In August, the government requested the State bank of Vietnam (SBV) to bring down banks’ lending rates to boost business activity. That came a month after SBT reduced its first official interest rate in three years. Quarter percentage-point cuts in both the refinance rate — to 6.25% — and the discount rate — to 4.25% — are feeding credit risks in a nation dealing with a bad debt-hangover from the previous bust. Inflation may be ticking up, too. The consumer price index rose an annualized 3.4% in September from 2.52% in August. Some experts suggested that a high level of credit booms in Vietnam are not sustainable in the long term, as a result, the government needs to consider potential risks and the increase in debt.

As such, it would be important for Vietnam to continue with structural reforms. In addition to the effort of attracting foreign capital and foreign investors, it is necessary to strengthen financial institutions. That would give the government’s confidence to liberalize the capital account, increase transparency, get the state out of the private sector, make industry more competitive and companies more shareholder-friendly and curb the shadow-banking system. Bold structural reforms are needed to make productive use of capital inflows and slow the pendulum’s swing toward trouble. 
Recent rate cuts further deaden the urgency for economic modernisation, including developing the capital markets. Vietnamese companies still rely heavily on bank lending. Easier monetary policy will make it even cheaper for businesses and individuals to over-borrow, exacerbating bad-loan risks.

Recently, the government has put up effort in overhauling the banking sector. In 2013, the SBV created the Vietnam Asset Management Company (VAMC) to take non performing loans (NPLs) off bank balance sheets. 17% of loans were considered as bad debt at that time. Now the official ratio stands at about 3%. Even so, as Moody’s Investors Service warns, there are few guardrails in place to avoid another credit binge that goes bad. In May, for example, Moody’s said Vietnam’s banks “will face capital shortfalls over the next 12-18 months, and that such a situation continues to represent a key credit burden for the industry.”

“Successful management of NPLs in Vietnam is essential while remaining vigilant to NPL flows,” says World Bank economist Jennifer Isern. The key, she says, is “strengthening lending practices and financial sector oversight to prevent an accumulation of NPLs.”

Like China, Vietnam is often seen as an attractive destination for investors. With 21% of the population under 15, low labor and land costs, a lively tech scene and close physical proximity to China, it is just a matter of time before Vietnam becoming an industrialized country. However, it would require the joint effort from all economic components to bring prosperity to Vietnam.