Finance & Banking
Last updated: Thursday, May 23, 2013
Rate Cut QuizzesPosted: Wednesday, May 30, 2012
For Vietnam’s economy in need of working capital now, I think that interest rate cut must be sensible. It must be tied to inflationary development, plus interest sharing of market elements.
According to the General Department of Taxation under the Ministry of Finance, by mid-May 2012, this country had some 200,000 enterprises facing bankruptcy or temporary halt of operations. In particular, 79,000 enterprises were dissolved in line with legal procedures while more than 120,000 others are uncertain of their future. In other words, there are no official accurate reports on their operating situations from competent authorities. Meanwhile, the number of bankruptcy files lodged to the court is very small. Many companies have informed tax authorities of their temporary halt of operations, but many others have stopped their operations without any official notice of announcement.
The weak health of Vietnamese enterprises is a picture of recession, production contraction, layoffs, and incomplete projects in real estate, construction material and apparel sectors, and signalling the advent of deflation. Consumer markets both at home and abroad are in a state of saturation or very weak demand. Exorbitant interest rate is only one of many reasons leading many businesses to failure.
Two scenarios may occur to the overall economic picture in the next period: (1) Recession in association with inflation in case of money injected to support growth; and (2) Recession in association with deflation in case of continued interest rate- and quota-based credit crunch.
For Vietnam’s economy in need of working capital now, I think interest rate cut solution and credit market policy must be sensible. They must be tied to inflationary development, plus interest sharing among market elements.
First of all, on the money - credit market, it is advisable that the State Bank of Vietnam purchase excess capital at commercial banks with interest rate 1 percent lower than its refinancing rate and sells that capital to banks falling short of capital with interest rate equal to or approximate to its refinancing rate of the same period, not higher than the rate on the primary market. It promotes the function of State management on the one hand and serves as an eventual purchaser/seller on the secondary market on the other, aiming to stabilise the market.
The State should support State-owned credit institutions to reschedule bad debts incurred by companies with good futures and output markets by means of purchasing debts, extending old debts and providing new funds, and with a roadmap for reselling debts and recovering State capital.
Inflation curbing must draw proper attention. The central bank essentially withdraws money through open market operations (OMO) and the interbank market. It can regulate the liquidity of individual commercial banks and refinancing capital-short banks by purchasing G-bonds they own and/or refinancing them with their registered capital served as their guarantee plus its closely conditional control measures before embarking on undertaking reshuffle or applying other strict measures. In the next stage, it needs to require all credit institutions to have enough assets for the guarantee for joining the OMO market.
It should encourage customers to use corporate bonds (issued by companies rated AAA and AAB by the Credit Information Centre under the State Bank of Vietnam or prestigious ratings agencies) as collateral assets for short-term loans at commercial banks, helping banks to support the stock market and provide cheap capital for the right borrowers and encouraging prestigious companies to seek capital (medium- and long-term) from the stock market before knocking at the doors of banks. It also looks to introduce new regulations on controlling commercial banks (excluding investment banks and development banks), only allowing them to provide short-term loans and/or it controls the proportion of medium- and long-term loans from shrinking short-term sources to attract all elements of the financial market to mobilise and supply capital to the economy.
It is time to remove all sorts of interest rate ceilings on the primary market, liberalise gold import and export activities for all credit institutions, and make national gold bar standards in line with international standards (gold has exclusive logo, a gold bar weighs from one to 10 kilos, gold has quality not lower than 95 percent pure gold). The central bank will appoint gold producers and get rid of gold bars not meeting international standards and allow all eligible entities to trade gold to prevent bubbles.
If administrative measures are employed to intervene in interest rates on primary market, they should be flexibly applied to lending rates. The State Bank orders all credit institutions to keep highest lending rates on the primary market at no more than 130 percent (and/or 135 percent) of government bonds with popular terms (1 - 3 years) in the latest issue in relation to the time with comparative credits.
With the above interest rate mechanism, the central bank easily identifies weak banks by eradicating interest rate caps. At that time, the race of deposit rates will definitely appear. But, with the interest rate management mechanism as proposed, weak credit institutions will come into sight without having to “locate” for the purpose of restructuring. For very weak credit institutions, if all M&A plans do not come up to scratch, they should be allowed to go bankrupt with the message that the State only protects depositors and shareholder capital by liquidated assets of such credit institutions plus insurance from the Deposit Insurance of Vietnam (DIV).