One of the bottlenecks of banking operations in 2009 was the interest rate. For many reasons, the prime rate has not been solved immediately.
According to experts, when the government still supported high GDP growth rate, the State Bank of Vietnam (SBV) will not easily increase benchmark rate (or lift the interest rate cap to apply the free interest rate mechanism) in the first quarter of 2010.
But in reality, loosening interest rate policy is necessary to encourage credit institutions to mobilise temporarily idle capital of the whole society.
The ease will help credit institutions to mobilise capital at high rate. This helps credit institutions improve liquidity, make profit and have enough resources to offset operating risks in a volatile business environment.
Deflating interest rate balloon?
According to many experts, the State Bank of Vietnam will continue expanding beneficiaries of negotiable interest rate. Perhaps, the adjustment to medium and long-term credit loans is more rational because loans with longer terms are prone to higher risks and the interest rate needs to be higher. Thus, the rate for such kind of loans is usually floating (usually fixed at the current cap of 12.5 % per annum in initial period and adjusted from time to time, depending on market conditions and SBV regulations as well.)
Moreover, outstanding medium and long-term loans of small companies are usually greater than short-term loans; hence, the interest rate hike for medium and long-term loans is not a shock to enterprises which are enjoying interest rate subsidies.
Remarkably, high interest rate will force borrowers to use the capital more economically for highly feasible projects and encourage companies seek the capital in other channels such as issuing shares or corporate bonds to relieve pressure on the credit requirements which is now a burden that the commercial bank system is unbearable.
The implementation of negotiable interest rate for medium and long-term loans also helps the economy get familiar with interest liberalisation mechanism and minimise administrative interventions that may distort the capital flow in the economy.
Therefore, SBV may consider applying negotiable interest rate mechanism to medium and long-term loans. This is a measure described by a deputy director of a commercial joint stock bank as “deflating oversize interest rate balloon.”
Adjustment will cause pressure?
The liquidity of the Vietnamese banking system is always problematic in recent years, partly due to ineffective use of capital by many credit institutions which excessively use short-term capital for medium and long-term lending (primarily real property). This practice may lead to high risk and SBV must adopt supporting measures (lending through instruments of the central bank) to influence the effectiveness of monetary policies issued by the State Bank.
Now, if the adjustment to negotiable interest rate for medium and long-term loans will increase the source of credit from this lending field. Therefore, credit institutions will continue to provide more medium and long-term loans to take wider margins to offset short-term loans which are currently subject to ceiling interest rate in accordance to the benchmark rate.
This situation will cause the capital using structure at credit institutions to change slowly (focusing on lending working capital to supplement the short capital companies) and increase term risks (mobilising short-term deposits for long-term loans). As a result, the liquidity of credit institutions will not increase very much and the system safety is still almost the same as before.
On the other hand, this may fuel up another interest rate race, the difference of interest rate for different terms of deposits lacks economic meaning, and short-term loans will hardly rise to “pump capital” into the system as expected by policymakers.
The general situation intensifies pressure on prime rate and affects the increase of credit supply sources with reasonable interest rate to support high economic development growth. This should be anticipated at this point of time because the stock market has thrived, companies will face more difficulties in raising capital via the stock market, and the capital demand is put on the shoulder of credit institutions. Therefore, if the lending interest rate is too high, the economic growth will be affected.
For that reason, appropriate criteria should be applied along with expanding the mechanism of negotiable interest rate for medium and long-term credits to avoid a market shock, minimise adverse impacts on the stock market while still ensuring the provision of capital for high GDP growth strategy of the Government. This is considered an important step to convince the National Assembly, the highest lawmaking body, to apply market-based interest rate.
Removing term gaps
A source from the State Bank of Vietnam (SBV) on February 23 said the central bank is finalising a draft circular on negotiable interest rates for medium and long-term loans, which is expected to take effect soon.
Thus, in addition to interest-negotiated loans in VND and foreign currencies for certain purposes, credit institutions will be allowed to apply negotiable interest rate for medium and long-term loans in VND when the circular is issued and takes effect.
In addition to consumer loans, so far, credit institutions must apply interest rate cap to its loans, which are regulated by the prime rate, periodically adjusted by the State Bank of Vietnam. According to the current base rate, loans in VND must not exceed 12 % per year. Meanwhile, the lending interest rate for consumer loans has reached, or even exceeded, 20 % per annum.
Many expect a new ceiling level will be formed immediately after the new circular comes into effect.
L.D
Vietnamese
