Banks locked in fierce battle to attract borrowers

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Two employees count block of money at a branch of Vietcombank in Hanoi

OceanBank has been offering corporates loans at just 7 percent interest, lower than the top deposit interest rates of 7.5-8 percent.

Others like HDBank, VPBank, TPBank, and Maritime Bank offer loans at zero interest for the first few months.

Clearly, competition is fierce among banks in attracting customers at a time when credit growth is very low.

The head of a bank in Hanoi said there would be no customers if the bank does not cut interest rates sharply, and the losses then would be much bigger.

It is now buyers' market, and banks which want to lend have to fulfill borrowers' demands, he said.

His bank gave a big firm a loan of around VND100 billion (US$4.76 million) for two weeks at the overnight interest rate on the interbank market.

"If we do not agree, they will stop dealing with us and shift to another bank.


"In the current tough situation, we have to fulfill customers' requirements."

The extended economic slump has hit companies' demand for funds.

Credit growth this year has been just 8.83 percent, much below the 12 percent target, Nguyen Thi Hong, head of the Department of Monetary Policy at the State Bank of Vietnam, said. Last year credit growth was 8.7 percent.

To boost lending, banks have cut interest rates by 2-5 percentage points.

The fierce competition to attract borrowers and the resultant lending at below deposit rates is raising concern about the health of the banking system.

Banks only break even when the interest rate spread is 3-4 percentage points, according to some economists.    

But Le Quang Trung, deputy general director of VIB, dismissed this, saying banks' average cost of funds could be as low as 4-5 percent if they have a lot of money in current accounts.

In that case they would still earn profits by lending at 6-7 percent.

Economist Bui Kien Thanh said the low rates are often offered only for a short time, maybe the first one to six months, and subsequently interest rates are increased to market rates.

"It is a way to attract customers."

Besides, banks also earn fees from many services like ATMs, money transfer, and foreign exchange trading, he pointed out.

Unhealthy practice

Despite the explanations, the central bank, which wants banks to step up lending, said lending at below than deposit interest rates is an unhealthy practice and has ordered banks to stop it.

"Several credit institutions have accepted to lend at below deposit rates, which"¦ causes risks," it said in a recent statement without naming any of them.

It also called on banks to lower both deposit and lending rates, adding "Liquidity at credit institutions has improved significantly in recent months."

Banks are offering 6.5-8.5 percent interest for dong deposits.

Do Minh Toan, general director of Asia Commercial Bank, said banks now have ample deposits and can also borrow at just 5.5 percent in the interbank market, and so can lower lending rates to attract customers. The central bank's instruction to stop lending at low rates would make it difficult to expand credit because of low demand from firms.

But Le Tham Duong of the Banking University of Ho Chi Minh City justified the order saying the central bank is worried about the unhealthy competition among banks.

The credit growth target for next year is 12-14 percent, according to the central bank.

The government was counting on lending growth to be higher than last year's 8.4 percent to spur the economy. This year's GDP growth is likely to be at 5.4 percent compared with 5.25 percent last year.

It hopes the economy will grow at 5.8 percent in 2014.

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