Joining Hands to Support Businesses

The current worrisome reality rings an alarming bell of economic prospects. Bailing out businesses is a frequently mentioned phrase in the past time. And, lowering interest rates is considered a feasible plan to “rescue” businesses.

 

In mid-March, the State Bank of Vietnam (SBV) slashed deposit rate ceiling from 14 percent to 13 percent and, not long ago, to 12 percent. And, as a result, lending rates are expected to go another low level. However, in practice, access to bank loans is very difficult for most businesses, especially small and medium ones.

 

According to businesses, apart from bringing down interest rates, banks need to have more flexible mechanisms and policies for businesses to access capital source. This is considered a sufficient condition to bring the interest rate policy of the State Bank to life. Financiers and bankers said that the current situation requires time to make loans cheap. For the time being, commercial banks are still quite cautious with lending rates because, like it or not, they still face a sobering reality: Liquidity has not improved while bad debts are still high.

 

As 80 percent of working capital of enterprises, especially small and medium ones, relies on bank loans, the cycle of interest rate is always a heavy pressure. According to calculations, the current profitability of a company often falls in the range of 10-15 percent. If that company mainly depends on bank loans, with the recent lending interest rate of 20 percent, its profits will flow to lenders and it will have to accept losses. This is the primary reason for the current very high bad debt ratio and volatile liquidity. Hence, even when inflation has been curbed, banks cannot open their purses, especially for small and medium businesses.

 

According to financial expert Nguyen Thi Mui, only 30 percent of small and medium-sized enterprises can access bank loans. At present, banks provide limited loan, with priority given to close and powerful customers. Business capacity is becoming a prerequisite condition to access bank loans. Meanwhile, Vietnamese enterprises only develop in number not in quality and performance as they employ outdated technology and their leaders lack the knowledge of corporate governance. They mainly chase after immediate benefits and focus on price matters rather than market development.

 

Dr Vu Dinh Anh, an economist, noted that a large number of businesses are now in need of bailout. Banks necessarily provide appropriate interest mechanisms for good-performing businesses. They die because of insufficient credit but they are not actually deserved to die. This is considered a measure needed to be done immediately for the existence of businesses - the source of income of the State Budget - as well as the employment of many workers.

 

In the long run, according to Dr Nguyen Trong Tai of the Banking Institute, in an economy where lending rates are always the deciding factor for economic stability and development, the State should have suitable roadmaps to bring down interest rates to below 10 percent per annum by mid-2012. This will be the basis for economic development.

 

He said that the benefits of banks and businesses are always interlinked. The healthy and stable development of businesses ensures the health of banks. If interest rates are too high for businesses and the economy to tolerate, liquidity will be weakened. This makes capital flows distorted, efficiency lower, and risks higher.

According to economists, to unfreeze capital flows for businesses to develop, it is vital to handle macroeconomic problems. This is a main cause for high interest rates and credit disruptions.

To unfreeze capital flows and support businesses, in addition to reducing interest rates backed by the State Bank of Vietnam, the Ministry of Finance is considering financial measures like tax and fee exemptions before submitting them to the Government which will then be sentto the fourth upcoming meeting of lawmaking National Assembly. The ministry will focus all resources to support policy, capital and finance for enterprises but such support must come to correct addressees.

 

It is vital to embark immediately on three restructuring priorities: public investment, commercial bank system and State-owned enterprises. At the same time, it is also necessary to reform the wage system in the State sector at the earliest, reform the budget system, step up changes to the Land Law, etc., concentrate all resources on rescuing enterprises, with special emphasis given to rescuing businesses out of stagnation.

 

To support businesses, the Government must prepare to buy back bad debts incurred by businesses, settle those debts, and provide loans for them to function normally. Then, the Government will have stakes and hold the right to supervise those enterprises. And, when such businesses operate well, it can sell the stakes to take back its money. Or in other words, the government will be at a profit, not a loss.