Interest Rates Lower; but Hard Access to Loans

Interest rates drop quickly
On 28 November 2008, Bank for Investment and Development of Vietnam (BIDV) decides to conduct the ninth reduction of its interest rates in November. The interest rate bottom gets brought down to 11.4 percent from 12 percent. From 1 December 2008, BIDV applies the lending interest rate in Vietnam dong at the lowest reduction of 1.6 percent per annum, depending on type of customers. The interest rate of 11.4 percent per annum is applied for customers who produce and trade commodities with stable consumption market or directly produce necessary products for the economy; or are small and medium sized enterprises; or subsidize export; or collect and purchase rice for export. The interest rate for medium and long-term loans equals to the post paid 12 – month deposit interest rate plus a minimum fee of three percent per annum. The lending interest rate for loans which are mortgaged by valuable papers issued by BIDV will be at appropriate level in order to encourage customers to deposit their money. The rate is ensured not to exceed 150 percent of the basic interest rate.

 

BIDV is the leading bank in the recent interest rate cut wave. The interest rates keep being cut during the last two months, from the peak of 21 percent per annum plus other types of fee. In fact, the real interest rates born by enterprises are much higher, amounting to 23 – 24 percent per annum. The lowest interest rates of 11.4 – 13 percent per annum are applied for large customers who use the bank’s service package. Enterprises in the priority group according to state policy are also enabled to credit source at better interest rates. Currently, the popular lending interest rates in Vietnam dong of state commercial banks range between 14.1 and 14.7 percent per year, and of joint stock commercial banks, 16.4 and 16.5 percent per year

 

Mr Tran Bac Ha, Chairman of BIDV’s Board of Directors, believes that banks’ continuous cut of interest rates is an action in the roadmap to stimulate production and business as well as implement major points of the government’s five-solution package to prevent economic recession, promote production and export and push demand for investment and consumption, etc.

 

Though the interest rates are lowered significantly after the decision to cut the basic interest rate of State Bank of Vietnam (SBV), some finance and banking experts broadcast that the basic interest rate can possibly be further reduced to 10 percent by SBV. This is considered a possibility after the government officially announces five solutions to economic recession prevention. In the time to come, if SBV brings the basic interest rate to 10 percent, the lending interest rate ceiling will be 15 percent. If the CPI in December 2008 and January 2009 are not up or even below zero, the basic interest rate can possibly be subject to further cuts. This forces banks to further cut their interest rates and small-scaled banks into difficulty. With the current lending interest rate, many banks do not make a profit. Banks can neither lower their interest rates immediately since cost for mobilizing capital is still high. Lending interest rates, therefore, can only be gradually reduced.

 

In early 2008, banks’ interest rates got pushed to very high levels due to the inflation and the tightening monetary policy. The banking system ran into difficulty in terms of liquidity. Enterprises, individuals and households were in desperate need for capital but banks were very restrictive to grant loans.

 

Currently, the liquidity has been improved much but the total outstanding loans of the whole system are still low. Both banks and enterprises are very cautious towards loans. Enterprises do not want to borrow for fear of not being able to make profit and return credit to banks. Enterprises still want to approach credit source more easily and the cost for capital be cheaper so that they can stay firm in the crisis. Meanwhile, banks are worried about the increase of overdue loans. Heaps of enterprises have plunged into difficulty and run the risk of going bankcrupt. At this time, overdue loans of many banks are at alarming level. Since the end of October, SBV have cut key interest rates, compulsory reserve ratio, etc. Banks’ capital source has been much better, cost for capital mobilization has gone down and lending interest rates have been down as well. However, outstanding loans of many banks still fail to increase. Some banks even show signs of outstanding loans going down and overdue loans going up, which makes many banks more cautious in credit activities in order to avoid risk.

According to the Monetary Policy Department (under SBV), banks’ usable capital is still in excess. In early November, the excessive usable capital of the system is estimated to reach VND100,000 billion. The Monetary Policy Department affirms that the excessive usable capital at commercial banks is around US$50,000 billion. A finance expert forecasts that with the new policy, the excessive usable capital at banks can amount to VND100,000 billion since apart from the mentioned above VND50,000 billion, the excessive usable capital is added with VND20,300 billion of compulsory bills which are returned ahead of schedule by SBV. In October and November 2008, there will be a further amount of US$1.3 billion (equivalent to VND22,000 billion) from matured government bonds, mainly of commercial banks. The compulsory reserve ratio in Vietnam dong is also reduced to 10 percent from 11 percent, and in foreign currency, to 9 percent. The amount of money set free according to the mentioned above policy is estimated to be between VND10,000 – 12,000 billion. By the end of November, if the 2 percent of compulsory reserve ratio is returned to banks as planned, the capital source of banks is estimated to be added with some VND15,000 billion.

Enterprises are seriously short of capital for production and business and they also call for interest rate cuts. However, when interest rates are cut significantly, approaching credit still seems a challenging task for them. Banks explain that this situation lies in the fact that enterprises do not hurry to sign credit contracts. They wait for further interest rate cuts. Another barrier to credit access is requirements to apply for credit. After interest rate cuts, many enterprises say that they still face obstacles while approaching credit due to tightening requirements. Particularly, many enterprises have their reputation lowered given the current difficult situation.

 

The profound reason for this situation lies in the fact that in early 2008, joint stock commercial banks pushed their credit growth rate, creating a hot development and expanded their network too fast in order to meet lots of targets while their risk management capacity is either weak or disregarded. High risks, therefore, exist. When Vietnam’s economy runs into difficulty, a heaps of enterprises operating within the steel, agricultural and realty sectors plunge into a somber period. The situation gets worse with the severe slowdown of the securities market. The most important reason is that the output of enterprises is really restricted. The tightening credit policy forces enterprises to bear high interest rates. Consequently, bad debts of commercial banks in 2008 will witness a high growth.

The global economic crisis makes many consumers to tighten their expenditure. Demand drops strongly. All these facts place large influences on enterprises making products for export. Enterprises’ trust is, therefore, lowered.

 

Above reasons cause banks to be extremely cautious in granting loans, if they do not wish to increase bad debts. In fact, banks desire to push their credit growth rate and compete to occupy market share in this period but it must be a healthy growth. This explains banks’ promotion offered to borrowers in stead of offering incentives to depositors only as before. Customers who apply for credit for consumption at ABBank are rewarded with gold which increases according to the value of the loans.