Reports from the VPBank Securities Company (VPBS) and BanViet Securities Company predict full-year credit growth to exceed the target of 13-15 per cent.

The highest growth has been registered in lending to the property sector — 10.9 per cent – as it accounted for 8.3 per cent of total outstanding loans as of end July.

VPBS analysts attributed the rapid credit growth to reasons like the reduction in interest rates.

Deposit interest rates declined by 0.2-0.5 percentage points, allowing lending interest rates to fall by 0.3 percentage points, they said.

With the prices of commodities and fuel falling in the global market since late last year, companies have been able to cut production costs, leading to a recovery in their business and increased credit demand as a result.

The chief of a commercial bank in HCM City said the positive signs in the country's economy encouraged companies to expand their production and trading activities for which they need more money.

Analysts considered the strong credit growth as a sign of the country's economic recovery, but expressed concern about banks' liquidity and the increase in bad debts.

Nguyen Tri Hieu, a senior economist, told Dau Tu Chung Khoan, "Viet Nam's banking sector always faces an imbalance between deposits and credit, which threatens banks' liquidity."

In recent years, because of the high inflation, the State Bank of Viet Nam (SBV) has had to apply a tight money policy, sharply increase interest rates, and reduce lending to non-production sectors.

As a result, inflation has declined significantly and the imbalance between deposits and credit has been mitigated, Hieu said.

But the higher growth of credit than deposits means banks' liquidity is not as good as it was a few months ago, he said.

This is underlined by the fact that banks, the biggest buyers of government bonds, are not too keen on them now. Consequently, the percentage of government bonds bought in the primary market fell dramatically from 68 per cent in the first week of July to 39 per cent in the second.

Analysts also expressed fears about a possible increase in non-performing loans.

Hieu agreed saying that when credit is loosened bad debts are likely to rise.

According to SBV figures, by late March the banking sector's bad debts ratio had risen to 3.81 per cent from 3.24 per cent late last year.

Analysts said bad debts are always banks' biggest worry, including big ones. Even Vietcombank, which boasts the best financial management in the banking industry, has a bad-debts problem.

Over the first half of this year its bad debts climbed to 2.43 per cent of total loans outstanding, higher than its year-end target of 2.3 per cent.

Chairman Nghiem Xuan Thanh said the bank's credit quality is worrying because its provision for bad debts has reached an all-time high level while bad debts recovered have been much lower than planned.