Local banks are expected to cut lending rates as soon as they are allowed to negotiate interest on short-term loans.
In a move to keep interest rates in line with market supply and demand, the government has asked the central bank to allow interest rates on short-term loans to be negotiated, a development that Ho Chi Minh City-based VietABank general director Pham Duy Hung said would make way for flexible rates that depend on risk levels.
"Banks may have to lower lending rates as well as deposit rates," Hung said, noting very few companies were willing to take the 16-17 percent his bank was offering.
Vietcombank, Vietnam's largest partly private lender by assets, cannot find customers for loans at rates of more than 14.5 percent, general director Nguyen Phuoc Thanh was quoted by local news website VnExpress Tuesday as saying.
In order to bring lending rates down, lenders need to stabilize deposit rates as well, Thanh said
Nguyen Duc Huong, vice chairman of LienVietBank, said there will be a race among lenders to bring down interest rates as they need to compete for customers.
By mid-May lending rates could fall to as low as 12 percent while deposit rates may be even less than 10 percent a year, Huong predicted.
"High interest rates will kill production. A company's dividend payout ratio at 10 percent is already high. Lending rates of more than 12 percent are unbearable for most companies.
"If rates are not adjusted soon, some companies would rather deposit their money at banks than continue their business," Huong said.
The government last weekend injected funds into the banking system to lower lending rates. The State Bank of Vietnam lent
VND8.2 trillion under a 28-day term at a rate of 8 percent and VND2.5 billion via seven-day funds at 7 percent late last week, a government statement said on Tuesday.
In February the central bank widened the scope of medium-and long-term bank loans that can be offered at negotiable interest rates to include areas such as production, business, services and investment for development.
Previously, rates on all loans except for consumer loans were capped at 1.5 times the central bank's benchmark base rate.
The deregulation saw market rates surge to 18-19 percent, making it impossible for many companies, especially small and medium-sized enterprises, to access credit.
The government last week asked the central bank to try to bring down lending rates and allowed negotiable interest rates also on short-term loans.
When the mechanism on negotiable rates is applied for short-term loans, banks will have to compete with each other on their lending rates and joint stock banks will reduce lending rates to attract customers, central bank Governor Nguyen Van Giau said Friday last week.
The current cap on deposit rates is 10.5 percent a year, but bankers and analysts also expected it to be lifted soon.
Nguyen Tri Hieu, member of the ABBank board of directors, said a decision to eliminate the caps on short-term lending rates and on deposit rates would be "welcomed by the financial market."
"In terms of macroeconomic management, such a move will make the banking sector more transparent and facilitate healthy competition on the market," Hieu was cited as saying by the Vietnam Economic Times on Monday.
Commercial banks would find it easier to attract deposits and offer loans when interest rates are no longer subject to any limits, he said.
Hieu said lifting the rate caps would cause interest rates to surge out of control for a while before reaching an equilibrium thanks to the market's auto adjustment mechanism.
The role of the central bank then is to use monetary policies including the discount rate and compulsory reserves to regulate the market, he said.
"A concern now is that many companies without enough money have to borrow from banks but they eventually suffer losses because of high interest rates.
"In the long term the State Bank of Vietnam needs to bring interest rates to more reasonable levels by regulating money supply... Lending rates should be lowered to under 10 percent a year so that businesses can afford loans and create profits, which is necessary for strong economic development."
Economist Le Tham Duong of the Ho Chi Minh City Banking University said allowing banks to offer short-term loans at negotiable rates is the correct move and in fact it should have been made sooner.
"It's a little late to make such a change now. Why? Because earlier lenders had to lie. They offered a short-term loan but they made it one day longer and turned it into a medium-term loan so that they could negotiate on interest rates."