The State Bank of Vietnam (SBV) has issued Circular 25/2024/TT-NHNN, revising the prudential ratios for credit institutions. Effective July 1, 2024, the maximum ratio of short-term capital used for medium- and long-term loans will increase to 40%, up from the current 30% limit. This adjustment aims to provide commercial banks with greater liquidity for longer-term lending.
Why the SBV is raising the capital ratio
The move marks a return to the 40% threshold that was previously in effect during the 2020–2021 period. According to the State Bank of Vietnam, this policy shift is designed to support economic recovery by making more capital available for medium- and long-term financing. By allowing banks to utilize a higher percentage of short-term deposits—which typically carry lower interest rates—for long-term lending, the central bank expects to exert downward pressure on lending rates across the market.
Impact on the Loan-to-Deposit Ratio (LDR)
Circular 25 also amends the methodology for calculating the Loan-to-Deposit (LDR) ratio, specifically regarding the treatment of State Treasury deposits. Under the new rules, the SBV maintains the current 20% cap on the inclusion of State Treasury term deposits in total deposits. However, the circular introduces a provision granting the Governor of the State Bank the authority to adjust this coefficient for specific periods based on macroeconomic conditions.
This change provides the central bank with a more flexible tool to manage liquidity in the banking system, allowing for rapid adjustments if credit growth deviates from national targets.
How this affects bank risk management
While the increase in the short-term capital ratio might appear to heighten liquidity risk, financial analysts suggest the move is tempered by improved risk management practices within the sector. Since the previous 40% limit was enforced, Vietnamese banks have strengthened their capital adequacy ratios and tightened internal controls.
The following table summarizes the key regulatory changes effective July 1, 2024:
| Regulatory Metric | Previous Requirement | New Requirement |
|---|---|---|
| Short-term capital for long-term loans | 30% | 40% |
| State Treasury deposit inclusion (LDR) | 20% | 20% (Adjustable by Governor) |
What happens next for borrowers
Borrowers should expect a more favorable lending environment for long-term projects, particularly in infrastructure and real estate development. Because banks can now tap into a larger pool of low-cost short-term funding for long-term commitments, the structural cost of capital for these institutions will likely decrease.
The SBV has mandated that all credit institutions must update their internal risk management systems to comply with these new thresholds by the start of July. The central bank retains the authority to monitor these ratios closely, ensuring that the increased flexibility does not undermine the overall stability of the domestic financial system.
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