Central bank urged to be aggressive with interest rates

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With lending interest rates still high, experts say it's time for the central bank to step in and lower borrowing costs for businesses, instead of waiting for lenders to deliver on their promises.

Nearly one month has passed since the State Bank of Vietnam strictly banned commercial banks from paying more than 14 percent on dong deposits in an attempt to effectively lower lending rates.

The order has been followed by almost all banks, thanks in part to strong punishments handed down to transgressors of that rule.

But on the lending front, interest rates have hardly changed. Most companies still have to borrow at 20-21 percent a year, even though lenders have pledged to cut rates to as low as 16 percent.

Some banks have said that lending rates are falling quite slowly because most of their current funds for loans come from high-interest deposits.

Experts, however, argue that with deposit rates restricted at 14 percent for several weeks, commercial banks are able to set aside enough funds for cheaper loans. Whether the banks want to cut their rates as they have promised is another question, experts said.

Nguyen Van Thuan, a finance and banking professor at Ho Chi Minh City Open University, said there was usually a 3-3.5 percentage point difference between deposit and lending interest rates at commercial banks in Vietnam.

But now the gap has widened "unreasonably" to six percentage points, Thuan said.

"The State Bank of Vietnam needs to be more forceful to bring interest rates down. It shouldn't just wait for banks to voluntarily lower their rates," he said. "Things stay like this and banks will get all the benefits."

An economist speaking on the condition of anonymity said that after the central bank introduced a new 6 percent rate cap for deposits with terms of less than one month early this month, many lenders now have a new chance to earn even more profits.

They secure short-terms deposits at low rates, then lend to other banks on the interbank market at up to 15 percent, the economist said.


Professor Hoang Cong Gia Khanh of the University of Economics and Law, also in HCMC, agreed that the deposit-lending rate gap should never exceed four percentage points.

Many businesses are facing huge losses amid these tough times, but for banks, profits are growing, Khanh told Thanh Nien.

"We can accept that it may take a while for policies to start showing their effects, but the situation should not last too long," he said.

But it may already be too late for many businesses.

Local media quoted Minister of Planning and Investment Bui Quang Vinh last week as saying that 48,700 companies went bankrupt or stopped operations in the first nine months this year.

That was an increase of nearly 22 percent from the same period last year and Vinh said high interest rates were among the main reasons leading to the firms' demise.

As other companies are hoping for lower borrowing costs in order to ramp up production for the upcoming holiday season, professor Thuan said the central bank needs to restore business confidence by showing that it's committed to bringing interest rates down.

"Borrowers can endure high interest rates for one or two more months, but they want to know that cheaper loans will come. Such a belief will boost public confidence," he said.

The State Bank of Vietnam has aimed to lower lending rates to between 17 percent and 19 percent since mid-September.

However, governor Nguyen Van Binh said the central bank would minimize the use of administrative intervention measures.

Administrative measures

Experts have agreed that administrative measures are not good for the market in the long run and should be avoided if possible. But they also said half-measures are not good either.

Khanh said if the monetary authority has decided to put a limit on deposit rates, it should consider doing the same with lending rates, at least until banks cut rates on their own accord.

High interest rates, if prolonged, could lead to an increase in bad debt, Khanh said, adding that this would be a bad situation for the banking system to find itself in.

Nguyen Thi Thanh Huong, editor-in-chief of Banking magazine, said if administrative measures are to be used, they should be applied in a concerted manner and then withdrawn when the market has been stabilized.

Now that there is a ceiling on deposit interest rates, a similar cap on lending rates is necessary, Huong said. Interest rates should be between 17 and 18 percent on corporate loans while consumer loan rates can range up to 20 percent, she said.

Viet Capital Securities said in a monthly report Monday that the 14 percent deposit rate cap alone will not improve liquidity at banks. However, the State Bank has claimed that it will support liquidity for small banks, the report said.

"The move could help to push rates lower. Lower interest rates would encourage banks to lend more, ultimately improving liquidity," the company said.

It also said that as the loan-to-deposit ratio of 80 has been removed, the flow of money between the interbank market and a primary market will be improved. "This change should result in lower interest rates on the primary market," it said. 

Viet Capital Securities, however, noted that the market has yet to be convinced that the government can balance interest rates, low inflation, and dong stability simultaneously.

The State Bank of Vietnam will tightly monitor commercial banks' liquidity and the quality of their lending. It will actively seek to identify banks which may have liquidity problems, and introduce swift measures to address the issue, Bloomberg reported, citing a central bank statement Wednesday.

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