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Bank Lending Slows Amid Economic Downturn

Source: Vientiane Times

The injection of bank credit into the economy continues to slow despite government measures to improve the investment climate for the private sector.

According to a recent government report, credit growth further moderated to 3.13 percent over the past three months of this year, representing only 46.32 percent of Gross Domestic Product (GDP).

Credit growth was lower than the targeted 55 percent of GDP approved by the National Assembly and after peaking several years ago.

Minister of Planning and Investment Dr Souphan Keomixay has attributed the decline in credit growth to three factors. The first is insufficient capital funding by some commercial banks and their ineffective lending practices. Some banks have more debts than anticipated.

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Secondly, the two state banks did not perform well and were uncompetitive against private commercial banks, and the third factor is related to the effects of informal lending.   

An economist at the Asian Development Bank, Dr Rattanatay Luanglatbandith, told Vientiane Times on Friday the decline in bank credit was linked to a drop in demand after the government tightened budget expenditure and suspended salary increases for state employees.    

In the meantime, Dr Rattanatay said, commercial banks had toughened up on the rules governing lending to avoid risk and problems relating to non-performing loans. 

Critics say investors have been pessimistic about the business outlook against the backdrop of the country’s slowdown, noting that bank loans are a driving force in economic development.

The government’s decision to phase out many state-funded projects, particularly the construction of roads, state buildings and other public facilities has contributed to the decline in bank lending.

The government has announced that state-funded projects originally planned for this year will be postponed until 2020 or the year after, a move aimed at maintaining the country’s financial liquidity.

The decision to postpone this type of expenditure has been taken because the government wants to prevent more debts from accruing in the aftermath of the country’s revenue shortfall. One of the most significant points to note is that several mega construction projects have been completed and fewer are being initiated, contributing to the drop in credit growth.

In 2016, commercial banks lowered their interest rates for both deposits and loans in line with a decision made by the Bank of the Lao PDR. This was a major change in the banking sector as the government wanted to lower lending rates for private companies so they could borrow more money and boost domestic production.

According to a World Bank report, credit growth was recorded at 11 percent at the end of 2017, and the trend continued to moderate in the first quarter of 2018.

Observers say credit growth over the past three years is much lower than prior to 2016, when growth stood at 15-20 percent.