Vietnam's banking system is running into funding constraints. Deposits are not particularly weak and still growing at a healthy double-digit pace. The problem is that credit is growing much faster. Customer deposits have fallen sharply as a share of liabilities, conventional loan-to-deposit ratios have reached record highs, and banks are increasingly filling the gap with interbank borrowing, bonds and government borrowing. The SBV's regulatory LDR obscures much of this deterioration, allowing the official ratio to remain benign even as underlying funding becomes less stable.

Funding stress is showing up in prices. Interbank rates have repeatedly traded far above the policy rate, banks are competing aggressively for large deposits and margins are being squeezed. This is the consequence of a system in which banks are being encouraged to sustain exceptionally rapid credit growth while stable funding is growing much more slowly underneath it.

The buffer against future losses has also weakened sharply. While NPLs have increased to around 2% and special mention loans have fallen, the provision coverage has dropped from almost 1.5 times NPLs in 2021 to around 82% today. While Covid-era forbearance built provisions up sharply, the scale of the drop since then is alarming.