Finance & Banking
Last updated: Tuesday, May 21, 2013
Holding Down the Interest RatePosted: Tuesday, May 22, 2012
Not only quickly slashing interest rates, many banks tend to ease borrowing conditions after witnessing a rarely seen negative credit growth in the first four months of this year.
With the current macroeconomic developments, especially inflation, we are able to cut interest rates more quickly. Interest rates of Vietnamese dong deposits will be brought down to 9 - 10 percent per annum by the end of this year, said Governor Nguyen Van Binh of the State Bank of Vietnam (SBV).
Negative credit growth continues
In previous years, credit growth was always very high, climbing 34 percent a year in the latest five years and 29 percent a year in the last 10 years.
However, in the first four months of this year, liquidity modestly rose 1.55 percent over the end of 2011. Credit growth continues to be at a below-zero rate. It slid 1.96 percent in the first quarter, the first since the first quarter of 2009. As of end-April, it was still 0.66 percent lower than at the end of 2011, with Vietnamese dong credit dipping 1.09 percent and foreign currency credit inching up 0.91 percent. The National Financial Supervision Committee said as of April 16, credit growth was minus 1.71 percent over the end of 2011.
According to the plan of the central bank, in 2012, liquidity will rise by 14 - 16 percent and credit growth will climb 15 - 17 percent. These targets seem hard to be reached after witnessing what happened in the first four months. In theory, to strike these targets, liquidity growth must be quickened to 1.5 percent a month on average in the remaining eight months of the year while credit growth must be accelerated to 2 percent a month. This scenario is jerky and infeasible, especially when the economy is facing the risk of deflation, production and businesses are shrinking, and people are tightening their belts as incomes fail to follow prices after years of high inflation.
However, SBV Governor Nguyen Van Binh confirmed that the central bank had anticipated challenges, economic performances and realities of businesses at present. He said the macro economy had to take a medicine to cure its disease and such a medicine has side effects. These side effects have seen and anticipated: Economic growth is slowing down because inflation and economic growth are always in conflict. We have to surrender one to get another.
Weighed by global economic crisis and domestic economic difficulties, high inflation and declining purchasing power have scoured the health of enterprises. And, the prolonged application of tightened monetary policy and exorbitant interest rates added the weight on the shoulder of enterprises and sent them to bankruptcy more quickly.
Hard to lend
Paradoxically, while credit growth has slumped and regulators signalled interest rate reduction, interest rates remain quite high and most banks have escaped from liquidity strains and are keeping much money. In April and especially in early May, interbank interest rate for one-week loans dropped to 3.5 - 4 percent per annum while overnight rates were just 2.5 percent, the lowest since 2007. This indicates that banks have much money but they cannot find enough borrowers; hence, their demand for capital is low.
In April, the State Bank issued bills to withdraw VND51,431 billion from the system (28-day, 91-day and 182-day terms with interest rates ranging from 6.2 percent to 12.5 percent per annum). Particularly, in late April, bill rates declined day after day. Besides, successful bidding rate for government bond auctions was very low at only 11 percent per annum.
The General Statistics Office (GSO) said annualised inflation fell from 14.1 percent in March 2012 to 10.5 percent in April. The rate plunged from the peak of 23 percent in August 2011 to near a single-digit rate now. Slowing inflation helped the central bank to lower interest rates in the first quarter of 2012. Key policy rates were cut by 2 percent (200 percentage points) in one month. The SBV has also applied ceiling lending interest rate at 15 percent per annum for four selected fields. HSBC said in a report “Deposit rate cut of 2 percent in a month aims to simulate consumption and the next reduction is likely to happen in early third quarter of 2012.”
Many analysts believed that deposit rates will quickly be brought to some 10 percent per annum. In the tough time of economy, all investment channels are prone to high risks and the interest rate of 10 percent is not enough for money to leave banks.
Indeed, lending rates are rather high for the time being. According to a survey by Ho Chi Minh City Securities Corporation (HSC), lending rates currently average at 17.24 percent per annum, a drop of 0.7 percent in the latest two weeks and 1.4 percent from the start of April.
Although the reduction is significant, it is yet to satisfy borrowers because it not only remains very high and hardly stands but also enterprises have now become weaker. They will not borrow money if their sales continue going down and inventories keep going up. They expect a lower interest rate, similar to 12 - 13 percent per annum proposed by State-controlled Vietcombank.
It is easy to see that commercial banks are easing credit access, from issuing consumer support debit cards to seeking good companies and projects. Instead of squeezing capital access at any cost as previously, they are now trying to access businesses. A more comfortable interest rate will create more motivation for companies to expand business and production activities. But, the hardest difficulty is the weakening financial capacity of enterprises while borrowing conditions are tightened. Hence, the gap between lenders and borrowers need to be filled by support policies.