key channels: the corporate bond market and the stock market. Both have considerable potential to share the burden of capital provision with the banking system while laying the foundation for dynamic development in the business sector. Increasing these channels’ share of capital provision will also help create a more balanced financial structure with healthier development.

Reporter: Thank you!