The Prime Minister's directive marks a pivotal shift in mindset: from administrative command-based management to market-based regulation aligned with international standards.

At a national conference between the Government and local authorities on July 3, 2025, Prime Minister Pham Minh Chinh issued a significant reform message: he called on the State Bank of Vietnam (SBV) to urgently eliminate the use of administrative tools in regulating credit growth.

Specifically, he demanded an end to assigning annual credit growth quotas (known as "credit room") to commercial banks. Instead, the SBV should adopt market-based mechanisms with clearly defined safety criteria for credit control.

The outdated administrative tool: 'credit room'

Since 2011, the SBV has used "credit limits" - setting annual credit growth ceilings for each commercial bank.

Initially, this measure played a vital role in curbing runaway inflation. During 2007–2011, credit growth averaged over 33% per year, peaking at 53% in 2007 and leading to inflation above 19% in 2011.

However, the context has changed. As Vietnam seeks recognition as a market economy and its banking sector improves risk management regulations, the "credit room" mechanism increasingly shows its non-market nature. It fosters a "petition-grant" culture, obstructs capital flows, and distorts the market.

Commercial banks, fundamentally, are enterprises. They deserve the opportunity to expand their business if they meet capital safety standards.

Meanwhile, many healthy businesses with feasible plans struggle to access loans simply because banks have maxed out their quotas. Individual homebuyers have faced penalties for late disbursements - not due to credit risk, but because the bank had run out of “credit room.” What was meant to stabilize the macroeconomy has become a bottleneck to recovery and growth.

The Prime Minister's firm stance

This reform push is not a knee-jerk response, but part of a broader reform agenda outlined in the Strategy for Banking Sector Development to 2025 with a Vision to 2030 (Decision 986/QD-TTg). The goal is to build a modern central bank operating under a socialist-oriented market mechanism, ensuring fair competition among economic actors.

Maintaining credit quotas not only deeply interferes with bank operations - despite banks being private enterprises - but also carries legal risks. Once a quota is exhausted, banks may breach loan agreements, triggering civil disputes or undermining trust in the market.

More importantly, this administrative tool contradicts modern, transparent, and internationally-aligned banking governance. While dozens of commercial banks have implemented Basel II standards and comply with strict capital adequacy (CAR) and loan-to-deposit (LDR) ratios, the continued use of credit quotas effectively restrains the financial system's development.

Plenty of market-based alternatives

One of the main concerns for maintaining credit quotas is the risk of uncontrolled credit expansion. However, experts argue that several robust market tools are now available:

Capital adequacy ratio (CAR) and Basel II standards: When banks want to expand lending in high-risk areas like real estate, they must raise capital to meet CAR requirements - a clear, transparent, and enforceable barrier.

Required reserve ratio: The SBV can adjust this to influence money supply indirectly. For instance, raising the reserve ratio to 5% or 10% forces banks to hold more funds at the SBV, limiting excessive lending.

Open market operations (OMO): Through issuing treasury bills or securities, the SBV can inject or withdraw liquidity flexibly - without resorting to administrative commands.

These tools are market-driven, transparent, and reflect real financial capabilities - something credit quotas cannot guarantee.

A timely moment for reform

The Prime Minister has instructed the SBV to present a plan to eliminate credit quotas by July 2025 - a specific deadline reflecting the government's resolve. This timing is ripe for reform:

Vietnam’s economy is recovering post-pandemic and undergoing restructuring, demanding abundant and flexible capital. Vietnamese banks now have stronger capital bases and better risk management.

The government is aiming to build an enabling state, a fully functional market economy, and a modern legal framework.

Continuing the quota-based “petition-grant” system risks derailing the goal of modernizing the banking sector.

Removing credit quotas doesn’t mean relaxing credit control - it means changing how control is exercised: from administrative command to market discipline; from arbitrary limits to standard-based governance; from favoritism to fair competition.

This is a vital reform that could unlock capital flows for the economy, enhance monetary policy effectiveness, and drive sustainable development in Vietnam’s financial markets.

Eliminating credit quotas would mark a significant milestone on Vietnam’s path to a modern market economy - something the country has long sought international recognition for.

Tu Giang