Businesses fear loan interest rate hikes as banks pay more for deposits

By Ngan Anh, Thanh Nien News

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Banks have crimped lending to enterprises because bad debts have not yet been solved thoroughly. Photo: Dao Ngoc Thach Banks have crimped lending to enterprises because bad debts have not yet been solved thoroughly. Photo: Dao Ngoc Thach


Commercial banks have hiked deposit interest rates, raising fears about a concomitant lending rate hike, which would deal a big blow to local enterprises that are already struggling to compete with their foreign rivals who can borrow at much lower rates from foreign banks.
On June 14 Viet Capital Bank increased its rates by 0.1-0.2 percentage points. MaritimeBank increased the rate on seven-month deposits from 5.4 percent to 5.5 percent on June 8, and VIB raised the rate on its one-month deposits from 4.75 percent to 4.9 percent.
Several other banks have also made similar moves.
According to a forecast by the Bank for Investment and Development of Vietnam (BIDV)’s Research Center, the deposit rate hike is aimed at increasing banks’ liquidity in the next quarter when credit growth is expected to rise to 10-11 percent from 5.88 percent in the first five months.
Besides, banks want to invest more in government bonds, economist Tran Du Lich said.
Banks prefer bonds since they offer liquidity and decent returns, he explained.
The government is increasing its bonds issuance to VND220 trillion (US$9.82 billion) this year, and the central bank recently allowed banks to use more short-term funds to invest in the bonds.
Demand for the bonds has picked up this year, with the government, by May 26, managing to raise nearly two-thirds of its VND220 trillion ($9.81 billion) target for the year, Reuters said, quoting finance ministry data.
Successful issues could raise the public debts, which was equivalent to 61.3 percent of its gross domestic product at the end of last year, up 60.3 percent in 2014, just below the 65-percent limit.
High coupon rates have also made bonds attractive to customers. Banks now hold 85-95 percent of all government bonds, higher than the 80 percent in late 2014.
Another reason for the deposit rate hike is that most bank loans have long tenors while most deposits are short-term. Thus, deposit rates face increasing pressure, economist Nguyen Tri Hieu explained.
Short-term deposits accounted for 30.86 percent of medium- and long-term loans as of late March, according to the State Bank of Vietnam.
There is increasing concern that lending rates will be hiked as a result, though the government recently told the central bank to bring down the rates to support businesses.
Truong Dinh Tuyen, a former industry and trade minister, said: “It is difficult even to keep lending rates unchanged, let alone cut them. This will hurt companies, especially small and medium-sized ones.”
Nguyen Duc Thanh, director of a Hanoi-based garment company, said his company has taken a six-month loan from a local bank at 9 percent interest.
Though the bank has yet to announce a rate hike, he feared it would soon.
Bui Quang Tin, a lecturer at the Banking University of Ho Chi Minh City, forecast lending rates to rise to 11-13.5 percent this year. The rates on short-term loans now start at less than 7 percent.
Such high borrowing costs would put paid to businesses’ profits, he warned.
Moreover, when lending rates are high, many other sectors that rely heavily on bank loans, such as real estate and securities, would also be adversely affected, industry insiders said.
High borrowing costs would hit local companies’ competitiveness since their foreign rivals borrow from foreign banks at lower rates -- 3 percent in Thailand and 4 percent in China, for instance -- Hieu said.
Bad debts
Tuyen said banks have reduced lending to enterprises because the bad debts issue has not yet been fully resolved. The central bank is aiming to bring non-performing loans to below 3 percent of outstanding loans.
To pare their bad debts, banks are accelerating sales to the Vietnam Asset Management Company (VAMC), but there is no ultimate resolution to the problem yet since the company cannot find investors to whom it can resell the debts.
The VAMC, set up in 2013 to remove the bad debt from lenders’ balance sheets, buys bad debts using its own funds or issues special bonds to the banks in exchange. The bonds can be used as collateral to obtain refinance from the central bank. The company will, in theory, sell the debts to investors, both foreign and local.
If the debts are not sold by the time the bonds mature, the banks would have to swap them with the bad debts. Thus, banks would still play the decisive role in tacking their NPLs.
Few investors have been willing to buy the debts.
The VAMC plans to resolve VND30 trillion ($1.3 billion) worth of bad loans this year by selling debt and collateral. It has recouped around VND8 trillion this year, Reuters quoted its chairman Nguyen Quoc Hung as saying.
It has received offers from some 10 banks for VND17 trillion worth of bad loans this year, according to Hung.
Hieu said very few local investors have the financial wherewithal to buy such debts and prospective foreign buyers are concerned about the vague policies related to receivables in Vietnam.
"Foreign investors are interested in Vietnam's receivables market since it has not yet been tapped. However, the lack of regulations for bad debt trading and liquidation of assets has been a hurdle to their participation in the market."
Vietnam does not yet have a market for trading receivables, he said.
Another barrier to foreign investors is that Vietnam does not have independent assessment agencies.
"Foreign investors will not participate in a market unless they know assets' real value and the potential to resell the assets and can understand clearly the bad debt trading procedures," Hieu added.
The VAMC, which is also lacking in resources, will probably need financial support from the government or organizations such as the International Monetary Fund to address all of the bad debts in the country’s banking system, Reuters quoted Alan Pham, chief economist at VinaCapital Group Ltd., as saying.

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