On July 6, 2025, in Directive No. 104 on enhancing the effectiveness of monetary and fiscal policy management, the prime minister directed the State Bank of Vietnam (SBV) to strive for a 2025 credit growth target of approximately 16% compared to 2024. The directive also sets a vision for 2026: to manage credit growth through market-based tools, moving away from the current administrative credit growth quota system.

More specifically, the prime minister requested a review of the removal of administrative tools in managing credit growth, namely the allocation of credit growth quotas to individual credit institutions. This is not the first time the question of whether Vietnam should scrap the credit growth cap has surfaced. Since 2019, the issue has been raised almost every year — and even brought before the National Assembly. In other words, from before the Covid-19 pandemic through to the post-pandemic period, Vietnam has remained entangled in the ongoing question: “When will we remove credit growth quotas?” Why were credit growth caps introduced? The SBV introduced credit growth ceilings for commercial banks in 2011, following a period of overheated credit expansion that had pushed up interest rates and inflation, threatening macroeconomic stability. That period also saw sharp fluctuations in the exchange rate between the Vietnamese dong and the U.S. dollar. In that context, the SBV adopted the credit growth limit — often referred to in the banking circle as the “credit room” — to curb rapid credit expansion. This approach was understandable, given that between 2007 and 2010, the average credit growth across the system was around 36% annually. The credit-to-GDP ratio also surged, from 60.6% in 2005 to 106.6% in 2010. After that period, the SBV shifted to managing credit growth through quotas applied to each credit institution. Since 2011, this mechanism has brought system-wide credit growth down from over 30% per year (with some years as high as 53.8%) to around 12–15% in recent years. According to the SBV, since 2011 — after the banking sector’s period of overheating and double-digit inflation — the “credit room” system has proven to be one of the most effective tools in preventing a return to unsustainable credit growth. Can the cap be removed — and what tools could replace it? In many countries, modern central banking frameworks offer a range of tools that the SBV could adopt. These include setting capital adequacy ratios, applying risk weights to different asset classes, and conducting annual “stress tests” — similar to those run by the U.S. Federal Reserve and the European Central Bank. Commercial banks that take on excessive credit risk are required to increase their capital reserves and set aside higher provisions. This forces them to scale back growth in the following year or raise additional capital. Under this model, central bank oversight and shareholder pressure encourage bank executives to manage their own risks — preventing reckless credit expansion. Moreover, the development of corporate bond markets and debt trading platforms allows banks to securitize high-risk loans and offload them to investors, thereby reducing their balance-sheet risk. Finally, bank bankruptcy is also a tool within this ecosystem. Banks with excessively risky behavior can and should be allowed to fail — as seen recently in the United States in 2023, when several small- and mid-sized banks collapsed. Similarly, during the 2007–2009 global financial crisis, many banks in Western countries also went bankrupt. When can we eliminate credit growth caps? Credit growth limits are often viewed as administrative commands rooted in an “ask-and-give” mechanism. As such, they have frequently been proposed for replacement. Moreover, the relative macroeconomic stability of recent years has reignited debate — regularly at the National Assembly and Government level — about when to eliminate these credit caps. In my opinion, the answer largely depends on how much confidence the SBV has in the effectiveness of alternative tools. For instance, capital adequacy ratios and risk-weighted assets have already been introduced in Vietnam under the implementation of Basel standards in the banking system. Stress-testing tools are also no longer unfamiliar and have evolved into more advanced versions in Europe and the United States — with much of the information now publicly disclosed, making adoption in Vietnam relatively feasible. The real issue is whether this ecosystem of alternative tools truly exists in Vietnam in a meaningful way, or merely on paper. This is something that needs to be assessed objectively — because it is a necessary condition for eliminating credit growth limits. Removing a core policy tool without having effective substitutes is like switching from a traditional car to a self-driving vehicle that does not have a brake pedal — leaving no way to stop if something goes wrong. In reality, we often see capital adequacy ratios and risk-weighted assets being applied “flexibly,” which raises concerns about the reliability of the data. The classification of loans, the assignment of risk weights, the calculations behind capital adequacy — and even internal credit risk control processes — all contain loopholes that commercial banks can maneuver through. The SBV is surely aware of these risks. In fact, such weaknesses always exist. But with the credit growth limit still in place, the SBV retains an emergency brake it can press at any moment. SBV leaders have previously stated that removing the credit growth cap must be done cautiously, ensuring all necessary conditions are met and implemented gradually in accordance with market readiness. It should also be noted that in other countries, when commercial banks make reckless decisions, they pay the price — through bankruptcy. This is considered normal. But in Vietnam, socio-economic factors implicitly compel the state to step in with bailouts — as was the case with the banks that were acquired at zero Vietnam dong. Given an ecosystem that forces bailouts, and lingering doubts about the reliability of technical tools to regulate credit growth, it is understandable that the SBV remains hesitant. Still, we cannot indefinitely maintain an “ask-and-give” model. Tools such as capital adequacy ratios, risk weighting, and stress testing may still be subject to lobbying, but they rest on a more quantitative, objective, transparent, and market-driven basis. This model reduces the need for “asking for credit room” — allowing well-managed banks with strong capital, low bad debts, and efficient cost control to continue lending, rather than waiting for credit quota approval. That presents a clear advantage for both banks and the economy. For this reason, the prime minister’s directive serves as a necessary pressure point for the SBV to reassess its stance — or, at the very least, provide a more transparent explanation if it continues to uphold the credit growth quota system. We can empathize with the complexities in deciding whether to retain or remove the credit cap. However, after each “season” of this recurring debate, there needs to be a clearer answer: why the cap must remain — or what the roadmap looks like to phase it out properly.