Even though inflation may have peaked, the window for a rate cut in the first quarter is closing.
Businesses are struggling and the urgent task for Vietnam is to improve liquidity of the banking system and then lower interest rates, said Le Xuan Nghia, vice chairman of the National Financial Supervisory Council.
"Unless the liquidity problem is solved, rate cuts are off the table," he said. "When interest rates are still high, businesses will continue to face hardships and the economy is unlikely to grow at the expected pace."
Banks will have to restrain lending as the central bank is targeting an overall credit growth of between 15 percent and 17 percent this year, Nghia said.
Even if they are encouraged to offer loans, banks will still have to think twice about lending due to the ongoing "bad debt nightmare" that started last year, he added.
Nguyen Duc Huong, vice chairman of the Lien Viet Post Bank, said many local businesses will be pushed to the brink of bankruptcy this year because interest rates may remain high.
Banks have become reluctant to lend after a lot of their clients incurred losses last year, leaving a large pile of bad debts, he said.
"Our liquidity at Lien Viet Post Bank is still very good and we have strong inflows of deposits, but it doesn't mean we can be easy with loans," Huong said. "Even a strong bank can turn up dead anytime amid economic difficulties. So we have to be careful with our credit policies in 2012."
Vietnam, aiming for an economic growth of 6-6.5 percent in 2012, began to tighten monetary and fiscal policies a year ago in order to restore economic stability and curb inflation. Loans expanded by only around 11 percent in 2011, compared to the target of 17 percent in September.
During the course of the policy tightening, there were suggestions that lending should be eased to support businesses. However, major international agencies like the World Bank and the International Monetary Fund have all warned that early policy loosening would risk bringing back the instability cycle.
Now that inflation has slowed, with prices rising only 1 percent in January, the question of when borrowing costs should be cut is being raised again.
Nguyen Thi Hong, deputy director of the Monetary Policy Department at the State Bank of Vietnam, said inflation has eased since August, which is a prerequisite for lowering interest rates.
However, when and by how much the rates should be cut will need to be decided later, based on the liquidity of banks, she said at a press briefing in Hanoi late last week.
At the same meeting, Vu Duc Dam, chairman of the Government Office, said the central bank has not made any decision on interest rates yet because the government is taking a cautious approach, trying to balance the goals of maintaining economic growth, keeping inflation under 10 percent and rescuing local businesses.
The government understands that businesses are facing difficulties and there are many measures to be considered, he said, adding that efforts will be taken to keep the dong stable and bring inflation down, which will benefit businesses.
Most banks offered loans at 17-20 percent in mid-January, the central bank said in a report last week. Interest rates for non-production businesses were higher, at up to 25 percent a year.
Tran Phuong Binh, general director of Dong A Bank, told news website VnExpress that 2012 is expected to be another tough year because it is the beginning of the economic restructuring in Vietnam and the debt crisis in Europe is not over yet.
The banking system will have to operate in line with the government's goals to control inflation and stabilize the economy, he said. "Interest rates and credit growth will continue to be a problem that is difficult for banks to solve."
As lenders choose to play safe, businesses around the country have no choice but to lie dormant.
Nguyen Tien Dat, chairman of CDC, said he is still stressed out thinking about the time he went around looking for a bank loan last year.
His firm, which imports plastic household products and diapers, were turned down by almost all commercial banks in the city. One bank agreed to offer a loan, but at an interest rate of 20 percent, he recalled.
Without a cheap loan, the company has stopped all trading activities. Dat said he would keep his hopes down for the new year as credit policies are still tight.
State Bank of Vietnam Governor Nguyen Van Binh said in January the central bank may adjust interest rates, but only after March.
Ngo Thanh Phuong, director of Alibaba, a trading company in Hanoi, said the first quarter will be another tough period for him.
"I heard that the central bank can't cut interest rates this quarter. If that is the case, we will have to focus just on staying alive, because we can't take a risk doing business with high interest rates," he said.